21 September 2009

Debit-ridden Japan Airlines: a tie-up comes with both baggage and opportunities

TravelMole Guest Comment by Euromonitor International’s Asia research manager Parita Chitakasem

Japan Airline’s (JAL) restructuring announcement and news of a possible tie up has sparked interest amongst several airlines, most notably US players, Delta Air Lines and American Airlines who are looking to capitalise on the potential "open skies" agreement between US and Japan.

Investment in JAL comes with some big burdens, but nonetheless, it also offers unique opportunities.

The biggest issue facing new investors is JAL’s burden of debt. Latest quarterly results (end June 2009) showed that debt stood at ¥833.5 billion (just over US$9 billion).

Delta, which has US$16.7 billion worth of debt itself, is in a stronger position to take this on than American Airlines, which is currently in negative equity. However, this is still a very heavy burden for an airline to bear during one of the toughest climates for the global airline industry.

JAL’s new investor would also have to tackle JAL’s flagging image and low public trust. Since 2005, it has damaged its previously strong image by implementing three harsh restructuring schemes involving employee pay cuts and enforcing early retirement. JAL’s loss of public trust could take time to regain.

Amongst other issues, the player which ties up with JAL will also face aggressive competition and a dwindling share in Japan’s domestic market.

The company holds a leading 33% share of the total Japanese airline market in value terms, according to Euromonitor International, but it has been a poor performer over the past four years, losing share to its main rival, ANA, as well as to low cost carriers.

LCCs such as Skymark have become particularly popular over the past year as the younger Japanese who are more open to budget travel are choosing low frills flights to save money.

JAL’s potential investor may want to implement more competitive pricing to capitalise on this growing consumer group in the local market.

However, despite JAL’s debts and market challenges, a stake in its operations could offer huge long-term benefits once debts and other issues are ironed out.

Whilst the October 2009 restructuring plan is JAL’s fourth scheme in four years, its drastic cut-back efforts could be what are needed to address its internal management issues and unprofitability.

If it works, it will have lower cost issues and can start working towards operating more efficiently in the future. When this is achieved, JAL’s next investor could be in a position to ride on its long-term recovery.

Capturing JAL’s business also means accessing Japan’s two expanding airport hubs and 258 international routes, a huge chunk of which are within Asia Pacific.

With inter- and intra-regional travel in Asia Pacific set to be a key driver of recovery in the global travel industry, investors with operations in Asia will be at an advantage.

In particular, JAL’s routes to China, mainly through its code-share agreement with China Eastern Airlines, are routes which many western airlines would do well to have access to.

Whoever takes some ownership of JAL will enjoy a hotbed of China’s domestic and international travel market as long as the code-share agreement remains in place.

JAL’s next investor would also profit from Japan’s avid domestic and outbound travel market. JAL maintains its very close relationship with the country’s largest travel agency network, JTB, where it provides all charter flights for package tours.

With Japan’s holidaymakers continuing to rely heavily on organised tours, Japan’s position in the chartered flights sector will remain undisputed as long as this relationship remains intact.

JAL’s outlook in the immediate term looks far from trouble-free. However, in the long-term, taking a share in this airline will have key advantages, particularly when the airline industry starts to see recovery.

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Your Comments (1)

Funny

Gee..... Who would of thought that when they were charging over $2200 in TAXES from Australia to Europe that it would negatively impact their bottom line???? Idiots, care factor ZERO

By Jason Nooning, Tuesday, September 22, 2009