The international and domestic operations units of Japan Airlines Corp., the nation’s flag carrier, merged Oct. 1. The merger means the complete reorganization of JAL and a new start for the airline. But the new JAL faces rough times ahead.

The former Japan Airlines Co. and Japan Air System Co. were integrated under a single holding company in 2002 to improve their competitive edge. Then, in April 2004, Japan Airlines International Co. and Japan Airlines Domestic Co. came under the wings of the holding company, Japan Airlines Corp.

But the integration did not lead to the expected benefits. Restructuring efforts have been slow. A spate of safety problems has caused many customers to switch to rival airlines. Soaring fuel prices have also hit the company.

JAL fell into the red in fiscal 2005 on a consolidated basis, registering a net loss of 47.2 billion yen for the year ended March 31, 2006, compared with a net profit of 30 billion yen the year before. Falling passenger numbers caused a 30 billion yen revenue loss in domestic operations. Although overall sales rose 3.2 percent to 2.2 trillion yen, that was due mainly to a series of fare hikes and increased fuel surcharges. By contrast, JAL archrival All Nippon Airways Co. fared well in the same fiscal year. Its pretax profit rose 2.3 percent to 66.7 billion yen and sales increased by 5.8 percent to 1.37 trillion yen.

In the first quarter of fiscal 2006, JAL had a net loss of 26.7 billion yen, down from a net loss of 38.3 billion yen a year before. In the meantime, ANA’s net profit more than tripled from a year earlier to 7.68 billion yen. JAL’s operating loss amounted to 31.9 billion yen, slightly less than 32 billion yen a year earlier, indicating that the company is still suffering from the decrease in passenger volume and higher jet-fuel prices. ANA’s operating profit jumped 66.1 percent to 19.5 billion yen.

The difference in business performance between JAL and ANA can be attributed to the speed of each company’s restructuring efforts. ANA started purchasing fuel-efficient aircraft in fiscal 2003. It also cut employee salaries the next fiscal year. The efforts saved 30 billion yen over two years. JAL’s cost-reduction efforts didn’t go into full gear until fiscal 2006.

In March 2006, JAL announced a middle-range business plan covering the period of fiscal 2006 to fiscal 2010. For the current fiscal year, it is striving to realize a net profit of 3 billion yen, an operating profit of 17 billion yen and sales of 2.3 trillion yen. The plan also calls for completing the reconstruction of the airline’s business operation infrastructure by the end of fiscal 2008 and eventually raising the rate of consolidated profit to 5 percent or more.

Under the plan, JAL will strengthen its international passenger flight services as the main pillar of its business operations. To improve earnings from each flight, it will review air routes, number of flights and flight schedules as well as introduce smaller, fuel-efficient aircraft. JAL will phase out 29 Boeing 747 jumbo jets by the end of 2009 and plans to purchase 86 new aircraft over a period of five years. The new aircraft will cost about 750 billion yen.

To cover part of this cost, JAL raised 150 billion yen through issuance of new shares in July — short of the 200 billion yen it had hoped for. To fill the gap, JAL plans to take out loans from the Japan Bank for International Cooperation, a government-affiliated financial institution.

At a time when JAL needs money to improve its competitiveness and expand its business, its finances have weakened. JAL’s liability with interest stood at nearly 2 trillion yen, almost equal to its annual sales, as of the end of March 2006. In addition to the need to raise funds to pay for the purchase of new planes, JAL will need 100 billion yen for bond redemption, due next year.

The issuance of new shares was accompanied by an episode that betrayed JAL management’s lack of prudence. Its sudden announcement June 30 of a plan to issue up to 750 million new shares — including the public placement of 700 million shares equal to 35.3 percent of the company’s outstanding shares as of the end of May — prompted complaints from shareholders because the move diluted the value of their shares.

JAL is looking forward to an increase in the number of departures and landings at both Narita and Haneda airports in fiscal 2009. But the next two to three years before that happens will be crucial for the airline. It should explore every means to strengthen itself, including pay cuts and disposals of assets. Changing its corporate culture, traditionally characterized by lack of unity among employees and insufficient communication, will be indispensable to achieving this goal.

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