Isao Kaneko must steer JAL through its impending merger while grappling with the effects of a severe traffic downturn

When Japan Airlines (JAL) president Isao Kaneko and his counterpart at domestic carrier Japan Air System (JAS), Hiromi Funabiki, secretly agreed earlier this year to propose a merger of their two carriers, they had no idea that circumstances would conspire several months later to make the logic of the deal appear compelling.

However the collapse in trans-pacific passenger traffic since the 11 September terrorist attacks in the USA has served to highlight what Kaneko - a 40-year JAL veteran - acknowledges is the airline's over-reliance on cyclical international markets.

"It is a kind of proof that we need the stronger base for domestic operations," he says. "JAL is the biggest airline in Japan but depends too much on international operations. We are very weak in the domestic sector."

Under the consolidation plans, a joint holding company will be established by September 2002, and the operations of the two airlines merged into domestic passenger, international passenger and cargo, and associated business divisions by the spring of 2004.


JAL and JAS account for around 25% and 23% of total Japanese domestic traffic, respectively, giving them a combined share almost equalling the 49% held by the dominant player, All Nippon Airways (ANA). Though JAS has almost no international flights, the merged airline will still dominate the international sector, as JAL has a far larger overseas network than ANA. Slot restrictions at Japan's congested major airports left JAL with no option but to engineer a deal with JAS to boost its market share.

ANA has already raised concerns that a merged JAL/JAS will dominate domestic trunk routes, but Kaneko claims the merger will mean a greater number of secondary airports can be served from Tokyo's domestic Haneda Airport, thereby benefiting consumers.

When pressed for details of how the merger will benefit the bottom line Kaneko laments the fact that the two companies were forced into announcing the deal earlier than planned after news leaked to the media.

"I have my staff studying in depth right now," he says. "We wanted to make more detailed calculations but we had to make the announcement earlier than expected, so I cannot give the exact figures right now.

"But for example on airport facilities both companies are spending approximately ´160 billion [$1.27 billion] annually, so if we can save 10% of that money it means ´16 billion, which is quite enough to make a dividend payment to shareholders." JAL expects to end its current fiscal year with a substantial loss and will not make a dividend payment.

No decision has been taken on how the new airline will be branded, but Kaneko believes the JAL name is well recognised and should remain.

"We are now discussing this matter with the JAS people," he says. "My opinion is the JAL brand is strong, especially in the international market. We have to maintain the JAL brand so that we can compete with foreign companies.

"For now I think that I would like to keep the JAL brand in the domestic market too," he adds. "But we have to discuss and decide this with both companies."

There would appear to be plenty of room for consolidation of the aircraft fleets, but Kaneko is in no hurry to pursue this. JAL is standardising on the Boeing 737, 747 Classic and 747-400, 767 and 777 with the pending elimination of its MD-11s and McDonnell Douglas DC-10s. It has never bought an Airbus aircraft.

JAS has 777s but also flies a large fleet of Airbus A300s, about half of which are ageing B2 and B4 variants, plus MD-80s and MD-90s.

"It's an issue for the long-term," says Kaneko. "For the time being I'm not going to cut the types of aircraft from JAS because there are certain routes to be flown by each type of aircraft. Of course JAS has to replace these old aircraft so at that time we will consider together which type of aircraft should be introduced."

JAL, like many airlines around the world, is studying Boeing's proposed Sonic Cruiser and the Airbus A380 ultra-large airliner, which the European manufacturer believes must eventually have a role to play on high density Japanese domestic routes.

"We have already set up the fleet plan for the next two to three years so we are not in a hurry to make a decision on introducing new types of aircraft," says Kaneko. "In the meantime we have to consider the replacement of MD-11s and DC-10s and conventional 747s. We have decided part of the replacement will be 767s and 777s, but we have not decided the whole fleet so in that sense we may add Airbus derivatives."

While the merger preparations continue apace, JAL is having to deal with a dramatic downturn in passenger traffic. Overall international passenger numbers were down 35% in October and November, compared with the same months a year earlier. Routes to the USA have been hit by a 50% decline.

There are signs of a recovery, but this has taken longer to materialise than Kaneko predicted immediately after the terrorist attacks.

"We have been affected very badly," he says. "Due to the downturn of the business environment, we have been experiencing a decrease in cargo traffic since the end of last year of approximately 15%, and this was continuing even before 11 September. Passenger traffic was not affected by that time and all of a sudden after 11 September we have suffered a dramatic decrease."

JAL does not feel that membership of a global alliance will help it ride out the storm and Kaneko remains sceptical of the benefits of such groupings.

"The global alliance has not, from my point of view, been working as well as it was supposed to," he says, extolling the virtues of JAL's multiple bilateral partnerships.

Source: Flight International