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Business Trends

Strategies of Japan's top two airline rivals diverge

ANA aims for aggressive growth, while JAL focuses on shareholder returns

ANA Holdings and Japan Airlines have outlined contrasting strategies in their respective medium-term business plans released recently.

TOKYO -- Japan's top two airlines, which have long taken similar strategies, have indicated differing focuses in their medium-term business plans announced recently.

ANA Holdings' plan emphasizes an increase in investment, while Japan Airlines is focusing on rewarding shareholders, with investors already appearing to view ANA as a growth stock and JAL as a value holding.

"Last year, the stock price dropped right after we announced the medium-term plan, and we took it seriously," said JAL President Yoshiharu Ueki said on Feb. 28 as he announced the airline's revised medium-term plan to March 2021. "So this time, we made sure we announced numbers in a concrete manner."

In last year's medium-term plan, the company did not indicate the operating profit target, only outlining it verbally. The figure was down 14% from the record high level reached in the year ended March 2016. This had a negative impact on investors' assessment of the company, causing a sell-off that sent JAL stock tumbling 8% on the next trading day.

What prompted the selling were investor concerns about potential dividend cuts and low growth. After it went bankrupt in 2010, JAL received preferential tax treatment, but the measure is set to expire as early as March 2020. Investors feared the company might cut dividends as it faces this prospect of a heavier tax burden.

As a result, in its revised medium-term plan JAL this year included measures to allay such fears. It shows the dividend target levels in terms of a percentage of net income paid out as dividends, known as the payout ratio, set at 30%. A separate dividend target level is also shown as a debt-on-equity ratio, or the percentage of equity -- the company's total assets minus all its debts -- paid out as dividend. JAL's consolidated net income target for the year ending March 2019 indicates a dividend drop based on the 30% payout ratio, but the DOE target of 3% indicates the company is assuming no fall in payout, according to JPMorgan Securities Japan analyst Ryota Himeno.

Japan Airlines President Yoshiharu Ueki   © Reuters

JAL's plan also clearly states that retained earnings will be capped at about 2.6 months' worth of revenue for the year. Any amount exceeding it would be used for other purposes, including dividends. In addition to capital spending of 660 billion yen ($6.18 billion) over the next three years, a new allocation of "special growth investment" is planned at 50 billion yen.

Through this spending, the company aims to increase revenue by 46% to 2 trillion yen and operating income by 51% to 250 billion yen in 10 years from their respective current forecasts for the year ending this month. Market capitalization is expected to roughly double from the current levels to 3 trillion yen during the same period.

"JAL tends to be conservative, but it has expressed its goals in figures," said SMBC Nikko Securities analyst Hiroshi Hasegawa. "I can rate the company highly."

Investing for the future

Meanwhile, ANA's plan through March 2023, announced on Feb. 1, is characterized by an aim to seize every opportunity for growth. A total capital spending of 1.72 trillion yen planned during the five-year period is over 30% higher than in the previous five years. The average annual spend during the period works out at about 100 billion yen higher than that at JAL. The expenditure is targeted at purchasing aircraft to expand the passenger business, including for its low-cost carriers, introducing artificial intelligence and robot technologies and setting up a staff training facility.

"We need to take action right now for our future expansion, including capturing the business opportunities to expand flight slots at airports in the Tokyo area, for example," said ANA Holdings President Shinya Katanozaka.

Despite the large spending, however, the plan painted a moderate growth outlook. The operating profit target for the year ending March 2021 is 200 billion yen, unchanged from the previous target, with the target for two years later set just 20 billion yen higher.

This is attributed to increases in costs for maintenance and fuel, according to Ichiro Fukuzawa, the company's director of finance. "These are purely our minimum targets," he said.

One foreign investor has complained that the numerical targets do not line up with the large growth-focused investment figures. The investor also criticized the lack of specific numerical targets for shareholder returns in the plan, which only said the company would "enhance" returns. All this boils down to a degree of uncertainty about the company's ability to bring high shareholder returns, despite the high risk it is taking in making large investments.

Investors responded positively to JAL's plan, but negatively to ANA's. In the days following their respective announcements, JAL shares rose 5% at one point, while ANA shares fell as much as 5%.

JAL shares have recovered about half from their previous peak, but ANA shares remain at their lowest levels so far this year.

Contrasting fortunes

The contrasting plans reflect the different situations they are in. ANA has cemented its position as Japan's biggest carrier since JAL went bankrupt, overtaking its rival in terms of passenger numbers and operating income in the period from April to December 2017. Analysts say ANA aims to further expand its lead through its big spending plan. This appears to be reflected in the intention to expand the low-cost carrier and cargo businesses -- areas where JAL does not have a strong lead.

All Nippon Airways (ANA) Holdings President Shinya Katanozaka   © Reuters

On the other hand, JAL, still feeling the pain of bankruptcy, is focused on securing income. That means the company is focused only on mergers and acquisition opportunities and new businesses that it expects to bring in income early. In its strategy for international routes, too, the company is focused on expansion through tie-ups with other companies, which carry relatively low risk.

In terms of aircraft fleet, JAL's is expected to stand at 230 at the end of March 2021, significantly smaller than the 335 planes ANA plans to own by the end of March 2023.

There is another big gap between the two companies in the expected growth in available seat kilometers, a measure of international flight transportation capacity in which the total number of available seats is multiplied by the total distance traveled. While JAL expects the figure to increase 25% by the year ending March 2021 from the year ended March 2017, ANA is estimating 50% growth in the year ending March 2023 from the year ending March 2018.

SMBC's Hasegawa thinks both medium-term plans have their strengths and weaknesses. If the current economic growth phase continues, ANA's expansive plan will lead to accelerated income growth, expanding its lead against JAL, he said.

On the other hand, if growth slows down and decreases demand for air travel, JAL stands to loose less than ANA thanks to the former's modest growth spending.

A market insider, however, said JAL "would become unable to recover the ground lost to ANA if ANA expands its lead, if it fails to take risks and make growth investment at the right time."

Airline businesses are vulnerable to fluctuations in the external environment, including global growth trends. In Japan, air travel demand is expected to shrink as its population ages. But foreign visitors to the country are expected to continue to grow ahead of the 2020 Tokyo Olympics, which means growth is expected in international flights. Both JAL and ANA aim to grow by boosting their brand recognition internationally. The two companies' share price trajectories may well go in different directions depending on how their plans play out in the next few years.

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