Credit gaps grows in Japan air industry

The difference has been widening between the ratings on the two major Japanese airline groups, describes Moody’s Investors Service in a new report.The credit of All Nippon Airways Co., Ltd. (ANA) has stabilized and its rating has moved upward to Ba1 from Ba3, largely as a result of its rapid business rationalization, while the Japan Airlines Corporation (JAL) group - which comprises Japan Airlines International Co., Ltd. (JALI) and Japan Airlines Domestic Co., Ltd. (JALJ) - has not yet turned around under ongoing pressures in the industry environment. Its rating has stayed at Ba3.

Although international passenger flight demand bottomed in the fiscal year to March 2004 (FYE 3/2004), recovery has been slow, notes the report, “Japan’s Airlines Companies.” It comments that both Japanese airline groups have managed to increase unit prices per passenger to enlarge total revenues, and to reduce costs to improve profitability, although gaps have emerged in the paces of their overall credit improvement.

“ANA has been ahead in reducing fixed costs including labor, flexibly reorganizing flight routes and efficiently reallocating aircrafts, leading to an operating profit recovery in FYE 3/2004,” comments Kazusada Hirose, Moody’s Assistant Vice President - Analyst and author of the report, adding, “Since then it has increased revenue and profit, and for FYE 3/2006 recorded the highest operating profit in its history.”

In addition, ANA successfully issued JPY 97 billion of new capital in March 2006, improving its financial structure and securing funds to be used in capital expenditures to reorganize its fleet and thereby expand its business. The company’s improvements both in profitability and financial profile led to Moody’s upgrading its rating to Ba1 in May 2006, following the review initiated in March of the same year.

“The JAL group, on the contrary, has been suffering to a greater degree from stagnant international passenger flight demand, since it has a bigger proportion of international business,” describes Moody’s Hirose. “Furthermore, confusion has occurred regarding the JAL group’s operations following the integration of ex-Japan Airlines and ex-Japan Air System in April 2004, leading to delays in cost reductions. Consequently, the JAL group recorded net losses in FYE 3/2004 and FYE 3/2006, leading to continuing deterioration of its capital structure.”


Following a huge decrease in international passenger flight demand caused by the continuing concerns raised by terrorism, war, disease and natural disasters after September 2001, Moody’s ratings have been lowered on airline companies worldwide, especially those in North America. The airlines in that region now have ratings in B or lower categories.

In Japan, financial support from the Japanese government has been provided to the two major airline groups through government-owned financial institutions. This support factor has played a significant role in Moody’s maintaining their ratings at Ba3 over a period of several years.

Despite their business environment continuing to be tough, due to stagnant demand and high aircraft fuel costs, Moody’s believes the Japanese airlines need to invest capital expenditures for fleet restructuring in order to make use of business opportunities from the planned re-expansion of landing slot capacity at Tokyo International Airport in 2009. In Moody’s view it will be increasingly important for these companies to rationalize business operations, including implementing continuous cost reductions, to maintain or improve profitability and to stabilize or improve ratings.