All Nippon Airways has become both Japan's largest domestic and, more recently, international carrier. Its home is a domestic market with affinity for Japanese carriers – and increasingly ANA, not rival JAL – that translates to a yield premium. ANA is planning international and long-haul growth to reduce its reliance on the domestic market. In 2015 the once-exclusively domestic ANA expects for the first time in its history to have more international than domestic capacity.
But ANA is in a market filled with potential growth, has the highest cost base of major Asian carriers, and a smaller Asian network than its peers. While ANA is delivering returns, it is to a degree relatively inefficient, with low aircraft utilisation and domestic load factors around 60%. While these attributes provide the market with the reliability and rewards it prefers, it also means that should the market become more complex and require change, ANA has options to restructure. This is in contrast with global peers that have few avenues left to pursue.
An international pivot comes with the reality that ANA has limited experience with other markets, having catered largely to outbound Japan. While this has meant some mistakes along the way, ANA has been sufficiently innovative to embark on a strategy involving international acquisitions, including a proposed small investment in Myanmar's Asian Wings, a low risk venture now considered doubtful.
Strengths: Size, nuances of Japan's market
a) Larger than Japan Airlines. ANA for some time has been larger than rival Japan Airlines in the domestic market, and in early 2014 overtook JAL as the largest Japanese carrier in the international market. This can potentially bring benefits from scale and network reach, but also weaknesses and threats (to be discussed later).
Japan domestic seat capacity by carrier: 21-Jul-2014 to 27-Jul-2014
Japan international seat capacity by carrier: 21-Jul-2014 to 27-Jul-2014
b) Home market has high affinity for Japanese carriers. In most markets, the local population tends to favour local airlines. In Japan, this is true in the extreme. The local market has a very high affinity for Japanese carriers that translates to a strong yield premium over foreign airlines. As the market receives more cost-effective transport options (from low-cost and full-service airlines) and Japan continues to contemplate its financial state, theis advantage will diminish, albeit remaining at strong levels.
c) ANA is often viewed more favourably than JAL. Original flag carrier JAL was once the pride of Japan, a symbol of its economic might and "Japan Inc." But its spectacular bankruptcy and massive re-structuring caused it to lose favour in the eyes of some Japanese. More critically, it is now ANA, not JAL, that often attracts government favour. This has already paid dividends as, in a recent allocation, ANA received more precious Tokyo Haneda slots than JAL. ANA is casual about this, seeing the slot allocation as a partial correction of the government-provided restructuring benefits that JAL continues to enjoy.
d) Long-haul operations are entirely supported by JVs. 32% of ANA's international seats in Jul-2014 reach North America and Europe, where ANA is anchored with joint ventures, with United Airlines and the Lufthansa Group respectively. These are ANA's only scheduled long-haul markets, meaning ANA's long-haul operation is entirely covered by joint ventures. A potential Istanbul route would fall outside the Lufthansa partnership but would be aided by partnering with Turkish Airlines.
ANA international seat capacity by region: 21-Jul-2014 to 27-Jul-2014
e) Domestic Japan is a high yielding market. Domestic air fares in Japan are some of the highest in the world, and ANA derives a disproportionately large share of profit from its domestic network. This provides stability that is likely to continue as the inroads by challengers – Skymark and the more recent LCC entrants – have so far been modest. ANA and JAL have flagged long-term domestic capacity decreases. Capacity discipline could address weakened demand.
Weaknesses: High cost, muddled LCC strategy, low international experience
a) ANA's cost base is the highest in Asia. ANA's cost base is not only higher than rival JAL but is the highest of major Asian carriers. Although ANA can have an advantage in the large market to/from Japan, for international traffic it is disadvantaged. Korean carriers offer typically better geography as well as a wider intra-Asia network.
b) Complex LCC strategy. Rather than a strategy, ANA's approach to the LCC movement has been more reactive and has evolved incoherently. ANA has not one but two low-cost carrier part subsidiaries: Peach Aviation and Vanilla Air. Peach was ANA's first LCC (ANA has a minority interest) while ANA felt compelled to partner with Malaysia's AirAsia Group to create AirAsia Japan.
If ANA had not partnered with AirAsia, AirAsia would have likely pursued a partnership with Skymark, leading ANA to conclude it was to better to cannibalise its business itself rather than let another party do so. AirAsia Japan's failure (partially ANA's fault, exhibiting concern about cost discipline and international experience) lead to ANA taking over AirAsia's share, taking on full ownership of the LCC and re-branding it Vanilla Air.
There could have been greater synergies (and performance of Vanilla) had ANA permitted Peach to take over Vanilla. Further, preliminary traffic data indicates ANA has been more impacted than JAL by LCC growth.
See related reports:
- Vanilla Air to continue conservative growth while pivoting towards the international market
- All Nippon Airways and Japan Airlines respond differently to country's LCCs; is JAL faring better?
- Vanilla Air to give owner ANA a presence in abandoned markets while offering a hybrid model
- 'Vanilla Air' new name for AirAsia Japan under ANA's control – will it be sweet or plain vanilla?
- ANA to re-launch AirAsia Japan with new brand, oversight – can ANA get it right this time around?
- AirAsia Japan collapses after AirAsia Group was too bearish while ANA lacked experience
c) Weak international experience. Reliance on the outbound Japanese market has meant Japanese carriers have not had to focus on, and so learn about, international markets. This can lead to unprofessional marketing and more problematic decisions like ANA's proposed investment in Asian Wings, an airline in Myanmar that was found to have a sketchy history of concern to major foreign countries. ANA is all but certain to abandon this proposed investment. This process has cost it little, but potentially could have been worse, and illustrates a continuing need to develop greater internationalisation.
d) Target is international growth, but its foreign brand recognition and understanding is low. Affinity for Japanese carriers is a strength for ANA, but conversely this has allowed it and JAL a degree of complacency in their offering in the absence of other full-service international Japanese carriers. Long-haul and international growth is the agenda for both ANA and JAL, but foreign markets will be far more price sensitive than Japan and will not be as willing to pay a premium for ANA or JAL. ANA will need to work harder overseas to convince markets of its brand and associated value. This is the more so where Japan's economy - and outbound traffic flows - are languishing and Japan's new thrust is to attract inbound tourism.
Opportunities: growth in airline flying and other businesses
a) Expanded group/holding company role. ANA has shifted from being an airline with subsidiaries to a holding company where ANA is one (albeit the largest and flagship) company. For now this change may seem minor, but positions ANA well to explore non-Japanese flying opportunities and give it the corporate structure to evaluate and potentially make acquisitions.
ANA proposed investing in Asian Wings which, although unlikely to eventuate, is an indication of intent and a step in the learning process; it is also making moves in the training space, seeing itself as being able to tap into burgeoning Asian demand by training pilots. While this may not capture the prestige and notoriety of its airline operation, the Lufthansa Group (one of the few groups that breaks out profit by segment) shows non-flying activities have a significantly larger margin than flying businesses. Lufthansa Group's MRO 2013 profit of EUR404 million is only 18% less than the airline operating profit of EUR495 million.
Lufthansa operating margin by business segment: 2013
|Passenger Airline Group||2.6%|
This will help provide stability while allowing ANA to tap into the growth around Asia; Japan itself has more limited prospects for growth. Further endeavours are likely to be a greater MRO role. Airline acquisitions are more complex; Philippine Airlines for example had been considered but was ruled out. But ANA's strong domestic position should make it a relatively attractive partner, once the skills are developed to establish foreign acquisitions.
See related reports:
- ANA looks for international acquisition: talks with Philippines Airlines productive but not end game
- All Nippon Airways would invest in airlines as part of strategy to counter Japan's declining economy
b) Long-haul/international growth. In 2015 ANA expects, for the first time in its history, to have more international than domestic capacity. Japan, while below the tourist radar, wants to double 2013's visitors to 20 million by 2020 and 30 million by 2030. The weak yen is expected to make Japan more attractive to visitors, although it will be a while before Japan can shake its image of being an unaffordable holiday. But as noted earlier, ANA's high cost base may limit potential.
c) LCC growth. Where ANA cannot grow on its own (leisure markets, smaller cities, for example) it has two LCCs. Both Peach and Vanilla expect eventually to have more international than domestic capacity. There is undobtedly large potential demand in short-haul markets. ANA as the 100% owner of Vanilla Air can direct the LCC to certain markets and even establish an integrated dual-brand strategy (should it wish to do so). However, ANA is only a minority investor in Peach, meaning ANA does not have final say in the carrier's plans.
d) Opportunity for restructuring. ANA's opportunity in this regard is its current iinefficiency, according to most recognised KPIs. This is true especially domestically, with low aircraft utilisation and load factors around 60%. However, to date this has worked and delivered results. Should further efficiency be needed at ANA, it would be considerably easier (although contentious) for ANA to make it happen compared to peers that have already undergone or are presently undergoing restructuring.
Threats: Miscalculation in growth, organic and virtual
a) Dragged down by investments and partnerships in smaller airlines. A saying in the Japanese market is that "airlines don't die". ANA certainly contirbutes to this proposition, propping up smaller carriers that would otherwise have an uncertain future on their own. There are a number of factors: allowing an airline to maintain pride by surviving; ensuring a competitor does not acquire the airline; and providing a partnership that enables virtual growth at slot-constrained Tokyo Haneda airport.
ANA has a close partnership with Air DO and has evolved its partnership with StarFlyer from codeshare to investment. ANA's StarFlyer investment was met with a tepid response from the market, which was expecting ANA's capital-raising exercise to fulfil international growth and acquisitions, not merely domestic acquisitions. However, StarFlyer was at least an inexpensive acquisition, although it is now showing weakness. The threat is not substantial but it does see ANA not fulfilling its potential by bypassing synergies and diverting management attention.
See related reports:
- Japan's StarFlyer, struggling to expand its niche, will reduce its fleet and receive new management
- Air Do, product of Japan’s quixotic airline market, likely to remain independent pending reform
- ANA's capital-raising and international acquisition strategy raise questions for investors
b) Long-haul over-capacity. ANA is undergoing a cost reduction exercise and has achieved savings ahead of schedule, meaning it will target more. But ANA potentially risks growing its long-haul operations too fast. This applies both to the number of flights and capacity per aircraft: ANA is planning future large capacity long-haul flights (i.e. not 787) to be with the 777-9X, which is larger than its existing 777-300ERs, while JAL is planning to replace its 777-300ERs with the slightly smaller A350, showing JAL's more conservative approach.
The trans-Pacific market is already experiencing over-capacity, and this situation could potentially get worse before it gets better. Further, cost reduction exercises at Chinese carriers (inevitable but not imminent) will make their long-haul flights profitable and encourage further growth.
c) Increased foreign airline competion as Japanese aviation policy supports inbound tourism needs. Japan's ambitious - and unlikely to be achieved - inbound tourism goals are accompanied by increasingly liberal aviation policies. Several open skies agreements have been concluded with near neighbours and the US and more will be needed to encourage the sort of growth needed. Until ANA is able to improve its inbound marketing and sales capabilities (and reduce its high cost base) these moves will work to support foreign airline entry, undermining ANA's growth strategy.
Also, China's airlines are rapidly emerging with significant global potential and will increasingly divert sixth freedom traffic flows from Japan's long-haul markets as their range of foreign destinations improves.
Outlook: there is plenty of room for improvement, with a currently stable and secure base
ANA is being innovative from a relatively low base. Although it is reducing its cost base, this falls well short of the fundamental restructuring it needs. Nonetheless, its foundation is strong - a factor recognised by the market, as ANA's share price has improved in recent months while other Asian heavyweights Air China and Cathay Pacific have watched their past years' gains decrease. ANA's improved performance contrasts to Korean Air's weaker showing.
Growth prospects are strong with only mild short term impact of wider threats, both from outside and within the ANA group. But if the opportunities opportunities are taken to make significant improvements in efficiency, potential trouble at ANA could be strategically addressed.
In today's more complex environment, airlines are defined by their ability and execution of effective responses or of showing the ability to show initiative. Although ANA has room for improvement, it rests on a sound footing that makes other carriers, even in relatively stable Asia, envious.
For ANA it will be important to show that it recognises the medium to longer term fragility of these advantages and takes effective action to prepare for more difficult times. There is a danger that complacency will fail to drive the deeper changes that ANA needs to make.