Airline

October 2003

Airlines are making efforts to reduce personnel expenses, as All Nippon Airways Co. (ANA) to cut salaries for all employees. The cost-cutting efforts are not caused by deteriorating earnings stemming from the impacts of the war in Iraq and the outbreak of severe acute respiratory syndrome (SARS). For airlines that are facing intensifying competition in the domestic market and bracing themselves for full-scale competition with Asian carriers, cost-cutting is the most pressing issue and a step will allow them to stay profitable in the future. ANA already implemented this year a 10% cut in retirement allowances and a 5% reduction in compensation to managers. Now, it intends to lower salaries for nonmanagerial employees by 5%. The airline expects these measures to help reduce personnel expenses by a total of Y20 billion over the three years through fiscal 2005. This series of steps is aimed at bolstering cost competitiveness. Airlines have traditionally been characterized by low profit margins. Profit margins in Japan's manufacturing sector averaged 3.7% in the 11 years through fiscal 2001. The figure was 5.5% in the railway industry and 2.8% in all industries, but a mere 0.2% in the airline industry. The industry is vulnerable to such risks as war and terrorism. The financial positions of airlines are extremely fragile. Japanese airlines have used profits generated from their domestic flight operations to cover losses stemming from international operations. But it appears increasingly difficult for them to continue doing so. Passenger traffic on domestic flights has increased by 6% a year on average over the past 30 years, but the growth has come to 1-2% a year since fiscal 2000. Some attribute the slower growth in passenger traffic to structural problems, in addition to fears over terrorism and the domestic economic slump. And the creation of Japan Airlines System Corp. last year by Japan Airlines Co. and Japan Air System Co. has intensified competition among carriers to lower airfares. JAL cut personnel expenses by 50% in the 1990s, enhancing its profit margin to match levels at major European and U.S. carriers. But even its operations are twice as costly as those of some financially sound Asian airlines. (October 3, The Nihon Keizai Shimbun)