Japan Airlines talks acquisitions and plans for the future

Transcript

Peter Harbison:

And a big welcome to Tadashi Fujita who's Director of Japan Airlines. Tadashi san, great to have you with us and thank you for joining us on CAPALive. I understand that you'd like to show us a few slides first to set the scene for us. If you do that, and then we'll enlarge on some questions following that. So please over to you for your presentation.

Tadashi Fujita:

Okay. Thank you Peter. Thank you so much for inviting me to this wonderful event every year. I sincerely express my great appreciation to the CAPA staff and Peter. I also would like to take this opportunity to thank all the people struggling in the medical field and sincerely wish everyone can stay safe all over the world. So today I would like to talk about the post-COVID strategy of our company, Japan Airlines. First, I will share the latest update COVID-19 situation in Japan. Then I will move on to tell you the essence of our new media midterm management plan just announced on May 7th.

There are the numbers of COVID-19 positive and death cases in most severity struck nations and Japan. As you see, Japan has succeeded in keeping the numbers relatively low. However, currently the new Corona virus variant, especially UK variant is rapidly spreading in Japan. The government is seriously concerning the expansion of UK, India and Brazil and later the Vietnam variant from now on. Therefore, the state of emergency has been declared still from 20 June and immigration is stricter. This counter measures seem to be continuing before the opening of Olympic and Paralympic games Tokyo.

I think the movement of the people will be restricted until the expansion of the new Corona virus variant settles down. And at this moment, the number of passengers domestic is 30% compared to the 2019 and only 5% the international flight. On the other hand, cargo business using the passenger's aircraft, it's still capturing the strong demand. The Japanese government has planned to accelerate vaccination rapidly from June. The passenger demand of the domestic flights will be expected to recover if the vaccination will be on track with the plan. There are three important points for the path of recovery in the aviation industry, especially for the international market. First, of course vaccination is the key driver to [inaudible 00:04:39]. The Japanese government as I said, is trying to accelerate the speed of vaccination you need to achieve one million vaccinations per day. Secondly, the system for [inaudible 00:04:54] passport. Vaccination and patient need to be organized among nations. Currently, several kind of system and applications are being tested to establish safe and comfortable travel environment.

The necessary [inaudible 00:05:14] from now on are establishing vaccine passport and we shall test them and improving utility with the mobile apps to support travels. Thirdly, under these conditions, countries will start to flow on travel bubbles to open their borders. Regarding the international flight, the immigration to Japan is strictly controlled at this moment, but the trend to demand is gradually increasing between Asian countries and north America. So I think that recovery of international flight will start from [inaudible 00:06:03] movement and then going from Japan by the business and then return to Japan and finally inventory.

So we know that we offer our competitive service resource demand, JAL is proud to be the first airline in Asia to be certified in two awards with highest standard of safety and hygiene to confluence COVID-19. The people [inaudible 00:06:44]. I believe that [inaudible 00:06:45] relative demand combat at first stage and the essential business travel, I should say, still remain the market. Leisure demand will come back as the vaccination spread. However, some business demand would it be replaced by remote conference. After the Corona, the customer's need would become diversified. For example, the price of the ticket it's still important factor to choose. However, security and flexibility of booking and cancel. The information for the destinations is more detail. And the insurance with the disease also taken more seriously by the customers. The travel industry have to adapt to this coming change in the society. We need to utilize [inaudible 00:07:50] the IT technologies and to enhance the partnership between airlines and travel industries to offer a safe and secure environment to the travelers.

And we also need to improve the level of human touch point such as contact center because we need to provide necessary assistance to the customers directory. So we have learned a lot of things through this crisis. Create safety is always our top priority and we need to accomplish three missions to support this. First mission is of course, to protect our customers and the employees against diseases. And second point is to maintain our operation and network for the essential traveler cargo at any time as a public transportation mission. And third, we have to maintain the strong [inaudible 00:09:00] condition to ensure our company survive and protect the employment come what may. JAL has establish a top level financial foundations after the bankruptcy, but that was not enough. We must continuously put all our effort into making the financial foundation more robust. We are aiming to become a sustainable company by rebuilding the financial foundation and improving the productivity.

Now I like to show the future vision to 2030. This plan talks about strategies of adopting the changes due to the COVID-19. First, I will talk about JAL vision 2030. Safety and comfort and sustainability are the two key drivers like through our engines to grow in the next decade after the drastic change in people's [inaudible 00:10:16]. The way to continuously aim to become the world most preferred and valued airline group in travel and as in cargo we aim to have dynamic mobility in the post COVID era. Timeline of our medium term plan. This plan covers the next five years in which JAL recovers from COVID-19 and move forward to realize our vision. We plan to recover the profit to the pre-COVID level and achieve the 1.7270 billion yen EBIT in fiscal year 2023 and aim to approximately 185 billion EBIT in the fiscal year 2025.

Also, we set management target with an aim to achieve JAL vision 2030 SBGs net-zero CO2 emission. And this is a business strategy. Since COVID-19 has changed air travel demand along with change of the consumers behaviors significantly, they will to go through organized to establish a robust and sustainable business model. We have improved profitability of our full service carrier business model at first. We would introduce thereabout 6 different [inaudible 00:11:55] aircraft. Go to international routes from 2023 to capture more high end business travel demand. And regarding the cargo business, we have no plan to process our freight aircraft because we want to keep the flexibility in our cargo business. We focus on improving the quality of the total cargo operation, such as cargo handling, clothing, warehouse services.

Also, we will focus to enhance the partnership with our full orders and fully utilize the other airlines charter, aircraft as a charter. In the low end market in which we expect steady recover, [inaudible 00:12:54] potential. We will introduce three different low cost carrier business, ZIPAIR, Spring Japan and Jetstar Japan, in preparation the different and unique strengths. In particular, JAL would consolidate turning Japan into JAL group at the end of this month. We will collaborate with Spring Group, the largest LCC and the target Asian group in China to capture inbound demand from China. And we would expand with emerging new business domain such as in the mileage business where as we know we have the advantage of a site of contact customers and human related know-how as well. At this crisis, we have no dismissal for a layoff, not single staff of the company. Many of JAL staff, more than 2000 people are currently sent to other industries to diversify their ability and skills by experiencing different job in their [inaudible 00:14:19] opportunities.

We expect their new experience to contribute to the expansion of new business domains in the future as JAL aim to become a comprehensive service company for travel and life. When we talk about our target to reduce fuel emissions, this is the most important issue with the management. We announced have a goal to achieve net-zero CO2 emissions by 2050. And 50% of the reduction upgrading to fuel [inaudible 00:15:01] and aircraft such as Airbus 350 and Boeing 77. And 5% of the reduction will be immediate in our daily operation network. And another 45% reduction of CO2 emissions will be made by using sustainable application fuel. By the fiscal year 2025, we will reduce a total emission below 9.09 million tons which was the actual emissions over fiscal year 2019. And by the fiscal year, 2030 the total emission below 8.18 million tons in accordance with the international CO2 reduction framework. And we will use sustainable aviation fuel up to 10% of our total fuel consumption.

We need to accelerate development of sustainable aviation fuel and at the same time, we must ensure we have scale supply to reduce cost and to make it feasible. We have invested in programming bioenergy energy under the manufactures of the United States for the [inaudible 00:16:38]. And we have a partnership with [inaudible 00:16:41]. We welcome CO2 [inaudible 00:16:49] also in accordance with the initiative with the worldwide alliance. We are still in a very difficult situation. We all know that travel is an essential human need there we will ensure be an [inaudible 00:17:08]. So JAL will continue to challenge itself to achieve sustainable growth and development by our new plan and we make our progress only for our own advantage, but also in sort of being the biggest social issue through collaboration with tourism, transport and other related industries. So there is no question that we can overcome this crisis. So this is the end of my presentation. Thank you very much.

Peter Harbison:

Thank you very much Tadashi san. Very interesting and very comprehensive. I don't think anyone ever suggested the aviation business was simple. And I think you've illustrated that the massive challenges across the whole frame of the industry there. And of course, as you say, the underlying the key feature is that you actually remain profitable because without that, nothing else is going to work. And obviously that's going to be a challenge in the short term, getting back to a level where the revenues make you economically sustainable. I was interested in the way you see the sequence of recovery. And I think you mentioned if I heard you correctly, that you expected inbound travel to be the last segment of the market to recover. That's sort of not good news for inbound tourism for Japan it? Is that something you see as a general Japan inbound issue or is it more related to JAL's targets?

Tadashi Fujita:

One of the reason I state inbound travel will come last the was consensus was the people of residence in the area because still the people are very conservative to accept the foreign visitors to Japan. So in order to clear the problems, I think it's very important to prepare the strong medical support program not only for visitors but for the residents also. That is very important to develop the inbound travel in the future. So it takes a little bit time at a fast pace. However, after we established those welcome program, even not the [inaudible 00:19:54] but also the awareness. When we post for the appeal to the inbound people close in the future.

Peter Harbison:

Yeah, I think that's very interesting and it seems to be an attitude that most of the governments in Asia Pacific are taking that we need to be very, very careful about reopening. Whereas the contrast for example, with some of the European destination countries, Greece, Portugal, Spain, even in Turkey are very, very keen to reopen because they see that as economically being important. Let me address the sort of the bigger picture of how you see the industry going in future. Your president is on the record of saying that you see major structural changes in the industry in front of you. What's the sort of key, the fundamental structural change that you see? Is it with the growth in the budget travel market? Is it anything to do with business travel reducing the revenues for full service carriers? What are the sort of key issues there that will influence you?

Tadashi Fujita:

Well I think one of the reason is a business model before the COVID seems the market is developing year by year it's high numbers. So the airlines are making very big investments into the aircraft to catch up with demand. Even some of that route is not [inaudible 00:21:41]. And I think it's very good to adjust a model to the market to make profitable. Some of the route we should operate by the [inaudible 00:21:53] to offer the service to make a profit instead of offer the [inaudible 00:22:01] model to lose a profit. So essentially the airline business model before investment many aircraft, many bearings but now we have to be careful it's route by route if we check for stability to prepare the financial position in the future. And so I think partnership with the airlines is very important. We have dealt establishing a good partnership with American and British Airways in [inaudible 00:22:35] and those relationships is very good at help at this moment to cover the market each other and to share the profit and decrease the risk.

Peter Harbison:

Yeah, very important issue. Particularly when you're talking about actually downsizing the airline, reducing the size of the airline. Obviously you're going to have to rely much more on partners to provide connectivity globally. One of the other things of course you're doing, you've just acquired a majority holding in Spring Airlines, China's biggest LCC, and you've also got a Jetstar Japan in which you have a substantial holding. And ZIP, ZIPAIR which is your medium to long haul subsidiary. Talk a bit about how you see those low-cost carriers as part of your strategy moving forwards.

Tadashi Fujita:

Okay the definition of a local area would change everything. For example, ZIPAIR implementing a state-based aircraft and an [inaudible 00:23:46] class [inaudible 00:23:48] economy lass 31 increase. So it sounds like a narrow [inaudible 00:23:54] to squeeze a client. But the millions they have to pay and the language is chargeable. And so we both are the base comfort of your service and customers pay based with the need draws exercises. And this is one of the examples for what we are thinking about in [inaudible 00:24:18]. And so the whole LCC of course more efficiency and the most fit compared to the long and medium for aircraft route. But still the total service and especially like maintenance, security and safe support by the Japan Airlines to [inaudible 00:24:49] on-time departure and no cancellation that the more better service we can offer to the customer.

Peter Harbison:

Right. So with the full service model, it does appear with the likely reduction in business travel as well that I think everybody agrees is going to be reduced, whether it's 10, 20, 30, 40% reduction. Things like the configuration of your new aircraft coming in to more of a middle stream customer profile. Talk a little bit about that to how you see shift in first of all, in the hardware in the aircraft, but also in terms of your overall strategy.

Tadashi Fujita:

Yes, okay. So the international [inaudible 00:25:41] the new aircraft concept based on the full class service and [inaudible 00:25:47] and business and premium economy and economy class. The seat and the space or all the rooms, the business class type of rooms are really comfortable and more super supreme service to the customers for the business [inaudible 00:26:12] because business demands feel very conscious of the close wellness even in the cabin. [inaudible 00:26:21] is one of the merit for a super light space with safe and security [inaudible 00:26:30] basically important factors to those markets.

Peter Harbison:

But I mean looking at the economics of an operation, a full service operation, business travelers contribute disproportionately large amounts to the bottom line. Do you see that as requiring a significant shift in your strategy to adapt to a lower average yield effectively on long haul services?

Tadashi Fujita:

Well before the COVID, we still are making revenue management in a long time to making this profit. So I think even the capacity is less than before, we can control the revenue by the management step to make maximum profit with the aircraft. And even after the business class and premium [inaudible 00:27:36] and economy class, we can offer more high grade service compared to the other airlines to maintain the yield on certain levels to make a profit.

Peter Harbison:

Right, right. So there's a whole array of different adjustments you have to make to adapt to this new environment.

Tadashi Fujita:

Yes. And I agree with our company implementing what we call the weber system. This is every section, airport, cabins, cockpit or contact center, day by day they may keep the profitability for their jobs of their actions of their products to check. So everybody's very conscious to making profit. Of course, on the other hand, [inaudible 00:28:28]. So I think everybody trying to this challenge will be successful.

Peter Harbison:

This is the adjusting the culture to fit the demand.

Tadashi Fujita:

That's right.

Peter Harbison:

Exactly. Tadashi san, unfortunately we're out of time. But thank you very much for a very interesting presentation and for a nice discussion afterwards. We wish you well in your recovery process, we hope that the Olympics go well for you. And that domestically your state of emergency will be lifted and you can get back to doing your business in fact. Good luck and thanks very much for being with us.

Tadashi Fujita:

Thank you Peter. We will do our best and I will see you next time in video.

Peter Harbison:

Look forward to that. Thank you Tadashi san. Bye bye.

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