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Turnaround of Japan Airlines

Strategy Management Project


Group 4
Ankit Goel, 13P124
Mayank Rathore, 13P150
Prabudh Jain, 13P155

Kaushik Nihalani, 13P148


Nikhil Jain, 13P152
Shashank Shukla, 13P166

Acknowledgement
We would like to express our profound gratitude and indebtedness to Prof. Ankur Roy, who has
been a source of constant motivation and a guiding factor throughout the duration of this
project work. It has been a great pleasure for us to get an opportunity to work under him and
complete the project successfully.

The project has enabled us to gather insights about the working of a lesser known or studied
industry sector. It has also helped us to learn about the gamut of factors and strategic principles
that enable companies to stage a turnaround, which is a management marvel of sorts.

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Executive Summary
With the current scenario in Indian aviation, it seems that it is difficult to affect a turnaround in
this cut throat industry, with high fixed and running costs. However, JAL turnaround is a study
that can help us to understand how a loss making airline can also be turned around. Japan
Airlines was the nations pride and was growing as the fastest Airline in the world by 1980s.
From 1983 to 1987, it was the best cargo and passenger transportation platform. However,
some risky endeavors led to its first loss making year in 1991 since 1985, and had to remain
unprofitable for 7 more years. We look at the reasons of the down fall and how it pulled itself
to reach a level of thin profits, only to go back into losses. The economic downturn meant
record debts for the carrier, forcing it to file for Chapter 11 in January 19 2010. We look at the
debt profile of the subsidiaries to get a clearer picture of where the problems were. To affect a
turnaround, a number of structural reforms were undertaken. It was a first example, where we
saw an airline shrink itself to become profitable. We look at Japan government and various
other players who helped JAL to get back on its feet. We also look at the transformational
leadership of its CEO in 2010, Kazuo Inamori, who successfully led the airlines out of trouble,
despite having zero experience in aviation. We look at how different stakeholders played an
important role in affecting the turn around. There were process improvements, organizational
changes, and financial restructuring, which were all a part of the turnaround. There were a few
risks and controversies associated, which we briefly touch upon in this paper, and end it with
the achievements of JAL since the turnaround

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Table of Contents
Table of Contents ......................................................................................................................................... 3
Introduction .................................................................................................................................................. 4
Company History .......................................................................................................................................... 6
Reasons for the fall....................................................................................................................................... 9
Outstanding debts ...................................................................................................................................... 11
Structural Reforms ..................................................................................................................................... 13
The Restructuring plan ............................................................................................................................... 14
Crisis Stabilization .................................................................................................................................. 17
New Leadership ...................................................................................................................................... 17
Stakeholder Management ..................................................................................................................... 18
Strategic focus ........................................................................................................................................ 18
Critical Process Improvement ................................................................................................................ 19
Organizational Change ........................................................................................................................... 20
Financial restructuring ........................................................................................................................... 21
Risks and controversies .............................................................................................................................. 22
Achievements ............................................................................................................................................. 23
Financials .................................................................................................................................................... 24
Exhibits ....................................................................................................................................................... 28
References .................................................................................................................................................. 31

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Introduction
Set-up to meet the countrys requirement of a reliable air transport during the reconstruction period
after the Second World War, Japan Airlines has come a long way since its modest beginning more than
sixty years ago.
The airline was founded in 1951 with an approximate amount of 100 million yen in its pockets. During
the 1960s and 1970s, the airline experienced a phase of explosive growth and expansion. Japan Airlines
had become the worlds largest international air cargo operator by 1981 and had carried more than 100
million passengers to their respective destinations around the globe.
Privatization of the flag carrier was done in 1987. By the late 1980s and early 1990s, the shareholders
were guaranteed profitability quarter after quarter (success in no small part due to a promo-campaign
that had Janet Jackson dancing in front of JAL 747s). During that period, Japan Airlines seemed to be
unstoppable.
Japan Airlines Co. Ltd, the predecessor of the current company, was founded on August 1, 1951 with
100 million yen in capital and from October of the following year, it began its scheduled air
transportation on domestic routes independently.
The current company was established with 1 billion yen in government funding and 1 billion yen in sales,
for a total of 2 billion yen in capital as of October 1, 1953. This was on the basis of the Japan Airlines Act
(Act No. 154 of 1953).
In this way all of the rights and obligations of the previous company were inherited by the established
company and was licensed to become the Nations only scheduled international air carrier, along with its
domestic routes.

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Company History

August
1951

Japan Airlines Co., Ltd. (former) was established with 100 million yen capital. JAL began
independent operation as a scheduled domestic air carrier from October of the following
year.
Under the Japan Airlines Act (Act No. 154 of 1953), Japan Airlines Co., Ltd. was

October

established with a capital of 2 billion yen.

1953

In addition with the operation of domestic routes, JAL obtained a license as the only
international scheduled air transportation company in the country

February

Commenced the first scheduled international service, with the opening of the Tokyo -

1954

Honolulu - San Francisco route.

August
1960
June 1961
October
1961
October
1963
April 1964
January
1965
November
1966
March 1967
February
1970
July 1970
May 1971
August

Began service of the Douglas DC-8, the first jet airliner.


Commenced northbound route to Europe.
Listed on the second section of the stock exchange (Tokyo, Osaka, and Nagoya).

Merged with Japan Aircraft Maintenance Co. Ltd.


Established Japan Domestic Airlines with the merger of Nitto Aviation, Fuji Airline, and
North Japan Airlines.
Began sale of JALPAK.

Commenced New York route.


Commenced round the world route (westbound).
Listed on the first section of the stock exchange (Tokyo, Osaka, and Nagoya).
Commenced operation of the Boeing 747 (jumbo jet).
Toa Domestic Airlines created out of the merger of Japan Domestic Airlines and Toa
Airways.
Established Japan Asia Airways in order to operate route to Taiwan with the suspension
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1975

of diplomatic relations between Japan and China.


World's number one passenger and cargo transportation performance according to the

1983

International Air Transport Association (IATA).


(Maintains No.1 in world for 5 years, until 1987)

November
1987
July 1988
January
1993
September
2002

Full privatization.
Toa Domestic Airlines changes name to Japan Air System
Introduced mileage program.
Through the transfer of shares between Japan Air System and our company, Japan
Airlines System is established, and the company is desisted from the stock exchange
(Tokyo, Osaka, Nagoya)

October

Japan Airlines System is listed on the first section of the stock exchange (Tokyo, Osaka,

2002

Nagoya)
Japan Airlines System and Japan Air System change names to Japan Airlines International

April 2004

Co., Ltd. and Japan Airlines Domestic Co., Ltd. respectively. In order for our company to
target international passenger and cargo operations, Japan Airlines Domestic is
restructured to handle domestic passenger operations.

April 2004
October
2006

Japan Asia Airways becomes wholly owned subsidiary through simple exchange of
shares.
Merged with Japan Airlines Domestic Co., Ltd.

April 2007

Joined the "OneWorld" global alliance.

April 2008

Merged with Japan Asia Airways.

January

Our company, Japan Airlines Corporation and JAL Capital file for reorganization

2010

proceedings.

February

Japan Airlines delisted from the first section of the stock exchange (Tokyo, Osaka, and

2010

Nagoya) as part of reorganization proceedings.

November
2010
November

Obtained anti-trust approval (ATI) for American Airlines.


Rehabilitation plan approved.
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2010
December

Merged with Japan Airlines Corporation At the same time, merged two group companies

2010

operating on international routes, including JAL Airways Co., Ltd.

March 2011

Completed corporate reorganization proceedings.

April 2011

Changed trading name from Japan Airlines International to Japan Airlines Co., Ltd.

April 2011

Commenced joint venture with American Airlines.

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Reasons for the fall


After the burst of Japans asset price bubble and economic recessions in the United States & the United
Kingdom, the fortunes of the airline took a severe turn for the worse. The carrier was harmed by the
risky investments it had made in foreign resorts and hotels when Japan's stock market and property
bubble of the 1980s burst. In the year 1991, Japan Airlines reported its first loss since 1985 and had to
remain unprofitable for more than 7 years.
The costs incurred by the company also increased manifold with growing pension and payroll costs, and
running many loss making domestic routes, which it could not skip due to political obligations. Due to
the global economic downturn and increased competition from Japanese rival All Nippon Airways, the
passenger numbers were falling. The company lost around 131bn yen ($1.4bn; 880m) in the six months
to September.
In a desperate attempt to reduce its losses, the carrier cut down around four thousand jobs, forged an
alliance with American Airlines and replaced its Japanese employees with Thai workers who were paid
less. Then through the launch of its budget airline division Japan Air Charter, it tried to attract customers
who were price-conscious. In due course, these measures allowed Japan Airlines to become profitable
again in 1999 but only just.
However, by 2009, Japan Airlines was about to repeat history. Due to the global economic downturn, it
was grappling with a decline in passenger numbers. The carrier had huge debts to the tune of
$25.6billion. Japan Airlines' troubles not only reflected the carrier's inability in controlling its costs, but,
they also serve as a reminder that aviation can be a very difficult industry.
In the first half of the financial year 2009-10 JAL posted a net loss of USD 1465 mn, which was a reversal
of USD 2 bn from the previous years first half result. The company was still servicing a debt of USD 15
billion.
For the nine months period that ended 31-Dec-2009 operating losses that company incurred piled up to
USD1.36 billion and operating revenue slumped 22% to USD4.28 billion, for an operating margin of 31.8%.During the same period of the previous year, it had recorded a loss of USD100 million. Ordinary
losses were USD 1.72 bn, an increase of USD1.44 billion and net losses became USD2.0 billion (or a net
margin of -46.7%) the carriers worst performance since its merger with Japan Air System in 2002.
Since the company recorded huge losses, it was forced to lay off the staff and cut down on the number
of routes to reduce its operating costs. In order to avoid insolvency, the government of Japan gave a
loan of hundred million yen to its flagship carrier. But none of these measures proved effective, and
Japan Airlines filed for Chapter Eleven on January 19th, 2010.

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Key results for the six months ended 30-Sep-2009:


Revenue
Operating costs
Fuel
Labour
Operating profit (loss)
Net profit (loss)
Passenger traffic (RPKs)

USD8527 million, -28.8%


USD9597 million, -17.6%
USD2101 million, -25.0%
USD1484 million, -8.6%
(USD1068 million), compared to a profit of USD337.1 million in the
previous corresponding period
(USD1465 million), compared to a profit of USD408.6 million in the
previous corresponding period
-10.9%

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Outstanding debts
For Japan Airlines International Corp:

Debts related to purchase of aircraft, engines and turbines, parts, fuel, equipment and other
supplies or related services
Debts related to consignment goods or contracts for work concerning ground handling,
maintenance, catering and other services related to air freight business operations
Debts based on code-sharing flight agreements between the company and other airline companies
including International Air Transport Association
Landing fees, flyover fees, airport facility use fees, stationery fees, flight support fees, airport
security inspection fees and other debts arising from the arrival and departure of airplanes or the
use of flight courses on air facilities and debts arising from the import of goods which are necessary
to maintain operations and other debts arising from passenger and freight operations
Debts pertaining to the leases of the reorganization company offices and business such as rent,
deposit, restoration expenses and other related obligations
Fees against credit loan companies and travel agencies and other debts pertaining to selling airplane
tickets (including obligations to return expenses based on passenger cancellations)
Rebates of flight charges, refunds of operational deposits and other monetary debts (including debts
pertaining to volume incentives) against travel agencies (including IATA) and other parties which
execute passenger carriage service contracts and cargo carriage service contracts
Debts owed to partner companies due to exchange of accumulated flight mileage for JAL mileage
bank participants, use of airplane tickets exchanged for special benefits and coupons and giving
partner airlines flight mileage to passengers and others
Debts to pay insurance premium and related fees
Fees owed to financial institutions, guarantee fees, reimbursement obligations arising from
performance of overseas acceptance, guarantee contracts and similar debts
Debts to pay lease fees and installment payments pertaining to aircrafts, engines and turbines,
systems, equipment and other properties leased or purchased by installments
Debts to pay utilities including costs associated with heat, light, water and communication
Debts arising from the employments relationship between the company and the employees
(including employment insurance and other fees and debts which an employee bears against a third
party and of which the company makes payment based on consignment from the said employee or
the third person, deducting the equivalent from the salary to be paid for the said employee and
excluding retirement allowances)
Other debts arising from acts which fall under scope of the ordinary business (except for loan
obligations, obligations to compensate for damages and tax & public dues imposed in Japan)
Pay monetary debt such as foreign passenger tax, utility user fees, income tax, local tax, insurance
fees and other tax or fees for public service borne against foreign governments other than Japan
Perform and honor obligations to JMB Mileage Bank customers, pertaining to exchanges of
accumulated flight mileage, use of issued airplane tickets and other debts or debts pertaining to the
use of delivered airplane tickets arising pursuant to a JAL travel deposit contract
Perform and honor obligations pertaining to the issue or use of airplane tickets, JAL gift cards and
other discount tickets and coupons, etc.
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For Japan Airlines Corp:

Pay debts arising from acts which fall within the scope of companys ordinary business (except for
loan obligations, guarantee obligations, bonds, penalties, obligation to compensate damages, and
taxes and public dues imposed in Japan) provided that any such payments shall be made pursuant to
the pre-existing payment term and conditions between the company and its business partners

For JAL Capital Company Ltd:


Pay lease fees, installment payments, insurance fees, charges and other debts arising from acts
which fall within the scope of the reorganization companys ordinary business (except for loan
obligations, guarantee obligations, bonds, penalties, obligations to compensate damages and taxes
and public dues imposed in Japan) provided that any such payments shall be made pursuant to the
pre-existing payment term and conditions between the company and its business partners

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Structural Reforms
Following the decision to commence reorganization proceedings, the JAL Group undertook various
initiatives, including initiatives directed towards the following:
Construction of a management control structure and accounting reform
Optimization of route network
Aggressive utilization of alliances
Review of the air transport business (including cessation from the use of cargo-only planes)
Avoidance of aviation fuel price fluctuation risk
Sale of aircraft directed towards reducing the number of aircraft models used
Headcount reductions
Sale of subsidiaries directed towards reorganization of group companies
Procurement reform
Facility reform
Pension reform
airport-related cost structure reform
Review of flight crew base and training location structure
Revision of wage and welfare benefit systems
Reductions in taxes and public charges
Improvements in employee awareness

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The Restructuring plan


Japan Airlines Corporation, Japan Airlines International Co Ltd and JAL Capital Co Ltd filed its proposed
reorganization plan with the Tokyo District Court on 31-Aug-2010, and on that same day, the Court
rendered an order to put the reorganization plan to a creditors' vote.
As part of the plan, the carrier will eliminate approximately a quarter of its debt, 40% of its fleet, 30% of
its global workforce, and one in eight international routes and a quarter of its domestic routes (the route
reduction is more than expected), creating further opportunities for ANA, which is now larger than JAL
traffic-wise (and also Skymark to a lesser degree) in the Japanese market.
Key details of JAL reorganization plan

Action
Fleet

Details
The carrier retired 103 aircraft from a fleet of 258 aircraft. It reduced
its fleet through early retirement of inefficient models, a reduction in
aircraft size through deployment of new small and medium-sized
aircraft with a focus on B737-800, E170 and B787 equipment which
were more fuel efficient
Domestic network
The carrier eliminated 39 domestic routes out of a network of 109
domestic destinations, with greater focus on more frequent service
routes using smaller aircraft. The carrier centered its network around
Haneda Airport routes
International
It eliminated 10 international routes from an international network of
network
65, focusing on major cities in the US, Europe and Asia only and
eliminating unprofitable routes like Milan and Paris. The carrier also
directed its initiatives towards the consolidation of its network,
including the leveraging of bilateral alliances with other airlines as part
of which the carrier had to apply for antitrust immunity with American
Airlines
Merger of three
The carrier had plans of becoming profitable from the first year of
debtor
execution of the restructuring plan, with operating profit of JPY D64.1
companies/renaming billion in the 12 months to 31 -Mar-201 1 . It was separately reported
of airline
that JAL's operating profit is expected to improve to JPY 117 .5 billion
in the fiscal year through Mar-201 3 from an operating loss of JPY 1
33.7 billion in the last fiscal year ended Mar-201 0. However, its
revenue also declined by 15% to JPY 1.273 trillion from JPY 1.5 trillion
over the same period
Debt waiver
Banks including Bank of Tokyo-Mitsubishi UFJ Financial and Mizuho
Financial waived JPY 521 billion (USD6.1 6 billion) in debt
Capital injection
Enterprise Turnaround Initiative Corporation of Japan (ETIC) resolved
to Implement a capital infusion plan at the JAL Companies, subject to
approval of the business revitalization plan. The injection entailed a
new share issue by Japan Airlines International Co Ltd, covering 175
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Re-listing
"Aggressive"
utilization of
alliances
Cargo

Cost reductions

Airport and tax


reductions

Management

IT upgrade

Job reductions

Subsidiaries

Basic policy and


reorganization
claims

million ordinary shares, with a pay in amount of JPY 350 billion, with
a pay -in date scheduled for 01 -Dec-201 0 (the day after resolution to
implement the business plan)
The carrier stated it will get re-listed by 2013
The carrier stated that it would "aggressively " utilize the intangible
assets of alliance partners to maximize the alliance effect, particularly
in the areas of facilities, IT systems and managerial know-how, with
the carrier to also strengthen its bilateral partners with other airlines
Freighters being a non-core activity were taken out of service, and the
company reoriented its focus on cargo service using passenger belly
hold
The company achieved cost reductions through airport cost structure
reforms, facility reforms, and reviews of wage and benefit systems.
The carrier also directed efforts towards making fixed costs variable
The carrier laid-off self-operated airport facilities, with office spaces
reviewed, airport terminal space partially returned and the carrier
requested fee reductions in airport-related services. The carrier also
sought permissions to reduce aviation fuel taxes, landing fees and
other taxes and public charges
CEO Kazuo Inamori stated he would resign in Feb-201 2, a year earlier
than previously agreed, stating: "Initially, I said I would stay at my post
for around three years, but I would like to be relieved in two years."
The carrier also restructured its business plan by adding that the multilayer management structure and redundant functions of the
organization will be completely eliminated. They added that new
departments will be created that will be responsible for cash flow on
individual routes
The carrier laid critical emphasis on updating its IT infrastructure,
through which they expected to have a trickle-down effect into the
carrier's efficiency and productivity improvements
The carrier in a bold move of sorts, reduced its workforce by
approximately one third from 48,712 at the end of FY 2009 to
approximately 32,600 by FY 201 0 by Mar-201 1. At the same time
they also overhauled their wage and benefit systems
It planned to either sell or liquidate non-core subsidiaries, including
selling its hotel business, and concentrate all its managerial resources
on air transport business
The carrier also provided details on handling of overlapping claims and
reorganization claims (secured and unsecured), provision of collateral
assets and preferred reorganization claims (including taxes and labor
claims) and provisions concerning JAL Corporate Pension Fund claims

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The carrier was also considering the creation of a Japanese-style low-cost carrier as part of its
restructuring programme that would avoid the high operating cost structure characterizing Japans
carriers, which have long-standing problems such as high labor costs.
The Nikkei subsequently reported that the establishment of an LCC was added to the carrier's
restructuring plan "at the last minute at the Transport Ministry's request". It has previously been
reported that the carrier would be operated under its brand name, rather than under the JAL brand.
Back in Nov-2009, when jostling was occurring between OneWorld and SkyTeam related to Japan
Airlines membership, Qantas pledged to advise the carrier in successfully establishing a low-cost
offshoot, as it has successfully done with Jetstar. Qantas is still expected to advise the carrier on the
potential LCC establishment.
Qantas, with its dual brand structure, is perhaps the ideal partner to advice on establishing an LCC
subsidiary, as the Jetstar model, working closely with the mainline Qantas, has been enormously
successful.
While the Japanese market conditions and route structures are very different from the climate in which
Jetstar grew up, as a global model it would seem that Jetstars founders could offer some pretty sound
advice to JAL.
Jetstar has been a lifesaver for Qantas, both in fighting off low-cost competitors and then in expanding
the Qantas Groups market - Qantas now uses Jetstar to substitute for it on long-haul routes from
Australia, where the mainline carriers cost base makes operations unviable. The subsidiary for example
recently took over the key Tokyo Narita route for Qantas, protecting the valuable slots from being lost to
competitors.
Apart from the possibility of supporting JAL into a successful LCC subsidiary, courtesy of Jetstars
experience and support, there are clear potential advantages for both carriers if a successful venture
were possible.
A stand-alone JAL LCC, working with Jetstar, would offer advantages for both sides: for example, Jetstar
is highly connective, code sharing not only with its parent, but open to others as well. Working jointly to
support each other would alone deliver strong market presence. And the possibility of a joint venture
which would offer a lower-risk option on both sides would seem to be a good solution, with
considerable upside. And the advantage for OneWorld would be in a tighter long-term linkage into the
Japanese flag carrier.

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Crisis Stabilization

JALI will receive pay-in totaling 350 billion yen from the Enterprise Turnaround Initiative
Corporation of Japan ("ETIC") and issue shares to ETIC.
In order to prevent aviation service from being disrupted by the petition for commencement of
corporate reorganization and to enable aircraft to continue to fly safely, ETIC decided, with
certain preconditions for its support such as the continuous repayment of commercial
obligations and lease obligations, to provide support on the same day that the order to
commence reorganization proceedings was made.
In order to alleviate the uncertainty among commercial partners about availability of funds,
prior to filing the petition for commencement of reorganization proceedings, ETIC held
consultations with Development Bank of Japan Inc. and arranged for a line of credit for the JAL
group, totaling 600 billion yen, to be available from January 2010.
The repayment rate for Reorganization Claims shall be the same for all Three Debtor Companies
(what is known as par rate repayment); and with the merger, the internal claims among the
Three Debtor Companies will extinguish, and overlapping claims held by creditors against
multiple entities will be streamlined into a single claim.

New Leadership

Kazuo Inamori took on the task of leading the turnaround of Japan Airlines Co. in January 2010
At that time, he had precisely zero experience in aviation management.
Founded Kyocera Corp. when he was only 27 years old. Kyocera now generates about Y 1.2
trillion in revenue and more than Y 100 billion in operating profits, and it has never made a loss
in its 53-year history.
Another company that he created more than 20 years ago is KDDI Corp., which is the second
biggest telecommunications carrier in Japan.
His style was to have the whole company share a single philosophy, from the top-ranking
executives to low-ranking employees, and then manage the company based on that philosophy.
Told executives early on that they have to state the managements philosophy and share that
with everyone at the company. He also told them they dont need many statements. One thing
they need to say is that the managements goal is to pursue the happiness of all employees,
both physically and mentally. It wasnt for shareholders, and it wasnt for executives. It was for
all the employees working at the company.
o His style was to have everyone involved. Its like a bunch of people carrying a Japanese
mikoshi (a portable Shinto shrine). It may not seem sophisticated, but the crowd
gradually becomes one. For this to work, they have to be united by one philosophy.
o Theres an old saying in Japanese: Issho ko narite bankotsu karu a generals success
is built on the bones of ten thousand soldiers. This could be taken to mean that one
person at the top becomes really successful while everyone else working under him
becomes exhausted.
This is your company, and its goal is to make all of you happy.
For him, to share the idea that the companys goal is to make all employees happy is a
prerequisite, before sharing any other ideas. The whole philosophy wouldnt work without this
prerequisite.

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Stakeholder Management

For group companies, responsibility for profit and loss will also be clarified; there will be greater
understanding and management of the group's overall managerial conditions, as well as greater
sharing of managerial policy with group companies.
Mr. Inamori's policies took the form of a 125-page booklet, "JAL Philosophy," carried by all
32,000 remaining employees. Many workers say they were initially dubious, but now can cite a
preferred passage. "We talk about 'JAL Philosophy' every day" at morning staff meetings, says
Yuta Kawaguchi, 40, a manager responsible for part supply at Haneda.
JAL executives credit Inamoris management system in which individual corporate units are held
accountable for maximizing profitability even divisions that are not directly generating
revenue for reviving the group.
Under that system unit leaders meet once a month to share cost-saving ideas and competitive
intelligence, and are directed to put that information to work immediately. Previously JALs
various divisions operated in silos and many gave little thought on how best to minimize costs,
executives have said.

Strategic focus

Emphasizing greater frequency and smaller aircraft, we will maintain our network centering on
Haneda Airport routes and direct effort towards improving profitability.
We will direct initiatives towards the strengthening of our network, including the utilization of
bilateral alliances with other airlines.
o The customers, managerial know-how, facilities, IT systems and other tangible and
intangible assets of alliance partners will be aggressively utilized to maximize the
alliance effect.
o After obtaining antitrust immunity (ATI) with American Airlines, preparations will be
made for the joint business, American Airlines know-how will be acquired, and bilateral
partnerships with other airlines will be strengthened.
Construct a more efficient and strategic organization that is capable of reliably sharing the
Group's managerial policy.
Addressing event risk
o The aviation business has been exposed to a number of event risks, including SARS,
H1N1 influenza, and financial crises such as the one that began with the collapse of
Lehman Brothers; as a framework for dealing with the onset of a risk, a structure will be
built under which effort will be made to discover signs that an event risk may occur, the
appropriate system development will be carried out, and adjustment of flight structures
and emergency measures for reducing fixed costs can be flexibly
implemented.

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Critical Process Improvement


Japan Airlines' selection of the A350 is a welcome win for Airbus in a strongly Boeing-flavored Japanese
aircraft fleet. It is also consistent with JAL's strategy to use smaller wide-body aircraft as Japanese
demand weakens and global competition works even more against JAL's high cost base one of the
highest in Asia. It was not long ago that JAL operated the world's largest fleet of 747s. JAL's 2010
bankruptcy restructure saw all 747s retired.
This is also Airbus' first order from one of Japan's two major airlines who jointly account for nearly 75%
of Japan's domestic market and a quarter of its international market. Boeing had maintained a tight grip
on ANA and JAL, partially due to government and economic pressures, such as the substantial role in
manufacturing Boeing aircraft parts.
JAL evaluated the A350 against the 777X, the planned successor for the 777. The 777X is overall larger
than the existing 777 models it will replace. Its entry into service is also further away (next decade) and
none has yet been built, unlike the A350, which has already flown. JAL expects its first A350 in 2019 and
for delivery to be completed over six years. By 2019 JAL's 777-200ERs will be 14-17 years old and its 777300ERs 10-17 years old, according to CAPA's fleet database. This is suitable retirement age and, if
anything, above the typical retirement age for Asian airlines, which prefer young fleets. JAL's future
wide-body fleet will likely be comprised of the initial 31 A350s plus the 45 787s in service or on order.
The 787s will mainly be used on thinner routes and the A350s on major ones.

reducing the number of aircraft models through early retirement of inefficient model
o A total of 103 aircraft, including all 747-400sA300-600sMD-81and MD-90s, will be
retired. The number of aircraft models flying JALI routes will be reduced from seven to
four (excluding regional jets).
reduction in aircraft size through deployment of new small and medium-sized aircraft models
o Will proceed with the deployment of the highly efficient small-sized 737-800, the even
smaller regional jet E170, and the 787, an aircraft that is a key to future international
route strategy.
wholesale elimination of unprofitable routes, we will completely eliminate routes that lose
money
o For domestic routes, on the premise of ensuring profitability, emphasis will be placed on
more frequent service using smaller aircraft, and the flight network will be maintained
at a certain level.
o International routes will center on the major cities of US and Europe and on Asian
routes (a growth market), securing strategic positioning in terms of customer needs and
within alliances. For resort routes, JALI will specialize in Honolulu and Guam routes,
which have both high profitability and strong customer demand
JAL has one of the highest cost bases in Asia this limits potential
o The reason to move to smaller aircraft is largely due to two factors. First, Japan's
population is declining, which will dampen travel demand. Economic reforms will take
some time to materialize, but are not expected to restore Japan to its previous highs. So
this limits point-to-point traffic JAL can carry to/from Japan.
o Other airlines when faced with a small local market Emirates, KLM, and Singapore
Airlines have turned to relying on transfer traffic, using their hub as a mid-point. But
the successful execution of this is dependent partially on having a low cost base. JAL's
cost base was decreased during its bankruptcy restructuring, and its cost is lower than
19 | P a g e

rival ANA. But JAL still has one of the most expensive cost bases in Asia and the world,
according to CAPA's CASK ranking in Asia.
In the cargo and mail business, cargo-only planes (freighters) will be taken out of service, and
the service will focus on cargo service using passenger plane cargo compartments (bellies).
Office space will be reviewed, airport terminal space will be partially returned, requests will be
made for reductions in fees for joint facilities shared with other airlines, real estate-related fees
will be reduced by vacating storage rooms and cargo warehouses, etc., and personnel costs will
be reduced through headcount reductions and lowering per-unit charges for subcontracted
services.
With respect to the Kansai International Airport and the Central Japan International Airport, in
accordance with the reduction in number of flights, there will be contractions in group-run
operations of passenger services and flight services, and through sale of operations to other
companies, such group-run operations will be subcontracted.
Initiatives will be taken to achieve major reductions in real estate-related fees. Office space will
be subject to thorough review.
The IT infrastructure, which has become obsolete and overly complicated, will be updated, the
flow of organization-related information will be accelerated, and an operational platform will be
built that can support assorted productivity improvements and function enhancements at low
cost.

Organizational Change

Through such measures as encouraging early retirement and sale of subsidiaries, there will be
further headcount reductions in the JAL Group, so that the number of Group employees will go
from 48,714 as of the end of FY2009 to roughly 32,600 at the end of FY2010.
o Through a more flexible personnel positioning among organizational units and a review
of working standards and other personnel policy, the overall bare-minimum headcount
will be reduced, while ensuring safety.
As the basic policy of the new system, employee evaluations will be carried out fairly and in
strict accordance with standards, focusing on employee performance and conduct, and that
evaluation will be properly reflected in employee treatment.
A review will be carried out of the welfare and other benefits (i.e., fringe benefits) provided to
officers and employees, which have been strongly criticized as being too generous. With a basic
principle of making these benefits in line with statutory requirements or with general norms, a
thorough review will be carried out so that the levels and ranges are the minimum required of
air carriers.
JALS, JALI and JLC will merge, with JALI as the surviving entity.
JALI will absorb and merge with JALways Co., Ltd. and JAL LIVRE Co., Ltd
Managerial resources will be concentrated on the air transport business, and subsidiaries in
peripheral fields will be sold.
The multilayer structure and redundant functions of the organization will be eliminated, and
new departments will be created that will be responsible for cash flow on an individual route
basis, thereby clarifying responsibility for profit and loss results for individual routes and
departments.
Securing a proper managerial structure

20 | P a g e

For managerial structure, an execution structure will be built that will include
clarification of responsibility for numerical results, in respect of both revenues and costs
for the departments under each management team.
o Under this structure tireless and persistent efforts will be made to achieve the targets
in the plan. In monthly results reporting meeting and business plan status confirmation
meetings, the management teams will gain an awareness of current status and
upcoming issues, with the aim of ensuring that plan targets for the JAL Group overall are
attained.
In a large room reminiscent of a school sports hall, with a wood floor and Spartan desks and
chairs, about 80 senior executives gather with Mr. Inamori for a three-day examination of every
line in the budget.

Financial restructuring

Stock owned by JALS shareholders will be acquired gratis, and all treasury shares will be
cancelled, and JALI will reduce stated capital and capital reserves to zero.
Reduction in Taxes and public charges
o Because aviation fuel taxes, landing fees and other taxes and public charges are over
10% or so of sales from domestic and international routes of JAL Group aviation
businesses (the aggregate amount of aviation fuel taxes, landing fees and other taxes
and charges in FY2008 reached roughly 172.2 billion yen), application will be made to
the competent offices for reductions in amount.
For fuel hedge transactions using derivatives, decisions with wide discretionary latitude will be
eliminated, and risk management will be strengthened.
Elimination of debt
o On an approximate consolidated basis JAL Group had more liabilities than assets at the
end of March 2010 amounting to 959.2 billion yen. But, according to the Reorganization
Plan there would be a modification of rights, an investment by ETIC of 350 billion yen
and recording of business profits etc. which would eliminate the excessive liabilities by
the end of March 2011.

21 | P a g e

Risks and controversies


The most frequently asked question by the institutional investors during an overseas tour to market the
Initial Public Offer was whether JAL, after becoming a private company again would be able to maintain
its cost discipline or not.
According to estimation done by JAL, almost three-fourths of its gain in efficiency was due to layoffs and
other structural reforms. But, its jump to profit leader from industry basket-case was possible only
because of substantial private and state aid.
Banks had forgiven approximately 520 billion yen in debt. Its depreciation expenses suffered a huge
dent due to the write-down of its ageing fleet. The 1.1 trillion yen in loss carry forwards that the
company is sitting on could translate into a $4.5 billion corporate tax break stretched over 9 years which
would have a significant impact on the companys performance.

Elimination of excessive debt


The carrier stated it had JPY 959 billion in liabilities at the end of Mar-2010

Addressing event risk


Plans to implement risk management and planning strategies

Securing a proper managerial structure


Seeking to implement a structure that will include clarification of responsibility for
numerical results

Initiatives addressing changes in the competitive environment


To better react to competitive environment with new fleet and network structure.
The ANA has cried foul stating that charging the aids and other tax breaks has created an unequal
playing field that was not fair. But, it has lobbied for concessions behind the scenes, such as the
preferential allocation of landing slots coming up at Tokyos Haneda airport around 2014.
The Liberal Democratic Party which was always keen to criticize the ruling Democratic Party was the
main opposition to restructuring of JAL and had called for measures to keep resurgence of JAL in check.
The sliding of the carrier into its old bad ways was still the overriding fear among investors.

22 | P a g e

Achievements

For the year 2011, the Japan Airlines was named CAPA Asia Pacific Airline of the Year. The Asia
Pacific airline that has had the greatest impact on the growth and development of the airline
industry, established itself as a leader in the field, and has set the benchmark for others to follow
is awarded the CAPA Airline of the Year.
Japan Airlines undertook a noteworthy process of restructuring since 2010. It was an almost
irretrievable situation of a high cost airline an uncompetitive route network but it was able to
restore itself. A full metal neutral joint venture with its one-world partner on US routes was set
up by JAL since then and it is exploring an equivalent for its European routes.
Despite serious natural disasters in northern Japan JAL has returned remarkably to profitability
and now looks to be well placed to remain profitable.
To address the fast growing sector of low cost airline, recently JAL has established the
framework for a joint venture low cost airline with Qantas/Jetstar.JAL was established as a
market leader due to these features and it had set a benchmark in achieving profitability in
extremely difficult circumstances

In the 2nd largest initial public offering of the year after Facebook, Japan Airlines (JAL) as it is
poised to raise USD8.5 billion. The amount comes in the midst of much of the world being in the
economic doldrums and is still outstanding for the airline.
JAL's IPO, which is reported to have already been subscribed at the upper price end of JPY35003790 per share (USD44.85-48.57), would allow the Enterprise Turnaround Initiative Corporation
to more than double the JPY350 billion (USD4.5 billion) it loaned to JAL during bankruptcy, from
which JAL emerged in Mar-2011. JAL will not profit from the IPO, which will make JAL the fourth
largest carrier by market value after LATAM, Singapore Airlines and Air China.

In the six months ended 30-Sep-2011 (1HFY2011), Japan Airlines Corp (JAL) generated a solid
profit results with revenues of USD7.7 billion (JPY599.8 billion), an operating profit of JPY106.1
billion (USD1.4 billion) and a net profit of USD1.3 billion (JPY97.4 billion). In the midst of an
intensified focus on improving cost efficiency and an aggressive scaling down of operations as part
of its rigorous restructuring efforts, these results were an encouraging sign for the carrier.
JAL would be able to mark its largest full-year operating profit in nearly a decade (since FY2003)
as it upgraded its full year forecast to an operating profit of USD1.8 billion (JPY140 billion). The
airline is expecting a net profit result of USD1.5 billion (JPY120 billion), much higher than its
earlier estimated forecast of JPY75.7 billion, as its restructuring efforts begin to yield results.
For the former national flag carrier which lost its position as the nations largest carrier to All
Nippon Airways (ANA) in FY2010, the past few years have been tumultuous. However, things are
starting to change for the good, with JALs profit outlook more positive than ANAs. While ANAs
revenues are estimated to be much stronger than JALs in the full-year, JALs operating profit is
expected to be double ANA levels, with net income almost 6 times ANA levels.

JAL emerged as the second largest initial public offering after Facebook and the 4 th largest IPO in
Japan after being declared the 3rd highest bankruptcy in Japans history.

23 | P a g e

Financials
Consolidated Balance Sheet
JAPAN AIRLINES CORPORATION
CONSOLIDATED
Financial Statements
Consolidated Balance Sheet

As of March 31,
Current assets

Millions
of Yen
2003
530,32
2
1,641,
962
1,382,
615
915,93
8
53,127
206,21
9

2004
519,07
6
1,594,
219
1,322,
281
872,25
6
66,663
205,27
4
123

2005
683,17
4
1,479,
403
1,191,
744
814,76
0
69,854
217,80
4
76

2006
687,31
9
1,473,
913
1,152,
762
791,09
8
72,075
249,07
6
6

2007
707,31
1
1,383,
253
1,116,
391
742,54
5
77,007
189,85
3
669

2008
810,31
5
1,310,
534
1,037,
117
721,96
7
82,838
190,57
9
1,933

2009
487,029

Total assets

2,172,
284

2,113,
418

2,162,
654

2,161,
240

2,091,
233

2,122,
784

1,750,6
79

Current liabilities

615,34
6
23,035
67,495
127,53
7
1,279,
158
218,70
0
864,38
5
143,67
0
1,894,
505

560,55
9
10,782
23,700
118,54
5
1,369,
446
225,00
0
936,39
0
163,12
8
1,930,
005

569,14
0
11,611
15,000
110,63
6
1,372,
993
310,00
0
862,22
3
149,66
5
1,942,
133

644,84
4
6,562
30,000
113,04
5
1,340,
879
280,00
0
800,00
1
139,75
3
1,985,
724

659,79
6
4,810
70,000
110,54
9
1,099,
563
130,22
9
705,95
7
129,06
1
1,759,
360

661,22
9
3,084
28,000
130,33
5
990,48
3
102,22
9
651,41
6
95,485

649,897

1,651,
713

1,553,9
07

23,522

24,139

25,774

27,449

Fixed assets
Tangible fixed assets
Flight equipment
Intangible assets
Investments
Deferred Charges

Short-term borrowings
Current portion of bonds
Current portion of long-term debts
Non-current liabilities
bonds
Long-term debts
Accrued pension and severance
costs
Total liabilities

Minority interests

1,262,5
80
1,031,0
21
723,590
79,548
152,010
1,068

2,911
52,000
128,426
904,010
50,229
567,963
94,911

24 | P a g e

Common stock

100,00
0
136,14
1
34,978
-6,416

100,00
0
136,14
5
90,186
2,109

16,399
254,25
6

100,00
0
136,67
8
65,031
12,373
159,27
3

194,74
6

148,06
6

2,172,
284

2,113,
418

2,162,
654

2,161,
240

Stockholder's equity

Capital surplus

Retained earnings
Common stock in treasury, at cost
Valuation, translation adjustments
and other
Net unrealized gain on other
securities, net of taxes
Net unrealized gain on hedging
instruments, net of taxes
Translation adjustments
Minority interests

24,776
-887
33,851

447,26
6
251,00
0
155,83
6
41,320
-890
6,668

384,014

Common stock and preferred stock

277,23
5
174,25
0
79,096

3,557

2,578

35,314

8,167

-5,020
20,785

-4,077
17,136

Total net assets

331,87
3

471,07
0

196,771

Total liabilities and net assets

2,091,
233

2,122,
784

1,750,6
79

Capital surplus
Retained earnings
Other retained earnings, etc.
Total stockholders' equity

Total of liabilities, minority interest


and
stockholders' equity

100,00
0
147,17
5
23,481

251,000
155,806
-21,874
-917
209,358
-1,440
201,816
-6,101
22,115

25 | P a g e

Consolidated Statements of Operations


JAPAN AIRLINES CORPORATION
CONSOLIDATED
Financial Statements
Consolidated Statements of Operations

Years ended March 31,


Operating revenue
Operating expenses
Operating income

Non-operating income
Non-operating expenses
Ordinary income

Extraordinary gain
Extraordinary loss
Income before income taxes and
minority interests

Million
s of Yen
2003
2,083,
480
2,072,
891
10,58
9
59,24
9
53,99
8
15,84
0
11,99
9
23,75
8
4,081

Income taxes : Current

8,100

Income taxes : Deferred

16,46
8
804
11,64
5

Minority interests
Net income

2004
1,931,
742
1,999,
387
67,64
5
43,02
4
47,31
7
71,93
8
6,923

2005
2,129,
876
2,073,
727
56,14
9

2006
21993
85
22262
20
26834

2007
2,301,
915
2,278,
997
22,91
7

2008
2,230,
416
2,140,
403
90,01
3

2009
1,951,1
58
2,002,0
43
-50,884

64,44
6
50,79
0
69,80
5

26378

33,83
4
36,17
5
20,57
6

20,82
5
41,02
1
69,81
7

31,341

6,571

30471

31,71
0
44,66
6

35303
46440

36,23
2
76,21
7
29,83
2

44,604

17,13
4
82,14
8
8,854

52,41
3
20,93
3
52,05
5

7,897

8419

9,953

4,897

3,181

3,092

4,251

-9966

54,42
4

6,894

22

709
88,61
9

2,420
30,09
6

2350
47243

3,945
16,26
7

1,118
16,92
1

977
-63,194

41152
41608

62,634
-82,177

21,440
-59,014

26 | P a g e

Non-operating income & expenses (Consolidated)


JAPAN AIRLINES CORPORATION
CONSOLIDATED

Non-operating income & expenses


(Consolidated)
Years ended March 31,
Non-operating income
Interest and dividend income
Flight equipment purchase
incentives
Exchange gain, net
Equity in earnings of affiliates
Gain on derivative instruments
Other non-operating income

Non-operating expenses
Interest expense
Exchange loss, net
Loss on sales and disposal of flight
equipment
Loss on derivative instruments
Other non-operating expenses

Millions
of Yen
200
3
59,
249
2,9
31
42,
075

340

13,
900

2004

2005

2006

2007

2008

2009

43,024

64,446

26,378

33,834

20,825

31,341

2,928

3,169

3,713

5,941

7,224

5,303

29,260

48,386

424
1,221

9,190

2,075
1,514

9,300

12,170
1,899

8,593

18,036
2,481

7,374

4,070
2,176

7,354

1,630
17,462
6,944

53,
998
34,
657
1,9
75
10,
637

6,7
27

47,317

50,790

41,152

36,175

41,021

62,634

28,503

24,875

21,811

19,068

20,009

17,536

19,571

13,946

17,417

12,171

12,257

11,871

7,633

4,866

8,496

7,169

4,849

9,140

8,874
9,018

27 | P a g e

Exhibits

28 | P a g e

29 | P a g e

30 | P a g e

References
https://www.jal.com/en/investor/library/information/
http://online.wsj.com/news/articles/SB10000872396390444464304577535042332731160
http://www.economist.com/node/21562941
http://skift.com/2012/09/18/the-worlds-biggest-turnaround-story-japan-airlines-relists-in-huge-ipo/
http://centreforaviation.com/
http://www.bloomberg.com/video/57217166-japan-airlines-to-cut-third-of-staff-in-turnaroundplan.html
http://www.bloomberg.com/news/2012-09-13/jal-s-8-5-billion-rebirth-took-lessons-from-crash-sitemorgue.html
http://en.wikipedia.org/wiki/Japan_Airlines
http://www.jal.com/en/ir/finance/pdf/10019.pdf

31 | P a g e

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