Matching own success will be hard for JAL president

Bloomberg News Service

Tokyo — Japan Airlines Co. President Isao Kaneko displays a cartoon on the overhead projector: an aircraft surrounded by dark clouds and jagged lightning, its pilot struggling at the controls.

Three years after pulling out of a nosedive following losses of $1.2 billion, Japan Airlines faces challenges in a cooling global economy. Advertiser library photo • March 13, 2001

$1.2 billion forced the resignation of his predecessor Akira Kondo and of Chairman Susumu Yamaji.

Kaneko switches the scene for his lunchtime audience to the jetliner emerging from clouds, a smiling sun overhead and the pilot exclaiming: "Clear sky! Max power!"

Conditions have improved. The carrier beat analysts' expectations last week in saying group net income more than doubled to more than $320 million in the year through March, aided by a rise in business passengers on international routes. Kaneko, a graduate of Tokyo University's law faculty, gets much of the credit for the rebound.

"After almost four years in the job, Kaneko has a lot of credibility," said Naoto Hashimoto, an analyst at Nomura Securities in Tokyo.

The past year's earnings will be hard to repeat as the global economy cools, cutting demand for travel and airfreight. The U.S. economy grew 1.5 percent in the October-March half, the slowest pace for a six-month period since the first half of 1995.

Outlook dims

"JAL is one of those companies (that are) sensitive to the economy," said Kiyoshi Goga, a portfolio manager at Tokyo-based Profit Research Center Ltd.

The company said it expects profit to fall 39 percent in the financial year ending in March 2002, even as sales are expected to rise 3.9 percent.

As the head of the Scheduled Airlines Association of Japan, Kaneko also fronts lobbying of the Japanese government to make life easier for airlines. The group wants expanded airport access, reduced fuel taxes and lower airport landing fees, now the highest in the world.

Kaneko's plans at home, including expanding domestic routes, are hobbled by a lack of landing rights at Tokyo's domestic airport, Haneda. Japan Airlines did get 13 new slots last year but that was the same given rival All Nippon Airways Co., which already had twice as many internal flights.

Kaneko publicly objected to the decision, unusual in a country where airlines — and most other companies — need government approval for many activities.

Japan Airlines is under pressure to keep costs competitive with rivals such as Hong Kong's Cathay Pacific Airways and Korean Air Co., which operate from cheaper bases.

Small talk

Kaneko's other public roles include chairing the strategy and policy committee for the International Air Transport Association, or IATA, a four-year post he took on in June.

Kaneko, 63, complains that his stamina lags that of his youth when he played basketball at college. Now he finds making small talk in English on subjects such as rose gardening particularly draining at the international gatherings he's obliged to attend.

Past stock gains, including Japan Airlines' 73 percent rise in 2000, will also be hard for Kaneko to match. Last year's jump, the best return among Asian carriers, was spurred by a 10 percent rise in business travel, which has now stopped growing.

Shares have declined 15 percent this year, including a 2.6 percent plunge to 445 yen just after the earnings report today, compared with a 7.3 percent gain in the benchmark Topix index.

Vulnerable

Japan Airlines stock "looked interesting at one point," said Hideki Kamiya, who helps manage $86 million in assets at Asahi Tokyo Investment Trust Management Co. The company's shares gained on reorganization efforts, and now are vulnerable to a weaker yen, he said.

The yen has lost 13 percent of its value against the U.S. dollar in the past year, and in early April, traded at its weakest point in 2 1/2 years.

While a slump in the yen increases the value of the airline's overseas sales when the money is repatriated, it also raises the cost of overseas fuel purchases and cuts the spending power of Japanese tourists abroad.

Demand sags

Signs abound that growth is slowing, including on international routes, which analysts say account for about 70 percent of Japan Airlines' sales.

While passengers on overseas routes rose for a 28th month in March, the 0.6 percent increase on the same month last year was the smallest gain in more than a year, said Doug Hayashi, an analyst at HSBC Securities (Japan) Ltd. Domestic passengers fell 3.1 percent to 2.1 million in March.

In the cargo business, where Kaneko began with the company in 1960, demand fell in the second half of the business year, reversing gains in the previous six months. In March alone, cargo volumes fell 6.7 percent as slowing economies cut export demand.

Kaneko expressed confidence that cargo volumes will begin to recover from the half-year beginning in October. "In the financial year just ended we hit our targets," he said.

Japan Airlines has managed to reduce costs to a level close to those at U.S. and European rivals. Labor costs are now 48 percent lower than they were 10 years ago and operating costs have fallen 38 percent, Kaneko said.

At the same time, the carrier aims to trim group debt by about a quarter, or 350 billion yen, by March 2003 and be able to maintain pretax profit at more than 30 billion yen on an annual basis, up from 22.4 billion yen in the year to March 2000.

Eye on the ball

Staying on track to meet those targets may free Kaneko up for his primary passion. Since student days, the president's first ambition has been to coach basketball.

Kaneko follows the game as honorary president of the company's basketball squad and is a fervent fan of the New York Knicks, a team he began supporting when he spent four years at Japan Airlines' branch office in the city starting in 1968.

With the Knicks knocked out of this year's National Basketball Association playoffs on May 5, Kaneko should have more time to concentrate on business, at least until next season.