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Troubled JAL unveils five-year restructuring plan

Troubled Japan Airlines (JAL) has unveiled a five-year restructuring plan aimed at returning Asia’s largest airline group to consistent profitability, largely through stepped-up cost-cutting efforts.

The carrier, which has been struggling over the past year as its financial position has been deteriorating, has released its Medium-Term Business Plan for the 2006-2010 fiscal years just a day after its embattled chief executive announced he was resigning after losing the support of the board and other senior managers.

JAL releases a revised business plan every year and it typically covers a three-year period. But this time it covers five years as the Japanese market is due to change dramatically in fiscal 2009 after a new runway opens at congested Tokyo Haneda airport, increasing slots by more than 40% and allowing new competitors to start challenging it. The Tokyo Narita international facility is also due to complete an expansion of its second runway that year.

The carrier has now admitted that it will be in serious trouble without much more extensive cost-cutting work and says in its new business plan that its goal is to achieve ¥119 billion ($1 billion) in annual cost savings by 31 March 2011, which is the end of the 2010 fiscal year. It says existing cost-cutting efforts have resulted in savings of ¥57 billion for the current fiscal year.

JAL posted profits for fiscal 2004 but has said it will report steep losses for the year ending this month. It says the restructuring efforts should help it return to profitability in the next fiscal year, while by the end of fiscal 2008 it expects to complete the “rebuilding of the business foundation” which should enable it to produce consistent profits despite outside influences. By the end of fiscal 2010 it expects to be producing “consolidated operating profit margins of 5% or more”.

Most of JAL’s losses are from international passenger operations and the carrier says its restructuring efforts will focus heavily on cleaning up this part of the business. It recently announced that it will cut around 10% of its international passenger services, when measured by ASKs, during the next fiscal year, and now says more cuts will be made through the end of fiscal 2008. During the period it will also step up the retirement of older aircraft and use smaller aircraft on many routes.

“We plan to continue to focus on high profit and high growth routes and will suspend low profit routes to build a more profit-focused network, achieve downsizing of our fleet by replacing older aircraft with new mostly medium- and small-size aircraft to strengthen our competitive edge, and enhance our cost effectiveness in accordance with our reassessment of our business,” JAL says.

“We plan to increase both seat load factor and yield through measures such as enhancing route networks to meet the needs of business travellers and providing high quality products and services.”

The number of jet types in the group fleet of 279 aircraft now stands at nine but this will be reduced to eight by the end of fiscal 2010, by which time the fleet should comprise 296 jet aircraft. In the next fiscal year it will be retiring its last Airbus A300Bs while fiscal 2009 will see the retirement of the last of its Boeing 747 ‘Classics’, 30 of which are still operated. The Boeing 787 will be a new type added to the fleet, while JAL will also be replacing older Boeing 737s with new 737-800s, in addition to replacing other older aircraft with new Boeing 767s and 777s.

“As a result of the introduction of new aircraft, the average age of the JAL fleet will go down from 11.6 years at the end of fiscal 2005 to 10.4 years by the end of fiscal 2010. Focusing just on aircraft used internationally, the average age of the international fleet will go down from 11 years to 8.5 years by the end of fiscal 2009,” it says.

“In the longer term, it is the aim to create a fleet structure of 5-6 basic types of aircraft – large, medium and small.”

JAL’s financial troubles over the past year are largely due to the effects of increased fuel costs but it has also been hurt by highly public safety issues that led to an unprecedented government “business improvement order” and prompted many travellers to switch their business to rival All Nippon Airways.

The carrier, which plans to join the Oneworld alliance next year, says that “safety and customer satisfaction will be at the forefront of the JAL Group’s medium-term business plan” and it will be investing around ¥60 billion in the years ahead “mainly to strengthen the maintenance foundation and improve operational quality”.

Another ¥65 billion will be spent “to enhance the quality of products and services and maintain our systems infrastructure, as well as to bolster our capability to handle unexpected operational events, eg delays etc”.

“We plan on investing [this] estimated ¥125 billion in the areas of safety and service so that we can strive to re-emerge as a company with high safety standards and strengthen the quality of our products and services,” it adds.

“We aim to realise sustained growth by rebuilding our business base by focusing our resources on safety and customer satisfaction.”

JAL has also admitted to having a corporate structure that is too complicated, and under previously announced plans will merge main operating units JAL International and JAL Domestic in October this year. It says this will represent a key part of the “revival of the JAL Group in fiscal 2006”.

This article first appeared on Air Transport Intelligence, an online business intelligence service for the air transport industry with 24 hour news and data available to subscribers.

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