Japan Airlines (JAL) emerged from bankruptcy last year with a new lease on life, realising – although it was never in danger of absolute collapse – little is sacred and that the status quo cannot always continue, a radical change of thought in entrenched corporate Japan. This new thinking is evident in the carrier’s medium-term business plan from 2012 though 2016 which seeks to address the significant structural change that will start to occur later this year as low-cost carriers rapidly increase in the domestic market and expand on regional services.
While passengers and Japan as a whole will benefit from lower cost travel, that growth will be at the expense of Japan’s incumbent full-service carriers. JAL is smartly preparing to de-emphasise its mainline domestic market, which will be most exposed to LCCs, and concentrate on two areas LCCs will not reach in full force in the medium term: domestic regional flights and long-haul markets. In 2016 JAL plans to operate 13% more available seat kilometres (ASKs) than in 2011, with all growth in international markets; JAL’s domestic network will shrink.
Although JAL will broadly maintain fleet numbers, JAL will shift towards smaller aircraft, and regional aircraft in particular. The 787, slightly smaller than JAL’s long-haul Boeing 777-200 workhorse, will be used as a vehicle to add frequencies on existing routes with limited seat growth while also opening medium-served markets. This has already been seen with the carrier using the 787 to open a route to Boston, and replacing 777-200s with 787s on Moscow and Delhi routes. Alliance partnerships will be critical for the carrier; JAL already has anti-trust immunity with American Airlines and will establish a joint-venture with International Airlines Group (IAG), owner of British Airways and Iberia.
JAL is also preparing to differentiate itself from LCCs and respond to the technological innovations the LCCs will introduce. JAL will expand its premium cabin on domestic sectors while simplifying its domestic fare structure that can offer over a dozen fares on the web for a single flight.
Financially, JAL aims to achieve a 10% operating margin for five consecutive years (All Nippon Airways in 2009 achieved 4.8%, and in 2010 13.7%) and an equity ratio of at least 50% in 2016 (in 2012 it is projected to be at 41%).
LCCs force shift away from traditional domestic trunk routes
JAL's business plan is less about combating the existing competition – All Nippon Airways (ANA) – than it is combating changing dynamics in North Asia: the growth of Chinese carriers, and more importantly Japan's home-grown LCCs. The rationale for allowing joint venture LCCs to detract from the mainline business may not be clear on the outset, but is sound strategy due to converging factors. First, Japan’s population is shrinking. Japan's population is expected to shrink one-fourth by 2060, declining from 128 million to 95 million. Whereas markets typically rely on growing populations and the emergence of middle classes to fuel growth, Japan must stimulate new air travel at the same time of low economic growth. Domestic air fares are high – USD500 one-way fares for flights under two hours are not unheard of – and will not provide growth incentive the way LCCs, with their low cost base, will.
Second, Asian traffic will be dominated by carriers with significantly lower cost bases than JAL and rival ANA. The difference will be particularly acute in North Asia, where Chinese carriers have very low cost bases compared to the inflated costs of legacy Japanese carriers. Even Japan’s LCCs will be at a competitive cost disadvantage to Chinese carriers, but they will be far better positioned to capitalise on growth than legacy carriers. The emergence of LCCs is mandatory, not an option, if Japan is to maintain an air transport industry and grow tourism.
This then forces JAL to look at markets LCCs will not reach in the medium term. JAL’s five-year business plan will see the carrier operate 13% more ASKs in 2016 than in 2011, but growth will occur only in international sectors. International ASKs will grow 25% in 2016 compared to 2011 while domestic ASKs will shrink by 3% in the same period. JAL includes codeshares in its ASK figures, which inflate its own offering as the carrier has signalled intent to work with more partners. The marginal growth will not offset the drastic cuts made during bankruptcy, which included shedding 49 routes, 103 aircraft and 16,000 staff.
JAL projected ASK growth based on 2011 baseline: 2012, 2013 and 2016
This changed growth profile will also affect JAL’s revenue. This year it expects its domestic network to be the single largest operating revenue contributor, accounting for JPY484 billion of total JPY1217 billion, or 40%. International passengers will account for 32%. (Cargo and other business account for the remaining revenue.)
JAL projected consolidated balance sheet: 2012 to 2013
Next year, the gap will start to narrow, with domestic decreasing to 39% and international increasing to 33%. JAL expects international yields to decrease (a 4% decline in 2012 compared to 2011, and a 6% decline in 2013 compared to 2011 – higher than the typical rate of decline) while domestic yields will remain flat. Load factors are expected to hold domestically but shrink by 1 ppt in 2013 compared to 2012, unsurprising given the additional capacity JAL plans to put into the market that year.
JAL operating metrics measured with 2011=100: 2012 to 2013
While JAL has not provided revenue guidance beyond 2013, the increased focus on international flying and decreased focus on domestic flying will see international flights comprise more of the group’s overall revenue.
AirAsia and Jetstar, which later this year will launch LCCs in respective partnership with ANA and JAL, have made no secret widebody A330s will be available for their Japanese subsidiaries. While both would like noticeable A330 bases in Japan by 2016 (the end of JAL’s current business plan), mainline carriers will continue to dominate long-haul travel and may be hesitant to allow their LCC JVs to operate widebody services. (Also launching this year is Peach, another LCC established in partnership with ANA.)
Domestic network increases flights but decreases available seats
While domestic ASKs will shrink by 3% in 2016 compared to 2011, the number of flights operated by JAL will increase by 5%. This is a result of JAL operating fewer widebody aircraft and more regional aircraft. The rationale originates with new LCC competition. The LCCs will target high-demand routes where they can quickly build scale, leaving regional routes and lower-demand routes to incumbents.
JAL projected growth of number of flights operated based on 2011 baseline: 2012, 2013 and 2016
This shift is reflected in JAL’s fleet plan for its domestic mainline and primary domestic subsidiaries. While overall numbers are planned to remain approximately the same in 2016 as in 2011, widebody aircraft (777-200/300) will shrink in numbers while regional aircraft (Embrarer and Bombardier regional jets as well as Bombardier turboprops) grow. JAL also attributes smaller aircraft growth due to forthcoming improvements in Japan’s high-speed rail, the Shinkansen.
JAL domestic fleet plan: 2011 to 2016
JAL is also seeking deregulation at Itami Airport, Osaka’s downturn airport, to combat launch of Peach in further out Kansai Airport. Like in Tokyo, JAL sees a competitive advantage from operating out of the more convenient airport, even if fares are higher.
JAL has announced expansion in secondary markets in the short term.
JAL domestic network improvements (new routes and increased flights): 1H2012
International fleet to grow, with more 787s on order
JAL Group’s overall fleet will grow mildly, increasing from 212 aircraft in 2011 to 222 in 2016. Nine aircraft are allocated for growth in international markets while one aircraft is allocated for domestic operations.
JAL Group fleet plan: 2011 to 2016
In comparison, ANA operated 222 aircraft in 2011 in about the same size category proportion as JAL but leaning more towards larger aircraft and away from regional aircraft.
As in the domestic market, the proportion of small- and medium-sized aircraft will grow. The biggest overall growth will be in mid-size aircraft, namely the 767 and 787. Through 2016 JAL plans to retire 767s as it receives the 787; its first is due in the coming months subject to Boeing delivery timetables. With its business plan, JAL announced it was ordering 10 787-9s and converting 10 of its existing 35 787-8s to -9s, for a total firm order of 45 (25 -8s and 20 -9s) and 20 options.
With JAL targeting more long-haul routes – it also announced it would use the 787 to open new routes to Helsinki and San Diego – the performance improvement of the -9, carrying more passengers over a longer range compared to the -8, will be to JAL’s advantage.
The shift away from large aircraft began during JAL’s restructure when it retired its entire fleet of 747s. It had been the world’s largest operator of 747s. Through 2016 JAL will start to also retire older 777-200s. The 787-8 is comparable to the 777-200 while the 787-9 is a far closer match and brings a significantly reduced operating cost.
Through 2016 JAL plans to introduce 29 to 33 787s (including -8s and -9s, the latter to be delivered from FY2015), nine 737-800s and unspecified additional aircraft. Through 2016 the total projected capital expenditure is JPY478 billion.
JAL capital expenditure for new aircraft: 2012 to 2016
JAL this year will retire its MD90s, further simplifying its fleets.
International routes focus on the US, Europe and Middle East, with help of partners
Driving JAL’s international expansion will be increased flights from Tokyo Haneda Airport, located in downtown Tokyo, unlike the main international airport, Narita, located 65km away. JAL is targeting additional daylight flights from Haneda to Europe and the US beginning in FY2014 (commencing 01-Apr-2014). JAL says increased slots at Haneda and Narita present its “biggest business opportunity”, but also its largest threat as international carriers use some of the additional slots.
Japanese carriers currently have a competitive advantage over foreign carriers at Haneda as they are allocated daytime slots whereas foreign carriers are given unpopular evening slots. The number of Haneda slots will increase in coming years, but it is not clear how much foreign carriers will gain.
JAL’s new Tokyo Narita-San Diego flight, to launch in Dec-2012 with four weekly flights but increasing to a daily service in Feb-2013, follows JAL opening a Boston service and ANA expanding to Seattle and San Jose.
In both markets JAL has signaled its intent to work with partners, existing and forthcoming. JAL has a trans-Pacific anti-trust immunity alliance with American Airlines but has flagged it will “pursue new business alliances to improve our onward connection network to the U.S. East and West Coasts and Latin America”. JAL already has a limited relationship with JetBlue, which itself has a codeshare and frequent flyer relationship with American Airlines. With the merger of Latin America’s LAN and TAM, and their very likely selection of oneworld as their future combined alliance (LAN is currently in oneworld but TAM is in Star), the entity will be the largest operator – by far – in the US-Latin America market and is an obvious candidate to forge closer ties to. JAL used to operate to Sao Paulo (via New York JFK) but withdrew the route during its restructuring. It has not flagged its intention to return to Sao Paulo or any route it axed during the restructure (such as Australia’s Brisbane).
JAL plans to make unspecified capacity increases to Honolulu, its largest leisure market, and improve business class on the routes.
JAL last week announced it would form a joint-venture with IAG, owners of British Airways and Iberia, a decision that brought relief to IAG. JAL has maintained a close relationship to SkyTeam’s Air France while having limited involvement with IAG. The joint venture will see closer workings with IAG, likely at the expense of the Air France partnership ending. JAL acknowledges the weak situation in Europe, but is expecting recovery.
JAL has flagged a key intention to improve onward connections within Europe. Its European operation sees service into London and Paris, which require significant backtracking to access the rest of Europe. There is also service to Frankfurt, a non-oneworld hub, and Moscow, which has limited opportunities with oneworld member S7. JAL’s new Tokyo Narita-Helsinki route, however, gives a geographically strategic European base; the most efficient routes between Asia and Europe typically pass over Helsinki. “Helsinki is the entrance to Europe and functions as a hub for European cities,” JAL said when announcing the route, due to commence in Mar-2013 from Narita with four weekly flights, increasing to daily services in Jul-2013.
The Middle East was also identified as a region JAL wants to extend its reach to via existing partnerships. JAL does not fly to the Middle East and oneworld member Royal Jordanian does not serve Japan. But JAL has a codeshare and frequent flyer agreement with Emirates, formed in 2002 and expanded in 2010.
JAL international network changes: 2012 to 2013
Measured growth in South and Southeast Asia as 787 allows increase in frequency but not seats
JAL’s medium/long-haul operation to South and Southeast Asia will be characterised by increased reliance on the 787. This is not a matter of deploying the latest aircraft or gaining publicity but represents structural changes to JAL’s route planning. The 787, with the range of a 777-200 but a 767-300’s capacity, allows JAL to increase frequency while maintaining capacity or only slightly growing capacity.
In late Apr-2012, JAL plans to deploy the 787 on four of its five Delhi frequencies, replacing the 777-200 and decreasing weekly available seats. Some growth will occur in Dec-2012 when JAL increases the service to a daily operation. Likewise, JAL in Bangkok from Feb-2013 will use the 787 instead of the 777-200 on some of its 21 weekly flights.
In Singapore the 787 will replace the 767-300 in Sep-2012, approximately maintaining capacity while making some increases from Oct-2012 when the 787 opens seven additional weekly Narita-Singapore flights (overall capacity will be seven weekly flights to Singapore from Haneda and 14 from Narita). The 787 will have a much improved cabin over the 767-300 in a market where the newer 777-200 would have offered too much capacity.
The increased focus on frequencies is a deliberate move from JAL as it looks to improve its standing with the corporate market and its associated high yields.
JAL’s short-haul Asia network to target more sixth-freedom traffic
The new LCCs in Japan will be staking a claim not just on the domestic market but the short-haul international market, namely China, Korea and Taiwan. Peach, launching domestic services in Mar-2012, will make its first international flight two months later in May-2012 with a daily flight to Seoul, increasing to three daily in Jul-2012. Hong Kong flights will start in Jul-2012 and Taipei in Sep-2012. AirAsia Japan and Jetstar Japan will also be quick to enter international short-haul markets.
JAL says its focus in China, Korea and Taiwan will be not just for Japan-originating traffic but as connecting services for passengers from North America, expanding Japan’s role as a geographically convenient sixth-freedom hub to North Asia.
In these markets, and China in particular, JAL says it will target enhanced cooperation with existing partners; JAL and China Eastern have an extensive codeshare relationship that has been expanded in recent years. (Although China Eastern is a member of SkyTeam, it is overshadowed in North Asia by fellow member Korean Air.)
After the domestic Japanese market, this region will be most affected by the entrance of Japanese LCCs. JAL has been less bullish on its prospects, saying it will increase routes on “some” flights from Toyko Haneda (Japan’s LCCs will be based at either Toyko Narita or Osaka Kansai). JAL does not shy away from its JV LCC, Jetstar Japan, gaining an important role in the market, saying it will leverage Jetstar Japan “in a complementary manner”.
JAL targets further cost reductions
Under its medium-term business plan through 2016, JAL is targeting additional cost reductions, started during its restructure during bankruptcy, which commenced in Jan-2010. JAL aimed to bring its CASK down 10% from JPY12.9 to JPY11.6 by FY2013, but achieved a JPY11.5 CASK in FY2011, ahead of schedule. It now plans a JPY11.0 CASK in FY2016, representing JPY50 billion of savings. JAL bases its financial figures on fuel (Singapore kerosene) through 2016 costing USD130/barrel, with every USD1 increase adding JPY2 billion of costs. It projects JPY1 buying USD85 cents. JAL expects to maintain a headcount of 32,000 during the plan but will look to achieve increased levels of productivity from employees.
Its bankruptcy restructure saw JPY110 billion of savings, although the carrier saw JPY521.5 billion of debt forgiven and received a JPY350 billion capital injection.
JAL recorded an operating profit of JPY188.4 billion in FY2010 (ending 31-Mar-2011) and expects approximately the same result in FY2011. This is higher than ANA's equivalent results.
JAL is seeking usual service enhancements to place it ahead of the competition but also differentiate it from the emerging low-cost carriers. JAL will fit first class seats to its domestic 777-200 fleet, will finish installing business class seats on its 737-800 fleet, introduce full-flat business class beds on its existing international fleet, in 2014 will further expand its lounge at Haneda’s international terminal (and elsewhere in the world) and progressively upgrade its in-flight entertainment and introduce in-fight internet connectivity.
Most interesting are changes JAL is making to simplify its passenger experience. LCCs bring straight-forward processes with slimmed-down IT systems, which can pose a stark contrast to Japan’s tendency to over-engineer systems. JAL has coined the phrase “JAL SmartStyle” to overhaul its passenger experience to “convenient and simple” services.
JAL will overhaul its fare structure, promising a simple and easy-to-use system; its current structure can have in excess of a dozen fares readily available for purchase, causing confusion from passengers about what the differences are. JAL will also introduce a new revenue management system, an area in which it has been historically weak. AirAsia and Jetstar are already well adept at revenue management.
JAL will also standardise international and domestic booking systems, which are currently maintained independently, adding significant cost and limiting sale opportunities. With JAL’s increased international focus it will explore new sales channels and also look to grow web bookings, which are historically very low – below 20%.
Outlook: JAL prepares for medium term, but has it done enough to face the forthcoming LCC revolution?
JAL has rightfully faced the significant changes that will occur in the country as LCCs gain further prominence this year. The carrier has laid out detailed long-haul growth but has been specific on short-haul international growth, and it is this area that may see JAL significantly reduce flights except for strategic corporate flights and services which feed its long-haul network.
Within the early years of its plan, JAL will have to face the prospect of the country’s LCCs wanting to operate widebody aircraft (more immediate a concern is hybrid LCC Skymark, which last week ordered six A330-300s) and even move in to some of the more secondary domestic markets JAL plans to capitalise on. Its plan is a solid start, and remarkable when considering the inefficiencies in the carrier only at the start of the decade.
JAL financial plan summary: 2012 to 2013
JAL consolidated balance sheet: 2012 to 2013
JAL consolidated CF: 2012 to 2013
JAL air transport profit and loss: 2012 to 2013