Rising suns

The rate of decline has been accelerating. And for good reason.

Back in Tokyo, after decades of political dithering, mislaid plans and environmental protests, Japan’s grand airport strategy is finally coming together… and paying dividends. Once a domestic airport, Tokyo Haneda began opening up to international services in 2010, allowing long-haul flights during the night. From March this year, longhaul services began during the day.

It has been a seismic shift.

International services to Europe, the US and South America from Haneda have increased by 50 per cent and there’s a push on to attractmore international carriers to fly in at night, with landing fees being cut by half between 11pm and 6am, starting this month (November).

Narita too is set to see a boost in its ability to handle more traffic. A transport ministry panel says it is possible to increase the total annual number of arrival and departure slots at Tokyo’s two international airports by up to 79,000 to add extra capacity for the 2020 Tokyo Summer Olympics. The current slot total is 717,000, consisting of 447,000 at Haneda (more than 80 per cent of these are still domestic) and 270,000 at Narita. The latter is expected to have 300,000 slots by the end of March next year.

The panel proposed increasing the frequency of runway use and allowing flights over central Tokyo to boost slots at Haneda.

For Narita, it proposed improving flight control functions and adding taxiways between airport terminals and runways. It also thinks it will be necessary to consider adding one runway each to the two airports as a way to expand slots after 2020, by up to 290,000 a year. At present, Haneda has four runways and Narita two.

All of this is crucial because both ANA and JAL are pinning much of

Japan’s grand airport strategy is finally coming together… and paying dividends.

their future success on international flying. To do that, they need access to additional slots at the major gateways.

And there lies the bone of contention. When aviation authorities back in 2012 handed out 11 new domestic slots at Haneda it gave ANA eight and JAL just three.

A year later, with 16 international slots up for grabs, ANA got 11 and JAL a mere five. That altered the balance of international power between ANA and JAL, which until then had been equal with each operating 13 daily international flights from Haneda. Their offerings were almost identical, with the exception that ANA serves Frankfurt while JAL serves Paris, and ANA serves Los Angeles while JAL serves San Francisco.

For JAL, it was a brutal decision… and costly. Each international route out of Haneda brings in annual revenue of close to US$100 million. On the day he was informed of the decision by the Ministry of Land, Infrastructure, Transport and Tourism, the carrier’s president Yoshiharu Ueki visited every department at the airline’s Tokyo head office, telling employees: “I share the same gutwrenching anger that you must be feeling. ” For a Japanese airline chief, and one from the traditional national flag carrier at that, it was an unprecedented cutting remark aimed at government.

Why the imbalance? It all stems back to when JAL filed for bankruptcy protection in 2010. To save its skin the then Democratic Party government put together an US$8. 7 billion bailout package, granted the airline corporate tax exemptions and a get-out-of-wageand- pension-commitments-free card. But by 2012 the Liberal Democrat Party was in power and it is a government, say insiders, bent on clipping JAL’s wings. The argument it puts is that the nationalcarrier’s bailout gave it a significant advantage over rival ANA, which couldn’t get access to the same tax exemptions and other benefits JAL was receiving.

The unequal allocation of Haneda slots was its way of redressing the balance, although even that didn’t exactly calm ANA group president Shinichiro Ito, who sent a message to his employees expressing alarm, rather than delight. “We have been left far behind (JAL)… now we need to resolutely prepare to combat the entity that has been restructured under the corporate rehabilitation law,” he said.

His anger continues to stem from the belief its main competitor received a bundle of corporate welfare to remain in the air. JAL has not only stayed aloft, it is now posting higher profits than ANA.

Nevertheless, the changes appear to have thrown the pendulum well and truly in ANA’s direction. In May it became Japan’s largest international airline in terms of revenue passenger kilometres (RPKs), knocking JAL off thetop spot for the first time ever. ANA, which has been working to reorganise its international operations to generate more profits, saw its RPKs rise 25. 4 per cent year-on-year during the month to 2. 953 billion kilometers, higher than JAL’s 2. 912 billion kilometers, marking the first time it has taken the top spot since it began international services in 1986.

That hasn’t been the only win for ANA. In September Ito was all smiles as he saw off the airline’s first scheduled Boeing 787-9 flight from Haneda. He had just learned the carrier had also outperformed JAL in international passenger revenue, which rose 22 per cent year-on-year in the April-June quarter to US$1. 04 billion, overtaking JAL’s US$982 million. Again, it was the first time ever it had outgunned its rival revenue-wise in any quarter. During the period ANA also swung back into the black with a net profit of US$34 million compared with a loss of US$64. 1 million a year earlier. Much of that was attributed to its expansion at Haneda. Despite this, JAL is still making more money than ANA. During the same period JAL saw its net profit drop 19. 4 per cent to $145 million.

All in all, despite the “wins”, Ito clearly remains nettled by JAL’s financial position. As he watched his new Dreamliner enter service he said: “Our international business is good, but there still is a wide gap with rival companies in managerial power and earnings. ” ANA officials privately point to operating margins. JAL’s is expected to top 10 per cent for the year ending March 2015, while ANA’s is foreKazuo Inamore. Yoashiharu Ueki, a long-time JAL captain, took over in 2012 when Onishi became chairman. Together, they continue to lead the airline away from its traditional, conservative approach to business.

Onishi told this writer recently that his aim is to gain an “A” grade financial rating for the current fiscal year. “Once we have achieved this we will specifically look at what our dividends need to be to pay back our investors (the government for its bailout package),” he said. “We have achieved a certain level of profitability, but if you look at our balance sheet you will see there are many issues we must address to improve ourselves financially. It could be said today that JAL is comparably healthy financially. But we believe the aviation industry continues to be very volatile. There needs to be a lot more done to maintain the financial health that JAL is in right now. ” One of JAL’s unbreakable rules – ordering only Boeing aircraft – has already been trashed. As part of its

Despite early teething problems with the 787, both carriers have stood solidly by it.

cast at just five per cent (By any measure both these figures are the envy of a global industry that has trouble reaching margins of just two per cent). They attribute the difference to JAL taking such steps as asset write-downs to reduce depreciation expenses when it went bankrupt.

Ito said ANA could not use this accounting technique. “We’re working on reforming our cost structure now, and implementing it thoroughly is important. ”The carrier has devised steps to enhance productivity per worker, such as increasing hours for flight attendants. The increases at Haneda also allowed it to add services to major cities such as London, Paris and Hanoi. ANA has left unchanged its forecast for the fiscal year through to March 2015, expecting a US$320 million net profit, a US$780 million operating profit and and around US$1 billion in sales. JAL is also forecasting a lower net profit of around US$1 billion for the current year, which does represents a decline from last year.

Despite the wrangling over slots and JAL’s perceived financial advantages, both Japanese carriers appear set to enter a fruitful period. One glaring development has been a generational change which has brought new vigour to the management of both carriers. JAL’s chairman is Masaru Onishi, an amiable, astute executive who is at ease with the media. As president he was a principle player in leading the airline out of bankruptcy along with venerated local businessman mid-term business plan to fiscal year 2016, late last year it broke with tradition and signed up for 18 Airbus A350-900s and 13 A350-1000s, with options on another 25 aircraft. Deliveries are to start in 2019. That was the first widebody commitment for Airbus from either JAL or ANA.

“In making our decision between the 777 and A350, we did a lot of homework,” said Onishi. “A lot of minute details were studied. We came to the conclusion that for our business model the A350 was a little more advantageous to JAL. Hence we intend to look at the A350 as a replacement for our older 777s. ” JAL, which currently has a fleet of 117 aircraft, won’t be looking at a single-aisle replacement for some time as its fleet of 737-800s still had a working life. However, in September it did order a total of 47 regional jets, 32 of Mitsubishi’s new MRJ90s worth around US$1. 5 billion as well as 15 E170s and E190s from Brazil’s Embraer, worth some US$677 million.

These are all earmarked to fly with domestic regional Osaka-based subsidiary J-Air. Interestingly, when the MRJs, currently under development, begin arriving in 2021 it will be the first time JAL has owned a Japanese passenger aircraft since the YS-11 was taken out of service by Japan Air Systems (now merged with JAL) in 1996. J-Air currently operates 176 daily flights to 21 Japanese cities including Osaka, Sapporo, Sendai and Fukuoka.

As it awaits its new fuel-efficient widebodies, JAL is cautiously expanding its international network, which shrunk dramatically during bankruptcy. It recently announced new flights for the first half of next year (the second half of the fiscal year ending March 31 2015). It will launch services from Nagoya’s Chubu Airport to Bangkok andfrom Osaka Kansai to Los Angeles. These were originally scheduled for the following year but have been brought forward. It will be JAL’s first international flights from Chubu Airport in 10 years, and its first international flights from Kansai Airport in six years. Chubu-Bangkok will initially be operated with 767‑300ERs, later to be replaced by 787-8s. The Kansai-Los Angeles route will be served with 787s from the start.

While in recent years JAL’s international growth has been focused on new services, such as to Boston and San Diego, it is now turning its attention to re-opening routes cut during bad times. These may include services from Osaka to London and possibly to Sao Paulo, via New York.

For its part, ANA, which currently has a fleet of 236 aircraft operating to 54 international and 111 domestic destinations carrying some 45 million passenger annually, has also been busy in Seattle and Toulouse. In July it ordered US$16. 5 billion worth of Boeing and Airbus aircraft, firming up a deal for 40 Boeing widebody jets, including 20 777-9X, 14 787-9 and six 777‑300ER aircraft, worth US$13 billion at list prices. It also confirmed a deal announced earlier for seven Airbus A320neo and 23 A321neo single-aisle jets worth US$3. 49 billion, with delivery starting in 2016. It also has 15 Mitsubishi MRJ regional jets on order, with options for 10 more.

Despite early teething problems with the 787, both carriers have stood solidly by it. Altogether, ANA has orders for 44 of the new stretched 787. With one already flying, two more are scheduled to arrive before the end of March next year. The first 787-9s, in a 395-seat configuration, will operate domestically from Haneda to Fukuoka, Osaka (Itami) and Matsuyama with later arrivals being deployed internationally, where they will have a 215-seat configuration, 46 seats more than the existing 787-8.

Of course, neither Japanese carrier is immune from the volatile landscape in which all full-service airlines live. Fuel costs, rising levels of competition and the ever-present possibility of the unexpected loom over everyone. So does the enormous growth of low-cost carriers in the region, plying more and more routes with more and more capacity. In Japan at least, that threat is in its infancy. There are now eight budget carriers operating, three of them owned or part-owned by JAL and ANA themselves. A ninth, AirAsia Japan, is in the planning stages.

JAL has Jetstar Japan in partnership with Qantas. ANA wholly owns Vanilla Air and part owns Peach. But along with the others – AirDo, Skymark, StarFlyer, Solaseed Air and Spring Airlines, together they still hold only a tiny share of the Japanese market. It is likely to be several years before they have the sort of impact LCCs have had in the rest of Asia, although it is a future threat JAL and ANA will need to keep a careful eye on.

However, with a Japanese economy that is showing real signs of improvement and new aircraft in the pipeline bringing new levels of operational efficiency, as well as the prospect of an increasing number of slots at the country’s major gateways becoming available to allow for further international expansion, both JAL and ANA have much to look forward to… given market conditions, both at home and abroad, remain stable.