By Nicholas Ionides in Tokyo

All Nippon Airways president and chief executive Yoji Ohashi feels good about his carrier's restructuring strategy, with its return to profitability and dividend payments - but he still faces a threat from the enlarged JAL Group

On a clear day, you can see Mount Fuji from the group headquarters of All Nippon Airways (ANA) in downtown Tokyo. In fact, there have been few clear days during Japan's summer, but at least in terms of the business climate ANA has seen few storm clouds of late. "I am very happy," says Yoji Ohashi, president and chief executive, with a smile and in a rare bout of English.

Switching to Japanese, ANA's genial chief adds: "We are moving forward quite quickly and we think we are being very successful with our cost reduction plan and our restructuring plan. It is not just me saying this. We went to London recently for an investor relations presentation and overseas analysts as well praised our achievements. So I don't think I am being too bold."

It is understandable that a sometimes bashful Ohashi, 64, feels comfortable boasting about his company's achievements in a manner that in some ways goes against Japanese traditional modesty - for ANA has been having a good run of positive news in recent months.

In April it won major international exposure when it launched Boeing's 7E7 programme with a commitment for 50 of the new type. Days later, ANA posted a return to profitability the 2003-4 financial year to March. By contrast, competitor Japan Airlines (JAL) had suffered massive losses. Further profits are forecast for the current year and with more still to come and ANA is now paying its first dividend since 1997.

The group ended last year showing a net profit of ¥24.7 billion ($221 million), turning around a loss of more than ¥28 billion. That was despite the fact that revenues remained virtually unchanged at ¥1.2 trillion, with the SARS outbreak in key Asian markets and the war in Iraq contributing to a sharp drop in international passenger demand. It also came as domestic competition from high-speed trains intensified, and as rivals JAL and Japan Air System (JAS) completed their merger. ANA was Asia's largest carrier in terms of passenger numbers until the JAL-JAS merger pushed it into second place.

The airline also managed to return to profitability in the seasonably weak first quarter of the current financial year, as it reduced operating expenses despite higher fuel prices. Ohashi, who has headed the carrier for just over three years, attributes the financial turnaround mainly to cost-cutting and restructuring efforts. These are aimed at putting ANA on a solid footing for the future.

Restructuring success
The three-year restructuring is aimed at reducing costs by ¥30 billion annually by April 2006. Ohashi says "this effort was very successful in its first year", with two-thirds of the targeted reduction amount met. "We are actually quite confident that in 2004-5 we'll be able to achieve the full ¥30 billion," he says.

ANA needs to restructure to reduce the risks from future economic downturns or sudden drops in demand, says Ohashi. In addition to slashing ¥20 billion a year from personnel costs, it wants to reduce operational costs by ¥10 billion, in part by modernising its fleet, focusing international growth on profitable services to China and realigning domestic operations.

"Airlines are influenced a lot by whatever happens in the world at large and our costs can go up or down very much according to how things are," says Ohashi. "We need to be able to bring the costs down to a level where we can maintain profitability" in the face of unexpected changes in the operating environment. In a one-off comparison with ANA's main rival, he adds: "Perhaps ANA in all these areas is being a lot more positive and more dynamic than JAL is at the moment."

But not all has been easy. In April JAL and JAS completed an integration that started when they merged under a joint holding company in 2002. Already the biggest Asian airline group in terms of revenues, JAL grew larger with what was effectively a takeover of JAS. It gave the group a near even balance between domestic and international passenger revenues. The enlarged JAL Group suffered last year and posted huge losses due to its greater exposure to the depressed international market. But it expects substantial merger benefits over the next few years in the form of reduced costs and sales growth, and is forecasting a healthy profit for this financial year. The JAL Group has made faster progress in the more stable domestic market: increasing share at ANA's expense last year and at the same time reporting an improvement in yield.

At the time of their merger announcement late in 2001, ANA had a 48% share of domestic passenger numbers in the second-largest aviation market after the USA. JAL's share was 25% while JAS's was 24%. JAL figures show its share of the market together with that of JAS increased to 50.6% in the first half of 2003-4 while ANA's fell to 46.2%. For the full year to March, JAL Group airlines carried just under 46.5 million domestic passengers, virtually unchanged from the total a year earlier despite the fact that many services were consolidated. ANA Group airlines carried 44.8 million domestic passengers, down from 47.1 million.

ANA is working hard to take back market share, Ohashi says, in part by increasing the strength of the brand at home. It appears to be working. The latest numbers show that it is now slightly ahead of JAL again. In the latest June quarter ANA Group airlines carried 10.58 million passengers on domestic routes, while JAL Group airlines carried 10.53 million.

Ohashi is also confident ANA will turn a profit from international operations this year, which would be a first since it moved into the scheduled international market in 1986 with Tokyo-Guam services. The airline launched international flights after Japan started liberalising its regulatory regime. Analysts say it has suffered the losses for nearly 20 years, however, as it has aggressively expanded its network to compete with JAL - often without focusing enough on controlling its high cost base.

Ohashi says ANA has in recent years focused far more seriously on cutting costs and on boosting yield. One successful development was the introduction several years ago of the PROS revenue management system. "By introducing the system we are able to up the unit price, which then ups the yield, so although passenger numbers have not increased a lot, our yield management has become much tighter and much more efficient," he says. "That worked very well and because of the success of that internationally we also thought we could introduce it on the domestic side, and we did that last spring."

Today international passenger and freight revenues account for 15-20% of total revenue, while domestic passenger and freight revenues account for around half. The remainder of ANA's sales comes from travel services, hotel operations and other businesses.

ANA has not been able to expand as quickly as it would have liked because of capacity issues at congested Narita airport, the main international facility serving Tokyo, where ANA has around 10% of slots. Osaka's Kansai, which was built to ease the burden on Narita by being the country's second international gateway, is not popular and many airlines have reduced unprofitable services. Two years ago a second runway was finally opened at Narita, but its benefits are limited by the fact that it is only 2,180m (7,150ft) long.

However, Ohashi is confident about the airline's ability to expand its international reach as a result of airport developments elsewhere. Nagoya, in the central part of the country between Tokyo and Osaka, is to have a new airport opening in February 2005 while Asia's busiest airport, Tokyo's Haneda, is to get a fourth runway around the end of this decade. That runway should lead to an "internationalisation" of the 24h facility.

Fourth runway
Japanese industry observers expect the fourth runway to open 130,000 slots a year, representing an increase of around 40%, and officials have estimated that 30,000 will be reserved for international services. This may even rise by the time the runway opens in 2009 or 2010, although no firm determination has been made because of sensitivities about Narita, which has an overnight curfew, is much further from the city and stands to lose business. ANA Group airlines currently have around 47% of the slots at Haneda. At the end of this calendar year the group will move into its own terminal that it expects will improve customer convenience, in turn strengthening its competitive base against JAL.

The developments at Nagoya and Haneda have the potential to radically change the Japanese operating environment, and Ohashi is clearly excited about the possibilities they will create for ANA. But he is pragmatic about what the airline will be able to achieve, adding that it must continue working to lower its cost base and strengthen its operational structure in the years before the new opportunities become available.

"When JAL and JAS merged we went from three big companies in the market to two big companies, and they obviously became bigger than us. We can't beat them on volume and we're not going to try. In 2009-10 Haneda will be expanded and that will give us a chance to perhaps have bigger volume than them, but we can't wait until 2009. So what can we do? We think we can beat them on quality," he says.

"There's a certain amount ANA can do on its own, but a certain amount that ANA can't do," Ohashi adds in a reference to existing airport capacity constraints. "So part of our strategy is to expand using codeshares to cover those areas where we can't fly to on our own."

One way is through the Star Alliance, which ANA joined in 1999. Ohashi says the airline is satisfied with what membership has brought it and he expects more gains from joint purchasing as the alliance continues to mature. It is also forging alliances with airlines outside Star, particularly those in China. ANA now has ties with Beijing-based Air China, which is being courted for membership in Star, and Shanghai Airlines. Ohashi, who was born in China, says demand for travel between China and Japan has been booming on the back of economic growth and this will lead to a considerable shift in ANA's international passenger revenue mix.

China will be "at the centre" of international network expansion plans and new services were added at the start of the summer season. ANA also intends to inaugurate services to the country from the new Central Japan international airport (Centrair) near Nagoya, which is scheduled to open on 17 February. The airline now serves China from Osaka and Tokyo and it plans to begin its international expansion from Centrair with services to Shanghai.

Around 30% of ANA's international passenger revenue comes from services to Europe, 30% North America, 17% China and the remainder from other parts of Asia as well as resort destinations. Ohashi says that from this year China revenues should increase to 25% of the total, while sales from North America, Europe and other areas should account for around 25% each. He also sees no let-up in the growth in demand for flights into and out of China. "In 2008 we have the Beijing Olympics and in 2010 the Shanghai Expo, and we believe there will be a lot of growth into China during that period and beyond," he says.

"In the coastal areas of China, where most of the industry is centred and where the money is, there are 60 or 70 million people. These are wealthy people with a lot of money to spend. Obviously there is a big difference in China between people who have money and those who haven't, but just because there are so many people in the country you just look at that percentage of people who do and it's a huge number - and a lot of these people want to come to Japan."

Back at home, meanwhile, Ohashi does not see much threat from Japan's new entrants, several of which have launched since 1998 in the wake of deregulation but have tended to struggle. Although new airlines will have opportunities to expand when Haneda gets a fourth runway, Ohashi sees these carriers, which have sparked occasional price wars, continuing to find it difficult to compete in the high-cost Japanese market. "It is quite a difficult time for the low-cost carriers or the new entrants into the Japanese market," he says.

 "Obviously they want more slots but it's difficult for them in the same way that it's difficult for everyone else. These guys also have to fly out of Haneda in the same way that we and JAL do, and the costs are the same for them as they are for us. It's not like the American or the European model where they can use a secondary airport and fly from there. It's not that easy."

Low-cost ambitions
Despite this, ANA is looking to launch a low-cost domestic operation of its own, with the aim being to have lower personnel costs than the mainline operation. Details remain sketchy, but a launch is possible around the end of the year.

ANA has also been working to strengthen its brand to help it better compete with the enlarged JAL. Domestic operations are now run under the central ANA name, with the group having dropped the Air Nippon and Air Nippon Network brands. International operations are run under the ANA name and as Air Japan, which has a lower cost base and which serves short-haul international routes, while Air Nippon is used for one route, to Taipei in Taiwan.

Fleet restructuring also makes up a major part of ANA's overhaul efforts and the goal is to reduce the number of jet types to three or four, from the current nine, over the next decade. Its 7E7 launch order is key to the restructuring. ANA will take the first of 20 230-seat 7E7-8 types for international services in 2008, followed by the first of 30 300-seat short-range 7E7-3s for domestic services in 2010. The aircraft will mainly replace 767s.

The many changes are coming as confidence in Japan's economy is steadily returning after an extended downturn. Ohashi says the efforts are part of a grand plan "to be the number one airline in Asia, in terms of quality, customer satisfaction and corporate value by 2009-10, when Haneda airport expands".

ANA is not the only airline in Asia that says it wants to be the region's leading carrier by the end of the decade - and how this can be measured is entirely subjective. But Ohashi believes that if its run of success continues, it will certainly be a serious contender.


A lifetime's work at ANA

Yoji Ohashi was born in Jiamusi in north-east China's Heilongjiang province on 21 January 1940. He spent the first five years of his life in the country, where his father was running a trading firm as a Japanese immigrant to Manchuria. In 1945, after the Soviet Union declared war on Japan, his family began an 18-month journey back to Japan, arriving in November 1946.

Ohashi says that even before joining ANA in 1964 he was influenced greatly by its second president, Kaheita Okazaki, who spent much of his life working to boost relations between China and Japan, which reinstated diplomatic relations in 1972.

Ohashi graduated from the faculty of law at Keio University in Tokyo. At ANA he gradually worked his way up to senior management level and in 1993 he was named to the board as senior director and general manager of the Narita airport office. He later was responsible for US operations based in New York, and then for personnel, purchasing and facilities, associated business development and marketing. He took over as president and chief executive in April 2001 from Kichisaburo Nomura.

Ohashi is married and has one son and one daughter.

"It sounds like a cliché but I really like reading," he says of his personal interests. "I also like music and would like to do more exercise but unfortunately time does not allow it these days."

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