ANALYSIS: ANA shops overseas for revenue growth

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With cash from last year's share sale in its pockets, Japanese carrier All Nippon Airways (ANA) has gone shopping.

Last week, ANA Holdings announced a $25 million investment in a 49% stake in Myanmar carrier Asian Wings Airways (AWA) - its first investment in a carrier outside of Japan. Shortly before that, it paid $94 million for the purchase of Pan Am Holdings, operator of Pan Am International Flight Academy.

These purchases came less than five months after the group announced plans to make strategic investments in aviation-related businesses in Asia - where "high economic growth is anticipated" - over the next three years.

In addition, the Philippines' San Miguel Corp has also confirmed that it is in talks with ANA regarding a possible partnership in flag carrier Philippine Airlines (PAL).

Analysts interviewed say ANA is taking a step in the right direction by pursuing these investment opportunities as additional revenue sources in view of its cash rich position, especially when the relatively saturated Japanese market shows limited room for growth. Last year, ANA issued 914 million shares, raising some yen (Y)170 billion ($1.7 billion).

How the Star Alliance carrier will manage these joint ventures remains to be seen. It is interesting to note its recent fallout with AirAsia over AirAsia Japan, where the latter said the two had difficulties working together.

"With a fairly flat Japanese market and rising competition on the domestic level, ANA needs to do something different to address its relatively high cost base and its limited demand growth prospects ex Japan," says Flightglobal Ascend's chief economist Peter Morris. "Buying into a share of certain emerging Asian high growth markets, and indeed, forging alliances with low labour cost countries/airlines is one way to tackle this."

With its investment in Myanmar, ANA says it intends to up frequencies on the Tokyo Narita-Yangon route from thrice weekly to daily starting 30 September, and also introduce larger aircraft on the route.

AWA, which has two ATR 72s and one Airbus A321 and flies to 13 cities within Myanmar, recorded a revenue of $17.8 million for the fiscal year ended 31 March.

Myanmar has great potential considering its international market is largely underserved, and that most local carriers are only focusing on domestic routes. ANA says AWA intends to start international services from October, and to expand its fleet to 10 A320s by 2018.

"Myanmar has a population of 48 million...population means aviation growth, so it makes sense to invest early. ANA is also eyeing the Indian market via Myanmar, so Myanmar seems a good mid point in Southeast Asia," says Richard Wu, a senior lecturer at University of New South Wales' school of aviation.

Adds Ryota Himeno, an analyst at Barclays Securities: "We anticipate a medium- to long-term earnings contribution for the overall ANA network based on the ability to connect Japan to domestic Myanmar routes, and to acquire connection demand from Myanmar to Europe and the US."

An investment in PAL, however, could prove more challenging given the number of low-cost carriers in the market, especially with local stronghold Cebu Pacific in the picture. PAL is also a complicated choice given it is undergoing restructuring to return to profitability by 2014, after an investment by San Miguel in 2012.

Analysts, however, believe that ANA will bring industry expertise and valuable links through its Star Alliance network, which will benefit those it invests in. These investments should create synergy with ANA's existing network.

They add that aviation-related businesses are good investments for airlines, in particular ground services, given the higher profit margins.

The challenge for ANA will be to manage a multi-brand strategy, something easier said than done.

"On balance, the strategy appears to be seeking the limited shareholder ownership opportunities that exist within the international regulatory framework to seek benefits from the growth prospects of Myanmar and Philippines - both of which are undoubtedly high growth areas for the next decade," says Morris. "Whether the vehicle they have chosen in each market is the best place to do so, only time will tell."