Can Japan Airlines’ Layoffs and Shedding of Routes & Planes Be Good?

It is hard to pinpoint when Japan Airlines (JAL) started its downfall.  For more than fifty years JAL was the top airline in Japan and for a long time the top airline in Asia and one of the largest airlines in the world.  Even with competitor All Nippon Airways (ANA) being founded a year after JAL was established … JAL lead the way.

In 2009, amid the global comic downturn that impacted airlines around the world, JAL suffered massive financial losses. The total losses for the airline at the time it filed for bankruptcy was a staggering US$26,000,000,000 (yes, that is twenty six billion).

Much of JAL’s financial downfall can be attributed to the airlines’ corporate culture and its management.

The upper management at JAL failed to see the critical danger the airline was in. JAL’s management attempted to ride out the problems and seek emergency loans while assuming the Japanese Government would cover the bill.  Much of JAL’s management failed to see the company’s total financial crisis due to the compartmentalized structure of the company.

Japan Airlines’ corporate culture was to separate each department, each project, and each unit with no one overseeing the ‘big picture.’

Now with JAL having presented its bankruptcy restructuring plan to the Tokyo District Court today the company has laid out is plans to move forward, pay off its remaining approximately US$11-billion in debt, although it is seeking forgiveness for roughly US$6.2-billion of its debt.

With JAL having recently shed its hotel chain brand, cargo operations and ground handling divisions, it will shed 16,000 employees, retire 103 aircraft, eliminate 39 domestic routes and sack 10 international routes. Additionally, JAL reiterated that it intends to launch a Low Cost Carrier (LCC), which I had discussed here – Japan : An Airline Battle Ground.

First off, Japan Airlines’ shedding 16,000 positions, equal to around 30% of its total workforce, while a massive reduction of staff includes jobs that are attached to divisions being sold off by the airline. Obviously those who worked with JAL Cargo, JAL Hotels and JAL’s ground handling services that are being separated from Japan Airlines would no longer remain with the company.

JAL’s decision to retire certain aircraft focuses on specific aircraft types. Of the 103 aircraft being retired, these include 3 MD-81s, 18 MD-90s, 29 Boeing 747-400s and 22 Airbus A300-600s.  These aircraft elimination announcements are not new, in fact JAL had announced the removal of these aircraft from their fleet some time ago, however people are now paying attention since its bundled into the airline’s restructuring.

The three MD-81s and eighteen MD-90-30s have an average age of 15.1 years and the aircraft are known to be heavy fuel guzzlers. Many airlines have phased out the MD-80/90 series of aircraft for aircraft with lower fuel consumption.

JAL’s Boeing 747 fleet has an average age of 15.9 years, with its sub-fleet of 747-400D aircraft ranging between 18 and 19 years of age, with a much higher landing cycle than other 747-400s due to its usage in high frequency & high-density domestic routes. Of JAL’s 29 747-400s, 4 are 747-400D and another 5 are freighters…with the youngest passenger 747-400 having just turned 10 years old.

…and the Airbus A300-600s were inherited from JAL’s merger with Japan Air System (JAS) in 2002.  The A300-600 is considered ‘old technology’ and is incompatible with the rest of JAL’s all Boeing fleet. Not to mention that the A300-600 is a fuel hog.

While I believe JAL needs a more uniform and streamlined fleet, if JAL truly plans to move forward with the creation of a Low Cost Carrier (LCC) I have to wonder if the airline should consider retaining its high density 747-400D aircraft specifically designed for the Japan domestic market (the only other airline in the world operating the 747-400D is JAL’s primary competitor All Nippon Airways). These aircraft are ‘paid for’ and along with a few of the MD-90-30s JAL will be retiring would make up an LCC fleet to handle high traffic major city traffic as well as the smaller point-to-point LCC traffic until the airline can rebuild its credit to acquire additional type-specific aircraft for the LCC airline.  Even if the 747-400D aircraft are not viable for the LCC, the MD-90-30s for single class of service with high frequency can make up for the fuel burn costs with high-density passenger volume until the airline can afford different aircraft, preserving their access to liquid assets and reducing their payment for new aircraft.

Japan Airlines’ shedding routes is good and bad … of the 39 domestic routes JAL plans to eliminate I am confident these are routes where they not only compete with LCCs in Japan, but many will also be restored by JAL’s intended LCC, should the LCC come to fruition.  Japan’s domestic traffic was once highly regulated, allowing JAL and ANA to operate with little worry, however now with multiple LCCs within Japan, operating with lower operating costs, reduced labour costs and lower overall overhead, JAL is wise to shed routes.

JAL has not yet finalized the 10 international routes it intends to eliminate. While the airline has eliminated a few routes in the past year, a wise move for JAL would be to eliminate routes in which it has a code-share agreement in place with partner airlines flying the routes and potentially wait for certain long-haul joint-ventures to come into play. The proposed American Airlines – JAL joint venture could allow JAL to reduce flights on its own aircraft while maintaining routes form key US cities to their hub at Tokyo’s Narita Airport.

While some airlines maintain “trophy” routes to certain destinations, Japan Airlines is in no position to retain any route for the purposes of pride.

As of right now, with JAL being “only” US$11-billion in debt, down from its original US$26-billion in debt and investors such as Japan’s Enterprise Turnaround Initiative Corporation seeking to invest US$3.5-billon into the airline’s future the airline can create a whole new future.

Most companies that file bankruptcy for a fraction of JAL’s bankruptcy are gone forever, however JAL has the chance to rebuild and become a whole new company.

The big question is can JAL change?  Can JAL’s corporate culture change?  JAL can have a bright future. Japan’s airline industry can grow, and grow experientially, but will JAL be able to grow with the market?

The airline needs to change its tactics, not only in terms of fleet and route restructuring, but also in being open internally, allowing ideas and information to flow from department to department and never become compartmentalized again. The airline must work as a whole to be effective.

Aside from a vast change in the airline’s corporate culture, JAL must change how it attracts and recruits passengers and corporate accounts. The old methods JAL had in place worked once, but did not change as the business environment change or how passengers sought out their airlines.

JAL’s chance to rise from the ashes is now and only time will tell if they can truly change nearly every facet of how the airline operates internally. The company needs visionaries, as well as managers, open minds to new ideas while maintaining a strict fiscal responsibility.  JAL needs to remember its past as to not repeat it while keeping its focus forward.

Will JAL return to being the dominant airline in Japan? Maybe so … but not for a very long time.

Happy Flying!