Cookie Consent

This site uses cookies for functionality. To see our cookie policy click here.

If you continue to use this site we will assume that you are happy with this.

Japan: Immunised JVs could help in tough times March 2011 Download PDF

Cloud Image

Amid all the misery surrounding the crisis in Japan, which is having a devastating impact on travel demand to and from that country that could last quite some time, there has been one piece of positive news: American and Japan Airlines (JAL) are sticking to their plans to launch their immunised Joint Business (JB) on the Pacific on April 1. That may be exactly what the carriers – and the USJapan market – need at this point.

The Joint Business plans were confirmed by Beverly Goulet, AMR’s VP of Corporate Development & Treasurer, at the JP Morgan transportation conference in New York on March 22. Of course, there are no guarantees; as Goulet noted, “no–one knows what the future holds in this very fluid situation”.

So far United Continental and All Nippon Airways (ANA) have not commented on their similar planned Pacific Joint Venture, which also had an April 1 launch date, but one has to assume now that they will go ahead.

Both the JAL–AMR and ANA–UAL Joint Ventures (JV) were made possible by the October 2010 signing of the Japan–US open skies agreement and the subsequent granting of ATI on the Pacific. They are closely modelled on the immunised transatlantic joint ventures. While both airline pairs have code–shared for some time, this April was to mark the beginning of closer cooperation in terms of schedules, pricing and other activities.

The Joint Venture is particularly important to JAL because of its drastic downsizing as part of its bankruptcy restructuring over the past year. In the past two years JAL’s international ASKs have fallen by 40%. The carrier’s reorganisation plan called for “aggressive use of alliances”, and that includes benefiting from the “managerial know–how, facilities, IT systems and other tangible and intangible assets of alliance partners”.

Goulet explained American’s thinking as follows: “JAL operates one of the biggest airline networks in Asia and a joint business with JAL is a substantial opportunity for us, given the pace of economic growth in Asia and the fact that the Pacific region only accounted for about 5% of our total capacity in 2010.” Goulet said that about 50% of American’s traffic to Japan is connecting traffic and that “having the very robust JAL connecting schedule to Asia to offer to our customers is of paramount importance in this situation”. In other words, American views it as an important strategic long term relationship and in the short term is prepared to try to make it work relying primarily on connecting traffic to Asia.

But it is also possible that an immunised alliance would put the airlines in a better position to respond to the crisis.

Since they would not be competing, surely they would find it easier to reduce capacity to match the drastically lower demand levels.

The past year has seen instances of immunised global alliances being better able to cope with problems (albeit nothing of the magnitude now seen in Japan).

Delta noted last year that its “metal neutral” transatlantic JV made it possible to “de–risk the hiccups”, for example, enabling the partners to work around strikes at Air France and prevent traffic ending up at competitors. And when the FAA briefly downgraded Mexico to category 2 under the IASA safety assessment programme last summer, the Mexican carriers’ US partners were able to temporarily pick up the traffic for the alliances.

JAL and American have already been coordinating their activities since February, when they spaced their flight timings further apart and begun offering joint package tours in the US. But April 1 was always the target for the start of key activities such as joint sales, revenue sharing, schedule coordination, co–location of facilities, more fare options, service enhancements and the sharing of best business practices. Under the plans announced in January, the venture would initially cover ten Pacific routes, linking Tokyo with JFK, Chicago, San Francisco, Los Angeles and Dallas and also including three US–China routes operated by AMR. The two would code–share on 123 sectors beyond Tokyo and from AMR’s cornerstone cities in the US.

As Star partners, United, Continental and ANA already have a long history of code–sharing, FFP cooperation and facility sharing; now from April 1, if they stick to their late–January plans, they would integrate operations in very similar fashion to AMR/JAL. But the JV covers more Pacific routes, linking Narita with eight US mainland airports plus Honolulu, Haneda with two US cities and Kansai with San Francisco. Also some Hong Kong–US and Seoul–US routes are included in the scope of the JV.

It is hard to imagine, though, given the sharp fall–off in demand, that the JVs could be implemented exactly as originally planned. Undoubtedly the teams are hard at work trying to figure out which segments might work in the new environment.

The routes to the US from Beijing, Shanghai, Hong Kong and Seoul covered by the JVs are the obvious starting points.

The progress made with the Pacific JVs will be followed with interest in Europe, where Lufthansa is waiting for approval from the Japanese government for an immunised alliance with its longtime partner ANA and where BA is believed to be waiting in the wings to do such a deal with JAL. ANA and Lufthansa submitted their application for a Japan–Europe JB in late February and had been expecting approval by mid–year, but Lufthansa’s CEO Christoph Franz has expressed concerns that, given all the current turmoil in Tokyo, it might be delayed or even fall through.

The same rationale applies to the potential Europe–Japan JVs: such deals would be good for the airlines, especially in times like these.

Airline response to the crisis

Delta, which has the largest Japan exposure among US carriers but lacks a partner in Japan, sent shock–waves through the industry with the deep cutbacks announced on March 22. The airline is reducing capacity to Japan by 15- 20% through May. It is suspending the Detroit–Haneda service it only launched on February 19. Delta said that it expects a significant drop–off in bookings tied to Japan in the next 2–3 months and estimated the financial impact of the crisis at $250–400m.

In contrast, Goulet said on March 22 that American continued to operate a normal schedule to Japan and that JAL was also operating a full schedule of international connecting flights. United, too, appeared to be operating a normal US–Japan schedule. ANA has operated its normal schedule since March 13 (in addition to domestic relief flights free of charge) but planned to switch to smaller aircraft on some international and domestic routes from March 27. JAL said on March 28 that it would reduce frequencies or operate smaller aircraft on some international routes for most of April; the airline has seen a 28% decline in domestic passengers and a 25% fall in international passengers since the earthquake.

Many reports and anecdotal evidence paint a virtual collapse of Japan–bound demand. According to March 24 newspaper reports in Japan, foreign arrivals were running 60% down at Narita and 50% down at Osaka. Travel agents in the US report that business travel by Americans to Japan is now limited to only “mission–critical” travel (for news reporting, security, humanitarian or infrastructure purposes).

With the situation being in a flux, there is no clear view yet of the long–term impact. Some people have suggested that air travel demand to Japan will begin to recover when the reconstruction effort gets under way, perhaps in the second of half or 2011. But it is hard to imagine any recovery at least until the radiation leaks are eliminated and Japan’s water supply and produce are proved safe.

This is so unfortunate for Japan’s major carriers which, after being hit exceptionally hard by the recession, have staged strong financial recoveries in recent months. ANA swung to an operating profit of ¥77.7bn ($940m, 7.5% of revenues) in the nine months ended December 31, contrasting with an operating loss of ¥37.8bn a year earlier.

JAL, in turn, has accomplished an amazing turnaround, having gone through a much more thorough and swift business restructuring than anyone could have imagined. Its leadership disclosed recently that the airline had earned a consolidated operating profit as high as ¥165.9bn ($2bn) in the ten months ended January 31. Of course, the net losses could be horrendous because of the restructuring charges, but the very strong operating results were a promising sign that boded well for JAL’s future.

As an encouraging sign of “business as usual”, JAL announced on March 28 that it had effectively emerged from the court–led restructuring (April 1 had been the target date). Having received a ¥350bn ($4.2bn) injection from ETIC in December, JAL has now procured ¥255bn ($3.1bn) from 11 banks and repaid debt totalling ¥395bn. It has also raised an additional ¥12.7bn ($154m) through a share sale to eight companies; the leadership described this as adequate, but it is short of the earlier ¥50bn ($605m) goal and leaves JAL somewhat under–capitalised.

Download PDF