FLUG REVUE December 2003: ANA seeks better times

FLEET MODERNISATION AT ALL NIPPON

By Andreas Spaeth

The Japanese air travel market is actually ideal for Airbus's big types. The A380, in particular, could help chronically overcrowded airports like Tokyo Haneda to achieve better utilisation of their scarce infrastructure. Haneda is one of the most important hubs of All Nippon Airways (ANA), hitherto the undisputed market leader in the most densely flown domestic market of the world. Last year the airport by the Bay of Tokyo handled 61 million passengers, with the entire volume of the fourth-largest airport in the world exclusively serving Japanese domestic passengers. Altogether around 90 million Japanese people a year travel by plane in their own country.

In 2002, over 47 million, that is over half of them, were carried by the ANA fleet, with its distinctive blue and white colours. With its 3.8 million international passengers, ANA was previously the highest volume airline in Asia and was ranked seventh in the world – and most of that was down to its domestic market. In Haneda alone, 317 ANA flights take off and land every day. The most heavily flown connections are Osaka (twelve flights to the domestic airport Itami and eight to Kansai) and Sapporo (18 flights). On this most heavily flown route in the world, ANA offers over half a million passenger seats per month. Ideal terrain indeed for the super jumbo from Toulouse and Hamburg, or so one would think.

A321 of All Nippon

Yet, in an interview with FLUG REVUE in Tokyo, Katsuhiko Kitabayashi said, “Our Boeing 747's with up to 569 seats are big enough for our domestic flights.” The manager has been working for ANA for 33 years and today is Executive Vice President with responsibility for alliances and international affairs. “We believe that higher frequencies are more important than big aircraft. If necessary, we could deploy a super jumbo on international routes,” he says. ANA has apparently just begun a detailed analysis of the requirement. “We are still considering the A380.”

For Airbus, Japan is a difficult place – the market share of the European aircraft manufacturer in the land of the rising sun is only about 20 percent. This was all set to change this spring. ANA had announced a big order for between 25 and 50 aircraft with over 110 seats, and Airbus was believed to be the favourite. Then Toulouse was shocked to learn in April that ANA was ordering 45 Boeing 737's, predominantly the 737-700 variant, and that in return 27 elderly 737's and 25 Airbus A320's were to be withdrawn from service in the medium-term.

Once it has disposed of seven A321's in the near future, ANA will thus revert to being a pure Boeing user. It is the first time that an A320 operator has chosen the 737NG in a major order, and letters of protest have been sent from Europe to Tokyo, alleging that the selection process was unfair and politically motivated. “Japan is difficult market, you have to be very patient there, but we have good contacts with ANA,” Charles Champion, director of the A380 programme in Toulouse, told FLUG REVUE.

It does not seem the right time to be trying to persuade ANA to take a quantum leap forward, as an A380 order would signify. Japan's biggest airline up to now is simultaneously under pressure from several quarters, as rarely before in its history. For the last financial year 2002/2003, the ANA Group, which totals 133 companies, sustained an after-tax loss of around €212 million, the biggest loss in the company's history.

This was actually slightly better than expected, but the ninth time in eleven years that the company has end the year in the red. The Iraq war and the continuing poor economic situation specifically in Japan have had just as negative an impact on ANA as the SARS crisis, even though Japan itself was hardly affected by it. In the so-called “golden week” at the beginning of May, in which the Japanese travel more than at any other time in the year, the volume of international bookings was down by 42 percent, but only by around 8.4 percent in the home market. ANA continues to be a strong force primarily in the domestic market, in which at present it enjoys a market share of just over 50 percent. Over 93% of the almost 51 million ANA passengers in 2002 flew within Japan, where, despite the fares being kept down by government decree, over 80 percent of revenue was generated. Domestic air fares, which are now set to rise, have been fixed, for example, at between €70 and €100 each way on the Tokyo-Osaka route (around one hour's flying time).

Yet since October 2002 the cards have undergone a complete reshuffle in the domestic Japanese competition. After years in which deregulation was more on paper than a reality, the authorities finally approved a merger between ANA's rivals Japan Airlines (JAL), previously the dominant international airline, and domestic carrier Japan Air System (JAS) – against the bitter opposition of market leader ANA. Together these airlines have the same market share as ANA has enjoyed up now. On the most lucrative routes, whose numbers cannot easily be expanded due to the scarcity of slots, however, JAL and JAS together have more connections. At a time when ANA can least afford it, it is being forced to invest more in marketing with a view to positioning itself as the most punctual carrier compared with its new major competitor.

Already before the merger, ANA President Yoji Ohashi warned, “Detailed analysis shows that, despite similar shares in the total market on individual routes on which the three airlines competed up to now, JAL/JAS's market share will rise to 60 to 70 percent. This will ruin the competition.” On the other hand JAL spokesman, Geoffrey Tudor, viewed the situation before the merger as unsustainable: “We could not complete with ANA before because they had all the slots,” he told FLUG REVUE. “On many routes, ANA had a total monopoly and the public had no choice. It was ANA or nothing.”

ANA devised a counterstrategy for maintaining its position on its most lucrative market segment. “We have cut capacity on regional routes and moved more seats to the main routes,” explained ANA manager Kitabayashi. “We have used our own resources to counter the concentrated capacity of JAL/JAS to some extent and even teamed with the low-cost carrier, Air Do.” For Kitabayashi, the situation is clear. “If the number of competitors declines, then there is less competition.” A glance at the flight schedules shows how the merger has affected one of the most important domestic routes, from Haneda to Osaka-Itami: we are now witnessing an unrelenting race for higher frequencies. Before the merger there were 20 connections daily (eight ANA flights and six from each of JAL and JAS). In October the newlyweds added one extra flight, and ANA followed suit. At present ANA offers twelve flights and JAL fifteen, but from October ANA will be raising this to 14 connections, so that altogether there will then be 29 daily return flights between the two airports, almost one-third more than a year earlier.

A glance at the ANA story explains why to this day domestic flights are the backbone of the business. In December 1953 ANA's predecessor, Japan Helicopter and Airplane Transport Company, began a service with a de Havilland Dove between Tokyo and Osaka. In December 1957 the company changed its name to All Nippon Airways.

After merging with various other small companies, in 1964 ANA acquired its first jet, a Boeing 727, which flew between Tokyo and Sapporo and satisfied demand for domestic flights which was rising steadily despite an excellent railway system. All the larger Japanese airlines in 1974 got together and launched Nihon Kinkyori Airways which, as a regional airline, began state subsidised services to outlying destinations and islands. Today this airline is called Air Nippon/ANK and is part of the ANA Group, where, with a fleet of Dash-8 and YS-11 turboprops, Boeing 737's and Airbus A320's, it operates out of its hub in Fukuoka at 30 percent lower operating costs compared with its parent company, while also serving routes from Haneda for which there is less demand.

It was not until 1986 that ANA ventured beyond Japan's borders for the first time, whereas up to then only JAL had offered international flights. The first foreign route was to Guam in the Pacific, a popular holiday island under US administration. This was followed soon afterwards by Washington DC, and in 1989 came the first European route, Stockholm, followed by Frankfurt in 1993. At that time ANA also flew to Sydney, Katsuhiko Kitabayashi recalls, “But we withdrew that service five years ago. It wasn't worth it, as virtually all the passengers were holidaymakers seeking low-priced fares.”

Today ANA's international route network is highly streamlined and is notable for its efficiency rather than for global ambition. Apart from the Asia/Pacific region, the flight schedule includes five destinations in the USA (including Hawaii), plus Paris, London and Frankfurt in Europe, each with daily flights to Narita. “For a bigger intercontinental network all that is missing is slots in Narita,” Kitabayashi laments, “and then we would prefer to use the available take-off slots for flights to China and Australia. Our international emphasis is on intra-Asian traffic.”

Before the outbreak of the SARS crisis, ANA had already recovered a lot of ground in the Middle Kingdom, and ANA itself flies seven destinations ranging from Shenyang in the north to Hong Kong in the south. Other connections are offered through codeshares with China Southwest and Shanghai Airlines, and altogether the flight schedule includes 121 flights per week to China, some of which were withdrawn in the early summer. “Virtually all the China routes were already enjoying a twice daily service. China is and remains our top priority,” says the ANA manager. “That is where the growth lies, and we are hoping to also carry more Chinese passengers in the future, even if up to now the clientele has been primarily Japanese.”

When it comes to the international network, membership of the Star Alliance, which it joined in 1999, is very important for ANA, which itself serves only relatively few destinations. “Thanks to Star, our international sales grew by five percent or $80 million in the first year,” says Kitabayashi. At the same time he laments the lack of a Chinese partner in the Alliance. “Up to now that has been a blank area, and we would certainly welcome a Chinese carrier at Star.”

Japan is one of the most important markets of the Alliance, with up to 17 million Japanese travelling abroad every year. Altogether, foreign airlines flew the lion's share, 60%, of flights between Nippon and other countries, with ANA and JAL together having only 40 percent. Within the Star Alliance, relations are closest with Lufthansa and United Airlines. Together, all Star carriers flying to Tokyo-Narita enjoy a market share of 25%. “We fly the same routes as United, and although we are partners, at the same time the competition between us has stepped up,” says Kitabayashi. United, the third biggest provider of US connections from Narita after Northwest and JAL, moved into Terminal 1, recently lavishly renovated to the tune of $11 million, at the beginning of 2003, and by 2006 all the other Star carriers will be under the same roof.

Despite this and even after the long delayed opening of a second runway in April 2002, the bottlenecks in Narita's runway system remain an Achilles heel in the development of international traffic from and to Japan. The only 2,180m runway cannot handle any heavy widebody aircraft, but at least the number of possible flight movements has risen from 135,000 to 200,000 per year.

Now for the first time regional jets are also landing in Narita on domestic flights and offer international ANA passengers inexpensive connections to Sapporo, Sendai and Osaka-Itami, flown by ANA's partner Fair with the CRJ100 and -200. All in all, the ANA Group has increased its capacity in Narita by 50%. “We are still not entirely satisfied with the situation in Narita, but at least we have been able to extend our Asian routes because the Boeing 767 can take off from the new runway,” says Kitabayashi. “All the Japanese traffic is centred on Tokyo, and capacity is also a problem for us in Haneda, although there are now plans to build a fourth runway there. In particular, the landing charges at both airports, the highest in the world, are a blow to ANA's finances, since for reasons of competition the latest rises cannot be passed on to customers. Despite this, ANA is hoping that once its long cherished plans to fly to all the international destinations at least once a day are realised, it will finally break even on its foreign services in the present financial year.

Here, its new product on board the Boeing 747 jet might help with international traffic. Even when times are bad, ANA shows an innovative drive that takes a leaf out of the book of other Star carriers, especially Lufthansa. On all long haul routes, ANA now offers four classes: the normal Economy section has to accept a slight reduction in seat pitch, but in the new Premium Economy section seat pitch is a comfortable one metre, with other bonuses as well. The “Club ANA”, the renamed Business Class, is even more impressive: its well screened seats with their shell structure can be pulled out into a slightly inclined flat bed. Finally, the Nonplusultra is the new First Class section which has just been introduced: thanks to movable armrests, passengers here can not only stretch out their full length, but enjoy a comfortable night's sleep in any position they might care to adopt on the widest flying beds around today, at 84cm. That is, if they would not prefer to use the video on-demand system or have Japanese or western culinary specialities served up to them. Status symbols are important in Japan, and it doesn't get much better than ANA First Class in any airliner flying today.

From page 22 of FLUG REVUE 12/2003

Last updated 10 November 2003

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