Japan Airlines Co. has spent the best part of a decade recovering from its 2010 bankruptcy.
The collapse – Japan’s largest outside the financial sector – turned its one-time flag-carrier into a distant follower of ANA Holdings Inc. Worse than that, it put JAL on the back foot at a time of dramatic change in the country’s aviation industry, with the deregulation of low-cost airlines and a fivefold surge in inbound tourists rewriting the rules of the game.
The shift can’t come soon enough. When Japan first ventured into budget airlines in 2012, they were all complex joint ventures: ANA invested with AirAsia Group Bhd. in Vanilla Air Inc. and with a slew of domestic and overseas players in Peach Aviation Ltd., while JAL partnered with Qantas Airways Ltd. and domestic firms in Jetstar Japan KK.
ANA, however, has been busy consolidating – buying AirAsia out of Vanilla back in 2013, taking majority control of Peach last year, and now announcing plans to combine the two airlines altogether by March 2020. It’s also been making the most of Japan’s rising cachet as a destination for Asian tourists, with Peach marketing itself heavily toward 20- and 30-something women in South Korea, China and Taiwan.
Domestic aviation in Japan isn’t quite the wasteland you’d think given the competition from shinkansen high-speed trains. While the central spine of Honshu from Tokyo down to Osaka is a tough market, it takes eight hours by rail from the capital to the northern city of Sapporo, making air the obvious option.
Still, existing capacity on domestic routes means the expansion of budget airlines is more likely to cannibalize profitable full-service flights. Discount international flights, by contrast, should largely be opening up new markets.
That’s a problem for JAL, and for Jetstar Japan. Of the discount carrier’s 26 routes, 17 are domestic, in contrast to a more even split at Peach and Vanilla, and the aggressive expansion of China’s wholly international Spring Airlines Co. Jetstar Japan’s overseas destinations, weighted toward the airline’s regional bases in Singapore and Australia, also don’t do much for JAL’s ambitions to tap into north Asia.
JAL has some advantages in this fight. Thanks to that bankruptcy and turnaround, its operating costs are already below those at ANA. A low-fare carrier set up from scratch ought to be able to reduce those expenses even further. Nor is it short of funds: JAL’s 324 billion yen ($2.97 billion) of net cash is by some margin the industry’s biggest pile, though given its history, JAL is likely to be circumspect in deploying it.
The question must now be, are management nimble enough to exploit that?
With the growth of inbound tourism ahead of the 2020 Tokyo Olympics, there’s risk and opportunity in spades for JAL. Meanwhile, years of decline and post-bankruptcy restrictions mean JAL’s entrepreneurial muscles haven’t had a workout in ages. While its price-earnings ratio is finally drawing level with ANA’s, that cash heap makes up almost a quarter of its market capitalization.
Stripping out that effect with an enterprise value-to-Ebitda valuation, investors price JAL at a discount that’s been fairly stable ever since it emerged from the financial wilderness. It’s up to the airline’s executives now to prove those skeptics wrong.
