JAL, ANA Face Twin Challenges Of Recession And Swine Flu

TOKYO (Nikkei)–Japan Airlines Corp. (JAL) and All Nippon Airways Co. (ANA), already hit hard by the global economic recession, now face another cause for concern — the looming threat of a new strain of influenza A. As the World Health Organization raised on April 29 the pandemic alert level of the flu to Phase 5, weak demand for air travel is expected to shrink further. Suffering net losses in the year through March 2009, the financial health of Japan’s two major airlines is highly imperilled, possibly pushing them to undertake fundamental revival measures including application for government support.

At a press conference held by ANA on April 30 to report fiscal 2008 results, Executive Vice President Tomohiro Hidema frowned at a question about the impact of the flu. “Our profit forecast for fiscal 2009 does not factor in the effect of the incident, but the flu will inevitably have some adverse impact on our balance sheet,” he answered.

Although ANA posted a 4.3 billion yen group net loss for fiscal 2008, it expects to recover during the current year. The carrier projects a net profit of 3 billion yen on savings of 73 billion yen through painstaking restructuring efforts, such as reduced fuel consumption and wage decreases — despite a forecast 3% dip in sales. Now, however, the eruption of the possible pandemic threatens the company’s view that it can minimize the impact of the global economic downturn on its business performance.

ANA has seen about 180 participants of packaged tours, mostly destined for North America, cancel bookings since the outbreak surfaced several days ago. “A slump in demand for business trips may be protracted and a fledgling recovery in tourist demand, thanks to a substantial cut in fuel surcharge, could fizzle out,” an airline executive lamented.

JAL’s anxiety is much greater than ANA’s as its international flight operation is three times larger than that of ANA.

Amid recent grim business circumstances — few business-class seats are occupied because companies have cut back on business trips — a JAL official said the carrier reported a net loss of 63 billion yen for fiscal 2008, against profit of 16.9 billion yen in the previous year. The company is also bracing for dismal fiscal 2009 results. The company faces the threat of the flu, which will likely deal another significant blow to its balance sheet as it receives emergency loans from the government-affiliated Development Bank of Japan (DBJ).

It is not the first time that the two airlines have been struck by the fallout of an epidemic. When SARS broke out in Asia in 2003, JAL experienced a 90 billion yen drop in sales while ANA saw a 21 billion yen sales fall, leading the DBJ to decide to extend over 100 billion yen in emergency loans to the two companies.

As a result of the steep sales plunge, JAL suffered the largest-ever net loss — 88.6 billion yen — in the year ended March, 2004. ANA, which had followed through with drastic restructuring in the previous year, narrowly escaped red ink, but the company was also provided loan relief by the DBJ.

The government’s bailout through the DBJ helped bolster the financial positions of the airlines for the moment, but it heavily undermined the companies’ management freedom. “The DBJ meddled in almost every management decision from specific ways to slash costs and what assets to sell to the size of planes to buy, considerably damaging the flexibility of our decision making,” an ANA executive recalled.

ANA, whose financial standing is relatively better than struggling JAL, insists that it has no plans to call for more emergency loans from the DBJ because of the past bitter experience.

If the new flu develops into a pandemic, its effects would be much wider than that of SARS, which was limited to Asia. In that case, ANA’s balance sheet, not to mention that of JAL, would be badly hurt. A government official’s pessimistic scenario is that ANA could be eventually forced to seek DBJ loan relief while JAL may find the 200 billion yen DBJ loan insufficient to cover its shortfall, and may have to apply for a government injection of capital in exchange for preferred shares.

In fact, some JAL and ANA officials are beginning to call for government support in the form of sizable cuts in airport usage fees and an aircraft fuel tax.

— Translated from an article by Nikkei staff writer Fumihito Ishizuka

(The Nikkei Business Daily May 1 edition)

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