Weaker yen to raise costs for Japan Airline flights

By Tim Kelly
Bloomberg News

TOKYO — Japan Airlines Co., Asia's biggest carrier, said the flagging yen will spur an increase in costs, led by U.S. dollar expenses, outweighing the gains from increased sales on overseas operations.

"Overall, a weaker yen raises costs more than it increases the value of overseas revenue," said Japan Airlines spokeswoman Yoshie Otaka. The extra sales generated abroad in yen terms are not enough to offset bigger expenses for aircraft, fuel and other purchases, she said.

Japan Airlines plans to take over Japan Air System Co., the country's third-biggest airline, to give it more access to domestic routes, which would raise its share of yen-denominated flight sales from about a third now. The Tokyo-based carrier is trying to squeeze costs to stem losses after terrorist attacks in the United States in September hurt demand for air travel.

"It will be hard to raise sales overseas so the only option is to further reduce expenses, such as personnel costs, or by using smaller aircraft on some routes," said Hiroshi Kato, who helps manage 200 billion yen ($1.5 billion) in assets at Ikegin Investment Management Co. "Still, the yen's weakening has been quite sharp, and I wouldn't be surprised to see it return to about 125 yen against the dollar by about February," he said.

The yen has fallen 8.8 percent against the U.S. dollar since Oct. 1, the start of the second half of the carrier's business year. The yen recently traded at 131.08 to the dollar.

Foreign currency-denominated sales make up 19 percent of Japan Airlines' total revenue, compared with 28 percent of costs paid in currencies other than the yen, Otaka said. A yen-dollar rate of 110 would be the most favorable rate for Japan Airlines, she said.

Japan Airlines and Japan Air System plan to establish a holding company in the second half of 2002 and will then reorganize their businesses into four merged units by 2004.

Japan Airlines shares rose 0.6 percent to 314 yen in Tokyo. The carrier vies with Thai Airways International Pcl as the worst performing carrier in Asia this year. Both airlines' shares are down almost 40 percent in 2001, the biggest drop among the 17 regional airlines tracked by the Bloomberg Asia Pacific Airlines index.