Management Accounting Project Report. Japan Airlines International Co., Ltd. (JAL)

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AF2110 Management Accounting Project Report

Content

(I) Introduction to JAL        P.3

(II) Cost structure of airline business        P.4-5

(III) Economic downturn        P.6-7

(IV) Competition from budget airlines (From international airlines)         P.7-11

  1. Sales of Ticket
  2. Airline Service
  3. Airport fees

(V) Airline reorganization        P.11-12

(VI) Ethical issue involved in employment practice        P.12-13

(VII) Suggestion and conclusion         P.13-15

(1) Reduction in labor cost

(2) Reduction in fuel cost

(3) Route restructuring

(4) Cooperate with travel companies

(VIII) Bibliography         P.16

  1. Introduction to JAL

Japan Airlines International Co., Ltd. (JAL), is the  of , with its  in , , . The JAL Group's operations include scheduled and non-scheduled international and domestic  and  services to 220 destinations in 35 countries worldwide, including . The airline group has a fleet of 279 , consists of mostly  aircraft; In the  ended March 31, 2009, the airline group carried over 52  passengers and over 1.1 million  of cargo and .

In 2009, Japan Airlines suffered steep financial losses, despite remaining Asia's largest airline by revenue. As a result, the airline embarked on staff cuts and route cutbacks in an effort to reduce costs. The carrier also received a ¥100 billion credit line from the Japanese government that year.

The on-going financial crisis broke out in late 2008 and swept all over the world. The deteriorating economic environment imposes heavy pressure upon JAL’s customer volume. JAL applied for court protection under the Corporate Rehabilitation Law on January 19, 2010. JAL expects to receive a ¥300 billion cash injection and have debts worth ¥730 billion waived, in exchange for which it will cut its capital to zero, cut unprofitable routes and reduce its workforce by 15,700 employees—a third of its 47,000 total.

JAL recorded that the operating income in the air transportation business declined by ¥139.5 billion from the previous fiscal year (2008), to the ¥60.8 billion. In this report, the cost structure of air transportation business will first be analyzed and the above-mentioned problems will be discussed in details. In addition, practical solutions specific to these problems will also be suggested.

  1. Cost structure of air transportation business

The costs of air transportation business can be categorized into three groups: fixed costs, variable costs and mixed costs.

The fuel cost can be classified as both step-variable cost and fixed cost in different situations. From the whole business perspective, the number of flights is changeable. The whole cost increase or decrease in response to wide changes in activity i.e. the company can change its fuel costs by changing the number of flights. In this situation, fuel costs become step-variable costs. When we considering every single flight, then the fuel cost remains the same even when the activity changes within the relevant range, let’s say, the fuel cost remains the same when serving increased number of customers within the plane’s capacity.  The fuel cost of a single fight is classified as fixed cost.

According to the financial report (FY2009) of JAL, fixed costs such as airport facilities, maintenance and aircraft depreciation occupied a high proportion of the cost of the business. Sales commissions, passenger services and cargo handling are belong to variable costs, which occupied a relatively small proportion of the cost of the business.

Compared with other type of businesses, air transportation business has a high proportion of fixed costs due to the extremely high purchasing cost of planes. With sales revenue and total costs being equal, companies with higher proportion of fixed costs usually have higher contribution margin ratio and operating leverage.

Segment Information for the Group’s Core Business of Air Transportation

(Billions of yen)

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  1. Economic downturn

As a result of the global economic downturn, the purchasing power of people all over the world has decreased. The operating revenues in the air transport business of JAL declined by ¥110.2 billion from the previous fiscal year, to ¥1716.4 billion. This was primarily attributable to a decline of ¥50.7 billion to ¥703.5billion in revenues from international passenger operations. The domestic passenger revenues and international cargo revenues also declined with a great proportion.

The bad economic condition had put JAL into a difficult situation. To a larger extent, such financial difficulty ...

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