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JAL to cruise through virus turbulence with newfound resilience

Post-bankruptcy shift away from leases keeps costs down as demand plummets

Japan Airlines planes at Tokyo's Haneda Airport: The carrier is seen to have resilience against headwinds. (Photo by Kei Higuchi)

TOKYO -- Japan Airlines is expected to report a record loss when it announces quarterly earnings Monday, but its bankruptcy a decade ago taught the carrier lessons in resilience that will prove invaluable amid a coronavirus crisis likely to drag on.

JAL, which is believed to have suffered an operating loss of about 120 billion yen ($1.14 billion) last quarter, is in the process of securing 500 billion yen in funding. That is more than the 300 billion-plus yen in cash it held at the end of the fiscal year through March, but less than half the 1.04 trillion yen being raised by rival ANA Holdings.

Even so, JAL management believes this will be enough. "Look at our low percentage of rented planes," an executive said.

The carrier had 241 aircraft in its fleet at the end of fiscal 2019, of which 10% were leased. ANA, by contrast, rents 31% of its 303 planes. Airlines must make payments on leased planes even when they are grounded, while aircraft that are owned require only minimal spending when not flying -- a crucial difference in an unprecedented disruption to the normal flow of people and goods.

JAL's preference for directly owned aircraft stems from reforms implemented after its bankruptcy.

The carrier had previously rented freely to boost revenue, taking advantage of an easy way to expand its fleet without needing to burn much cash. At the end of fiscal 2008, 40% of its 279 aircraft were leased. But JAL's finances took a turn for the worse, due in large part to the 2008 financial crisis, and the company sought bankruptcy protection in January 2010.

The carrier took lessons from this experience and focused on profitability and financial health, reducing service on unprofitable regional routes and scaling back its fleet, particularly the rented jetliners. It turned away from the expansionary strategy that had made it the world's largest carrier by one measure in the 1980s, and its annual revenue still sits 30% below the fiscal 2007 peak.

Efficient use of assets is another indicator that bodes well for JAL in the current crisis. During its publicly funded turnaround, the carrier faced government restrictions on its ability to expand service to new routes, which were only lifted in the spring of 2017.

This pushed the company to ensure it could be profitable with limited investment and a relatively small fleet. It reported an operating profit margin of just over 7% for fiscal 2019, compared with ANA's 3%.

Fixed costs for aircraft and labor are high in the airline industry, meaning that a steep drop-off in revenue can quickly send the bottom line into the red. JAL's ability to turn a profit with a relatively small asset base, along with a reworking of domestic service to focus on more lucrative routes, will help cushion the blow from the pandemic.

"If demand for domestic service recovers to 80%, we'll move into the black overall," said JAL President Yuji Akasaka.

Domestic-travel demand hit bottom in May, according to ANA Chief Financial Officer Ichiro Fukuzawa, which puts carriers a step closer to recovery. But Fukuzawa also predicted that international passenger traffic will recover only gradually through fiscal 2023, and with new coronavirus cases picking up again, the outlook remains murky.

JAL is reportedly considering more than 100 billion yen in cost cuts this fiscal year. It plans to avoid furloughs and layoffs, instead reducing executive pay and bonuses. Investments in its fleet will be shelved, and the carrier will seek to defer advance payments to Boeing and Airbus for planes already slated to be brought in from fiscal 2021 on.

While a temporary drop in profitability will be inevitable, JAL's post-bankruptcy restructuring and its speedy responses to the pandemic have laid the groundwork for it to continue to compete even amid a prolonged slump.

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