As a consequence of the unprecedented global economic meltdown, airlines the world over are impacted by the severe business environment. The JAL Group is in the process of constructing a medium term corporate plan that will see drastic reformation to its business model and processes, from the period starting FY2009 and onwards. While it is due to be completed and announced later this year, the basic course of actions under this plan was announced today at the request of the Ministry of Land, Infrastructure, Transport and Tourism (MLIT).
Key Considerations

The new business model has to be one that can stay profitable and allow the Group to be resilient against the volatility of current operating conditions. The key considerations for the reform are as follows.

a. The financial crisis dramatically altered both international and domestic economies, and correspondingly, demand for air transport faltered to an all-time low. The new business model will not excessively depend on the recovery in traffic demand under such uncertain circumstances.

b. The airline industry is susceptible to the risks presented by sudden unforeseen crises such as the recent pandemic. The new business model must have a solid foundation upon which the Group can depend on to withstand the impact of such sporadic threats to the business.

Current Measures

A) Domestic Passenger

In the course of restructuring the network, a total of 23 underperforming routes were suspended and the flight frequencies on 11 other routes were reduced in the fiscal years of 2007 and 2008.

The domestic network for FY2009 will see an additional 7 routes discontinued and the flight frequency of 1 route reduced. As an overall result of this capacity cut for the 3 fiscal years, the size of the Group’s domestic fleet will be reduced by 9 aircraft by the end of FY2009.

B) International Passenger

On the international network, 6 unprofitable routes were suspended and 3 routes saw cuts in frequency in FY2007 and FY2008. As for FY2009, operations on another route will be ceased and the flight frequency on 2 routes reduced.

C) Cargo

The Group’s cargo business model is undergoing a radical make-over with plans that include establishing more strategic partnerships with external companies in order to condense the risks faced by cargo operations in this economic climate.

D) Cost Reduction

In the fiscal year 2008, JAL achieved a 50 billion yen cost reduction through a variety of such measures as the temporary decrement in annual bonuses, improved personnel productivity, and adjustments to the wage system which alone led to a 5 billion yen saving. The Group estimates an overall cost savings of 10 billion yen can be reached in FY2009 from the continuation of these measures.

Also contributing to the cost reduction achieved, the early retirement scheme in FY2007 and FY2008 shrank the workforce by a total of 5,574 persons, from 53,100 employees at the end of FY2006, to 47,526 employees at the end of FY2008 and thereby decreasing labour cost.

Plans for FY2009 include adjustments to the pension scheme which will bring about another 88 billion yen in cost reductions. In addition, special early retirement scheme will be implemented and each department is to re-look at their business processes to sift out more ways to lessen cost.

Measures to be Implemented

Aircraft in the Group fleet used for international and domestic routes are progressively undergoing downsizing and renewal, and the overall fleet size will be reduced as JAL continues the switch to smaller, more fuel-efficient aircraft. More emphasis will be placed on routes with higher profitability and drastic cost cuts will be pursued fervently.

A) Domestic Passenger

The domestic network will be reassessed and revised based on more conservative projection of demands and profitability, not discounting the possibility of discontinuing more under-performing routes. In addition, JAL plans to operate more regional jets on domestic routes and re-evaluate the management structure of subsidiary airlines of the JAL Group, where it will look for further areas for cost cuts.

B) International Passenger

The international network will also be reassessed and revised based on more conservative projection of demands and profitability, not discounting the possibility of discontinuing more under-performing routes. Furthermore, higher efficiency, state-of-the-art aircraft are progressively replacing older, bigger aircraft in the fleet to cut fuel consumption and cost.

C) Cargo

The Group’s cargo business model will continue to undergo drastic changes which include establishing more strategic relationships with external companies, while concurrently scrutinizing every aspect of the business to cut cost where possible.

D) Cost Reduction

In addition to changes in the pension system and the implementation of the special early retirement scheme, cost cutting measures will also converge on departments such as maintenance, flight operations, cabin crew, airport operations, sales and other backend operations. Efforts will be made to significantly streamline the processes in these fields, and thereby make each unit more efficient in order to accomplish greater costs reductions.

From hence forth, the medium term corporate plan from FY2009 will take shape under the discretion of the management and concerning parties, who will analyze the feasibility and effectiveness of the course of actions, as well as the effects of financial strategies and timing on these measures.
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