- 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 is attributed to the cost structure of JAL. As mentioned above, the relative proportion of fixed cost is higher than that of variable cost. In the years of strong economic activity, the company will be better off with the new plane. The new plane will increase the CM ratio and, as a consequence, profits would rise more rapidly in years with high demand in air transportation business and airline service. However, the company will be worse off in years in which the demand for air transportation business is low. The great fixed costs will result in losses being incurred more quickly.
As a result of the decrease in demand in 2009, the impact is more obvious for such a cost structure because of higher break-even point and higher operating leverage. JAL is a capital-intensive company with a high operating leverage. The high fixed cost created increasing pressure and burden to the operating income during the economic downturn. The cost structure of JAL is vulnerable to the economic situation. JAL was suffered from loss as the huge fixed costs cannot be covered.
According to the financial report (FY2009) of JAL, fuel expenses is the major constituent for the operation of JAL, which accounted for the greatest part of operating expenses, amounted to ¥509.1 billion. However, fuel costs increased by ¥96.3 billion to ¥509.1 billion on sharp increase in aviation fuel prices in the first half of 2009. The falling demand caused the average cost of air transportation business for each passenger and cargo service rose while the revenue did not increase by the same percentage. The external factor had put JAL into a hard time
- Competition from budget airlines
Besides the unfavorable economic environment, JAL is also facing exhaustive competition from budget airlines such as Ryanair, Hokkaido International Airlines and Skymark Airlines. They have developed swiftly and become highly competitive in the market. According to IATA, in 2009 the low-cost carrier Ryanair ranked first in international market by the number, 57,647,000, of passengers carried. Besides, JAL is also facing the high competitions in domestic market. The flights have reduced from 1004/day in 2008 to 931/day in 2009.
Compared with traditional airline companies, the lower price stratagem obviously attracts customers. Especially in the current economic downturn, passengers are more likely to choose a cheaper flight due to the decrease in purchasing power. The competitiveness of budget airlines lies in their low price which can be attributed to low operating cost. In order to attain this, budget airlines have adopted a different business model focusing on cost-cutting. They reduce the operating cost from several of aspects such as sales of ticket, airline services and airport fees.
- Sales of ticket
Budget airlines have adopted direct ticket sale. They do not participate in any of the traditional airline distribution systems even it is much easier to sell their tickets. Instead, budget airlines merely offer tickets on their own web site or at their ticket counter. This can help them to avoid fees and commissions paid to agents. Beside it can also reduce installation of system.
By comparing the price of the same route, from Tokyo to Sapporo Chitose, we found that the budget airline is charged 15% lower.
price charged by Hokkaido International Airlines.
price charged by JAL.
- Airline service
Many budget airlines choose to use only few types of plane with a simply designed. This helps companies to save money on pilots and mechanics training, since they do not need to provide extra training programs for operating different types of aircraft. Most of budget airlines also make an unreserved seating arrangement which can reduce the overhead necessary to run a booking system and the operation issue on the planes.
Some optional equipment in flight such as entertainment system may not be provided in the air flight. This can reduce the acquisition price as well as the cost of maintenance. Moreover, most of the budget airlines only offer few of routes. For instance, Oasis Hong Kong Airlines Limited was a now-defunct long-haul low-cost airline. It operated scheduled services to London Gatwick Airport and Vancouver International Airport from its hub, Hong Kong International Airport.
Besides removing the non-frills, some budget airlines have started to charge many services on board such as offering drinks, meals or providing blankets, earphone. Therefore, customers can choose and pay what they want. This enables budget airlines to offer a lower fare.
- Airport fees
Budget airlines also cut cost from airports operation. Airports in major cities are usually in high demand and charge higher fees. Due to it, most of low-cost carriers will choose a secondary airport which is smaller but cheaper. It can reduce the operating cost in airport fee and related costs such as parking and maintenance cost. Budget airline use a mobile stairway which is cheaper to avoid using jet ways to board and alight passengers which is charged a higher airport fee. According to JAL’s annual report 2009, JAL plans to reorganize the group’s Tokyo-based airport-handling company in light of expansion of Narita Airport and expansion and inaugurate of the operation of international scheduled flights from Haneda Airport.
To Sum up, most budget airlines have cut their cost successfully by the methods above. Lower operating cost has helped them to generate higher profits and set in a lower sales price. Therefore,
Budget airlines can compete effectively with traditional companies like JAL. They can also enjoy the advantages in the economic downturn, because most of the customers are willing to pay less for travelling during the economic downturn. Due to it, some of them will choose budgeted airlines.
Facing this competition and possible resultant fewer customers, if JAL cannot successfully lower its costs, it may affect its competitiveness and profitability. Therefore, in order to increase its competitiveness, JAL has decided to cut ¥53billion cost by the end of 2011. Some has claimed that JAL can follow the same cost-cutting measures taken by budget airlines, since they have already effectively gained a low cost. However, in that case JAL may not be able to provide customers a high standard of services and maintain the original service quality. It has already achieved a well positioning and reputation in the market and a number of loyal passengers. Therefore, JAL needs to enhance its advantages to distinct itself from competitors by high quality of services, instead of lower price.
- Airline Reorganization
The Japanese government will give JAL $11 billion to help it through its reorganization. As in most cases in bankruptcies, shareholders of the airline will be wiped out, and unsecured creditors, particularly bondholders, those who bought IOU's of the airline will be holding promissory notes that are practically worthless (Yang, 2010). The board of directors and management will be replaced.
By selling off 25% of JAL’s subsidiaries, such as a credit operation and smaller airlines based in rural Japan, it can cut most of the operating costs and release more resources to its restructuring plan (Sanchanta, 2010).
ETIC is set to inject 300 billion yen into JAL to provide the carrier with immediate liquidity. With this large sum of liquidity, the carrier will aim to retire all 37 of its Boeing jumbo 747-400s under its three-year restructuring plan. The old 747-400s will be replaced by 787 Dreamliner Boeing, which can reduce half of its fuel consumption and enhance 7% of planeload. In one hand, the maintenance fees and depreciation of the new 787 planes will be less than the old 747-400s. On the second hand, the fixed expenses can be brought down. With the increase in planeload and reduce in fuel consumption, it generates more revenues for each flight using the new planes.
Moreover, closer collaboration with other international airlines and carriers can increase its profitability shortly. By combining some of its cargo flights with other international airlines and carriers, the landing fees, fuel expenses and the maintenance costs can be brought down. Both the fixed and variable costs will be reduced, which is favorable to its profitability and brings a long-term relationship with them. This can help JAL to improve its service level and reduce its operating cost.
- Ethical issues involved in employment practice
Under the condition of airline restructuring and job relocation, ethical issues incurred with regard to employment practice. According to Wall Street Journal (Takahashi, 2009), JAL has confirmed tie-up talks with foreign carriers and said it would slash its work force by 14% as the struggling carrier seeks to escape its long malaise, which is around 6800 units. Delta Air Lines Inc. and American Airlines parent AMR Corp. have been in separate talks with JAL in recently to build stronger ties and potentially invest hundreds of millions of dollars in it. An article from Reuters has stated that JAL would receive severance pay early retirees and would start with 400 flight crew and ground staff managers (Unnikrishnan, 2010). JAL filed for protection from creditors with more than $25 billion in debts and vowed to slash 15,700 employees of its work force and 34 money-losing routes. Many employees are working with a fear of being laid off soon.
JAL posted weak revenues in proportion to the total number of employees. In FY2008, the group’s revenue per employee stood at $398,373.9, which is significantly lower than that of its competitors such as All Nippon Airways i.e. $417,929.5 and British Airways i.e. $414,665.9. In this circumstance, laid off is the last resort to give JAL some breathing space but would not cure all its ills. Cutting more than 15,000 units brings heavy burden to the society and the government. Fortunately, the company has given generous pensions payments to its retired workers, which is favorable to the early retirees. By doing so, the early retirees may have enough time to find another employment. Nevertheless, the morale of employees, especially for the flight crew and ground staff managers, has been suffered and reduced their productivity as well as their service level.
In addition, the top management should take the initiative to reduce their base salaries, which may help retain hundreds of employees. By collaboration with other international carriers, JAL may outsource part of its service, such as logistics service, to minimize its heavy fuel cost and increase cargo. With extra resources, JAL may improve the welfare of its existence flight crew and ground staff in order to maintain a high service level and morale. Increase the flight crew’s resting time and employ a more flexible contract with the crew would be beneficial.
(VII) Suggestion and Conclusion
1) Reduction in labor cost
Compared with other enterprise in Japan, the salaries of JAL staff is 2 times higher than the staff in other company. JAL need to spend a large amount on salaries expenses every year. It increased by 5.7 billions of yen in 2009.Besides, JAL offers many bonus and retirement pension to its staff. This expense becomes a large burden in JAL. During economic downturn, the demand of airline service decreased, JAL cut its airline service. It made the workload of staff decrease. Therefore, we suggest JAL to cut redundant labor. It is not ethical to cut employee salaries. But under bad year, we suggest employees to overcome the financial difficulties with company. JAL can cut the salaries and increase welfare. JAL should promise the staff to increase salaries in good year. Also, the company should reform pension system.
2) Reduction in fuel cost
The fuel cost is increasing sharply in this several years. The airline company needs to spend a large amount of money on this variable expenses. In order to reduce the oil consumption, JAL can choose to use fuel hedging .It can use futures contracts and derivatives to hedge their exposure to the price of jet fuel. By using crude oil futures contracts to hedge their fuel requirements, it can help to save a large amount of money. A good example is Southwest Airlines. It was able to save a large amount of money when buying fuel as compared to rival airlines when fuel prices in the US rose dramatically after the 2003 Iraq war and Hurricane Katrina.
Optimizing flight route can also help to reduce oil consumption. JAL can not only reduce the time of flight but also reduce the flight distance.
By aircraft downsizing, it can also help to reduce the fuel cost. JAL can use highly fuel-efficient aircraft, reducing the weight of on-board items, and increasing the frequency of aircraft engine cleaning.
3) Route restructuring
JAL’s operation is under government regulation. JAL has some commitments with Japan government about the airline service. Although some airlines are not profitable to operate, JAL still need to provide service on it. There are about 70 inland airlines are suffering from great financial deficit. Therefore, it is time for JAL to restructure route by eliminating the routes that are low usage. By doing this, it can reduce the operating expense.
4) Cooperate with travel companies
The demand of business class seats was falling sharply. It made JAL suffers great loss in 2009. The best way to increase the revenue is to stimulate this demand. JAL should proactively offer products and services that are attractive to customers who travel for leisure. JAL should focus its effort on securing demand for inbound travel into Japan by signing more contracts with local companies. It should cultivate tourism demand by forming alliances with local travel companies.
Conclusion
Under extraordinary downturn in the global economy, JAL is suffering from economics from a tough period. It made the revenue decrease sharply and its cost structure become unfavorable. Through the government subsidization and cost-cutting measure, we hope that JAL can reduce the fixed cost spending and expand the source of income in order to overcome this tough period.
- Bibliography
Sanchanta, M. (2010, January 19). Japan Airlines resturcture to cut 15,700 employees, 34 routes. Retrieved March 22, 2010, from Business With The Wall Street Journal:
Takahashi, Y. (2009, September 16). Japan Airlines to cut jobs, pursure alliance. Retrieved March 20, 2010, from Online Wall Street Journal:
Unnikrishnan. (2010, March 1). UPDATE 1-JAL to cut 5 pct of jobs - Nikkei. Retrieved March 20, 2010, from Reuters:
Yang, L. (2010, January 24). Japan Airlines files for bankruptcy. Retrieved March 24, 2010, from Asian Journal:
http://en.wikipedia.org/wiki/Hedge_(finance)#Hedging_fuel_consumption