Photography by Kevin Phillips

Haruka Nishimatsu is challenging the corporate culture at Japan Airlines, as he attempts to bring the troubled carrier back from the brink

A recent restructuring document issued by Japan Airlines (JAL) contained the revelation that chief executive Haruka Nishimatsu had taken a 60% pay cut, giving him a base annual salary of just ¥9.6 million (or $80,000).

Sceptics may call it a public relations move, but in a country where sizeable bonuses are not a major part of the culture, it is more than that. JAL's pilots make far more, for example, and for Nishimatsu the pay cut is intended to send a clear message to his staff.


Fighting chance

Being promoted to chief executive at JAL came as a surprise to Haruka Nishimatsu, as his predecessor had only been appointed to the top post barely a year earlier.

Nishimatsu, now 59, was suddenly thrust into the spotlight, almost 34 years after joining JAL following his graduation from Tokyo University.

Starting in the flight crew training department, Nishimatsu moved to the finance department in 1974. In 1980 he joined the traffic division in charge of budgets for airport offices, and in 1983 transferred to corporate planning where he was in charge of finance issues.

In 1987 he was posted to Frankfurt as administration manager of JAL's city and airport offices, and in 1991 returned to Tokyo where he rejoined the finance department, where he remained until becoming chief executive.

His last role was as senior managing director of finance and investor relations.

Nishimatsu's favourite pastime is golf. He is also an avid reader and says good red wine is his drink of choice. He is married with one son and one daughter.

Asia's largest airline group by revenue and traffic, JAL has been in financial trouble for years and it is finally acknowledging that drastic action is required after years of complacency. This action cannot come soon enough, for in a few years, major change will come to the Japanese market as more slots become available at Tokyo's congested Haneda and Narita airports. The new capacity is being eagerly awaited by competitors keen to take JAL on. If JAL does not get its house in order by then it runs the risk of descending deeper into a hole from which it could struggle to emerge.

JAL has a weak balance sheet, steep debts and a bloated workforce. In addition its corporate culture is so caught up in ways of the past that change cannot be pushed through quickly enough to meet market realities. All this as main competitor All Nippon Airways (ANA) has successfully restructured its business and is in a strong financial position. JAL, in contrast, suffers ugly financial mood swings with profits one year and losses the next in 2005-6 it suffered a net loss of ¥47.2 billion and an operating loss of ¥26.8 billion.

Nishimatsu, a career JAL employee, was unexpectedly named chief executive last year after predecessor Toshiyuki Shinmachi was ousted in a staff revolt after only a year in office. The new chief executive admits "there is a long road ahead of me" in terms of turning the company around, but he firmly believes JAL is salvageable.

Time for change
He of course must believe that, but it is clear that Nishimatsu is trying to push real change through the organisation. For a man who spent most of his career behind the scenes in finance roles, he is remarkably confident in speaking his mind about what needs to change, from the top down.

"Fundamentally the employees do understand that JAL is at present in a very severe situation," Nishimatsu said in an interview in Japanese capital Tokyo just days after releasing his four-year restructuring blueprint. "But we are very limited in terms of time. We only have until 2010."

At the heart of Nishimatsu's vision is slashing JAL's $14 billion debt by one-third alongside direct cost-cutting, which he says is of the highest priority. Plans call for the size of the workforce to be reduced further with several thousand more job cuts, the fleet to be modernised and many more non-core assets to be sold. JAL has also finally joined the oneworld alliance after years of playing hard to get.

The financial markets have given a generally muted reaction to the carrier's latest restructuring plan, with some analysts saying management finally appears committed to real cost-cutting, but others saying it does not go far enough. Nishimatsu agrees it is tougher than other plans that have been drawn up over the past six years, but at the same time he says it must be realistic.

"There are distinguishing characteristics that make this business plan very different from previous ones," he says. "One is that until now the top line was projected in a very optimistic way and this time we have really held down these revenue numbers and made them as realistic as possible. We are trying to work within these very limited revenue figures and trying to cut down costs as much as possible. That makes it a much more realistic business plan compared with others.

"The second is we have really tried to cut down costs, especially in terms of personnel costs. We want to raise efficiency in terms of personnel costs, and we are making drastic reductions of personnel.


"The third is that for an airline we have had a remarkably diverse range of businesses. Now we have taken stock of this again and decided to definitely withdraw from many businesses."

The "Medium-Term Revival Plan", which covers the 2007-10 financial years, focuses heavily on reducing the group's wage bill by a projected ¥50 billion annually. This will come in part from stepped-up job cuts, which have already been taking place through natural attrition since 2002, when JAL acquired Japan Air System (JAS).

By March 2010 the group workforce is to be reduced to 48,800 from 53,100 under the plan. There will also be "a bold review of the work process to increase workforce productivity by 10%", while a 10% across-the-board basic wage cut that was implemented last year remains in place.

Fleet changes are also forecast to save JAL tens of millions of yen annually, by stepping up an "aircraft downsizing" programme and replacing less-efficient, older aircraft with new Boeing 737-800s and 787s, and Embraer 170 regional jets. The aim is to reduce the number of types as well as the percentage of large aircraft - 777s and 747s - to 21% in fiscal 2010 from the current 29%. For international operations alone, the reduction will be to 39% from 58%.

JAL also plans to continue shifting more operations to subsidiary carriers with lower cost bases, after already making several rounds of route suspensions both domestically and internationally. By fiscal 2010, JALways and JAL Express will be operating 37% of the group's international passenger flights, up from 24%. JAL Express and J-Air will account for 26% of domestic flight operations by fiscal 2010, up from 15%.

Nishimatsu says these and other cost-reduction measures should help JAL record an operating profit of ¥35 billion in 2007, rising to ¥88 billion in fiscal 2010, while revenue is forecast to increase modestly, to ¥2.29 trillion by fiscal 2010 from ¥2.2 trillion in 2007. For the just-ended financial year JAL expects an operating profit of ¥13 billion on revenue of ¥2.26 trillion.

External shocks
JAL has made such forecasts in the past and they have not been realised, but Nishimatsu says that in fairness the airline has faced unexpected "external shocks" in recent years. These include the impact of the 2001 terrorist attacks in the USA and the subsequent war in Iraq, terrorist bombings on the Indonesian island of Bali in 2002, the SARS epidemic in 2003 and high fuel prices that started to be seen in 2004.

In 2005 and 2006 JAL was also 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 ANA.

While the government censure could have been prevented had systems been better, JAL was particularly vulnerable to the events abroad, as it was so reliant on international passenger revenues. Until just a few years ago around 70% of its passenger revenue came from international operations, while the minority came from less-volatile domestic operations. The solution was to acquire JAS, with which JAL had effectively been splitting the near 50% of the domestic market that market leader ANA did not control.

Legal formalities were completed in October 2002 and integration work began right away, but it proceeded far too slowly. Workforces were not integrated rapidly enough and the decision making slowed.


The corporate structure has since been streamlined and is now far less bloated and "top heavy". And Nishimatsu says that in the bigger picture the JAS takeover was without question positive for JAL. "I think frankly that without this merger, without this increase in our domestic business, JAL might not have survived as it is," he says.

"If we compare it to a human body, the international business represents the upper portion of the body and the domestic business the bottom portion. The top portion is more flashy, but the lower half serves as the foundation. Right now, with the incorporation of JAS, our domestic and international businesses are about 50:50, and I think the ratio could be even bigger for the domestic business."

Things will change, with a fourth runway opening at Haneda airport in 2009 which will increase take-off and landing slots by more than 40%, to 407,000 per year from 285,000. This will give competitors - ANA as well as new carriers such as Air Do and Skymark Airlines - more opportunity to challenge it.

Also at Narita airport, which mainly handles international flights, a secondary runway is being extended to 2,500m (8,200ft) from 2,180m, allowing it to handle larger aircraft from early 2010 and catering to more flights by local and foreign competitors.

But Nishimatsu says it is not all negative on the competitive front, as JAL sees the potential for significant growth of its own as a result of the airport expansions, which will enable it to compete more effectively with other modes of transport. Both JAL and ANA have trouble competing with the high-speed, high-frequency trains due to airport capacity limitations.

"Overall the positive possibilities outweigh the negatives by a large margin. With the increased capacity at Haneda certainly we may see more potential for newcomers, but I think when we talk about their productivity, the infrastructure that they have, I don't know how they are going to be able to take advantage of the opportunities at Haneda in a very big way, in the way that we can," he says.

Opportunities at Haneda

Japan Airlines at a glance

Revenue $1.93 billion

Change -2.5%

Operating margin -1.2%

Net margin -2.2%

RPK growth -4.9%

ASK growth -7.7%

Load factor 69.2%

Year end March 2006

Airline Business 2005 financial ranking 5

Airline Business 2005 traffic ranking 9

"Another concern that people have with the increased number of slots at Haneda is that there might be an oversupply of seats. But we don't think that this is going to be a problem primarily because we intend to increase the frequency of our flights and at the same time we intend to downsize, or decrease, the size of our aircraft. The average number of seats for flights coming into and flying out of Haneda is 313 and the world average is 150, so in other words Haneda's average is double that of the world and this is something that needs to be dealt with."

Haneda's fourth runway will allow for the partial "internationalisation" of the airport, which is mainly a domestic facility but more attractive for many travellers than Narita as it is so much closer to the business districts of Tokyo.

From Haneda, airlines are expected to be allowed to serve destinations up to 2,000km away. Nishimatsu believes JAL will be able to offer around 15 international flights a day from Haneda during daytime hours, and these should cater mainly to high-yield business traffic. Winning more of this segment of the market is another key focus of his business plan.

But to take advantage of the benefits, JAL needs to become more proactive and improve its decision-making processes. Nishimatsu is trying to convince staff to speak their minds and in a bid to foster this he is moving out of his private office and sharing an open space with other top executives. But he recognises that reshaping the conservative corporate culture will be a drawn-out process. "It is easily said, difficult to do. Certainly the situation is not ideal yet, but at the same time I do see hopeful signs," Nishimatsu says.

"One thing I see definitely happening is that people express their opinions much more frequently than before. We are getting more opinions, we are getting more voices. They come directly to me, which is a tremendous improvement. It is a completely different situation than we found ourselves in several years ago."

What JAL also hopes will help push change forward is its membership in oneworld, which Nishimatsu says will expose it to other styles of management. Its delays in joining perhaps highlight what was wrong with JAL for so long. Being as conservative as it was, it was the last of the top 15 IATA member passenger airlines to commit to joining an alliance, and in Nishimatsu's view that was a mistake.

"We should have joined before now," he says with clear regret in his voice. "In the past JAL has taken a rather conservative view as to what the benefits of joining an alliance might be. The reason is that until now JAL has had about 80% of its international passengers as Japanese. In regard to the non-Japanese people market we have not had a concerted effort and success in opening up that market. I think that with the alliance and the services we can offer through the alliance, there may be great potential benefits for JAL that we haven't really understood yet."

He adds: "But it is not simply enough to just join. If we do not take advantage of all the opportunities that are given to us then I think the benefits are going to be decreased by half."

Nishimatsu says that in the big picture, JAL's change process has to be much more than just talk - Asia's biggest airline needs to genuinely be overhauled. While some say his plan does not go far enough, particularly in terms of job cuts, Nishimatsu says pragmatism must be adhered to. He also insists that if his targets are not met that he will take full responsibility.

"If you were to ask is this the perfect, completely realisable cost-cutting plan, then that is a very difficult thing to declare," he says. "But if we don't achieve our targets, I do not intend to stay on."

Source: Airline Business