Merger, economy drop JAS shares
By Desmond Hutton
Bloomberg News Service
TOKYO — Japan Airlines System Corp. shares may not recover for a year from their 20 percent drop since October, as investors wait for economies to stabilize and war tension to abate before buying the recently merged carrier's stock.
Shares of the world's third-largest carrier, formed from the union of Japan Airlines Co. with Japan Air System Co., ended morning trading up 1 yen at 242 yen ($2.01) in Tokyo, a level last matched by Japan Airlines' pre-merger stock in March 2000. All Nippon Airways Co., Japan's No. 2 carrier, has dropped 27 percent since its rivals merged, ending the morning unchanged at $1.72.
"We still aren't clear how the merger will help the company make profits," with price competition intensifying on Japan's domestic routes, said Hisako Furuta, who helps manage $34.7 million at ING Mutual Funds Management Co., and recently sold All Nippon shares. "They still haven't come up with concrete plans."
Japan Airlines, which mainly operates international flights, sought the merger to increase its share of the domestic air travel market, dominated at the time by All Nippon. Increasing domestic competition led to more discounting, eating into airlines' profits, while the possibility of war between the United States and Iraq is raising passengers' fears of attacks on aircraft and tourist resorts.
"Nobody wants to take the risk" of buying the company's shares for now, said Doug Hayashi, an analyst at HSBC Securities Japan Ltd. "There's still the threat of war in Iraq."
Any new Middle East conflict also is likely to drive up jet fuel prices, increasing airlines' operating costs. The price has gained 26 percent in the past six months, rising to $34 a barrel yesterday in Singapore, Asia's largest oil trading center.
Domestic sales
Japan Airlines' domestic services made up about a fifth of its sales in the first half ended Sept. 30, before the merger. Domestic passenger numbers rose 1.1 percent in the half, while revenue from home routes fell 0.9 percent on discounting.
Sales from the carrier's overall passenger operations fell 3.1 percent to 343.5 billion yen ($2.9 billion), while the total number of travelers declined 4.1 percent, both because of terrorism concerns and as sagging economies damped consumer spending.
Japan Airlines System said last month first-half net income for the Japan Airlines group doubled to $280 million, on special gains from discounts on Boeing aircraft purchases. Japan Air System's profit dropped 30 percent in the same period, to $28.3 million, as domestic competition intensified.
UAL bankruptcy
The bankruptcy of United Airlines' parent UAL Corp. may mean competition on overseas passenger routes will also get tougher, Japan Airlines System's President Isao Kaneko said on Dec. 11
UAL filed for the biggest-ever airline bankruptcy on Dec. 9 after failing to win $1.8 billion in U.S. government loan guarantees. The carrier may use the protection from creditors granted under U.S. Chapter 11 bankruptcy regulations to trim operating costs and undercut its rivals on fares, Kaneko said.
Kaneko likened UAL's protected status to the advantage given to a new jockey in a horse race, where more experienced competitors are typically handicapped by being forced to carry extra weight. "We have to meet our commitments, so we're heavier, but we run in the same race," he said.
The bankruptcy is making investors more cautious about airline shares, as it may increase cost pressure on other carriers.
UAL's Chapter 11 filing may increase competition, said Albert Hung, who manages $451 million at Tower Asset Management Australia Ltd. "Everyone in the industry has to think how they're going to bring down their costs to survive."
Labor disputes
Japan Airlines System's plans to completely merge its units' operations may still be disrupted by labor disputes over pay, analysts have said. Japan Airlines pilots say their pay is lower than their colleagues' at Japan Air System.
"JAS pilot pay is much better, everything is better," said Capt. Masayuki Ando, who is also deputy president of the Air Line Pilots' Association of Japan. The pilots' unions for the two companies don't plan to merge, Ando said.
Japan Airlines has said it won't combine the two companies' pay scales until after 2004, when the merger will be completed.
Japan Airlines said in January the combination will save the company a net 53 billion yen ($440.5 million) by 2006 from sharing check-in counters and office space, as well as eliminating duplicated routes and jointly ordering aircraft parts.
The two airline units already teamed up to buy spare parts for Boeing Co. 777 jetliners, which both carriers operate, said Norio Ogo, head of maintenance for Japan Airlines Co.
Profit outlook
Japan Airlines System said last month net income for the combined company will total $199.5 million this business year ending March 31, beating the company's July forecast by $16.6 million, helped by tax rebates.
The increased forecast still hasn't convinced investors, who say they may wait until the second half of the next business year, ending March 2004, to buy Japan Airlines System shares.
"As we move into perhaps the second half of next year, where maybe there will be some further signs of bottoming out of the economy and some resolution on Iraq, then the merger will start making a positive contribution," said HSBC's Hayashi. "That may be more of an entry point. Right now its too early."
