Getting Undomesticated: It’s all international for All Nippon as Japan’s largest airline seeks refuge abroad

A domestic-heavy airline, bombarded with a sudden explosion of low-cost shorthaul competition, seeks refuge abroad. If that sounds like a description of how U.S. airlines began to improve their fortunes a decade ago—well, it is. But now, halfway around the world, Japan’s largest airline is doing exactly the same.

Announcing a new three-year business plan last week, All Nippon Airways set itself on a mission to have just as much ASK capacity abroad by early 2017 as it does at home. For an airline that last year generated a full two thirds of its passenger revenues from domestic markets, that’s no small shift in priorities.

The updated business plan is ANA’s response to a series of challenges—of which the LCC attacks are just one—that have already taken their toll on profit margins, which dropped last year. Most debilitating is the dramatic weakening of the Japanese yen, which caused a giant blowup in ANA’s cost structure, one it worked hard in recent years to reduce. Last quarter, for example, its fuel costs alone spiked 23% y/y even though it only increased capacity 6% and even though it flies some of the world’s most fuel-efficient planes—B787s make up almost a fifth of its widebody fleet. The weak yen, meanwhile, also depressed outbound international demand from Japan, a disconcerting trend considering that roughly two thirds of ANA’s passengers on international flights are Japanese nationals.

On top of its currency headaches, ANA watched helplessly as traffic on Korea and especially China routes evaporated due to political tensions between Japan and these countries. The impact was particularly severe in late 2012 and early 2013. China alone accounted for about 13% of ANA’s international passenger capacity last year and about 16% of its international revenues. The China shock, moreover, was but one of several experienced by Japanese airlines in the past few years: the global financial crisis, the H1N1 scare and the Tohuku earthquake, not to mention the disruptive grounding of B787s for several months.

ANA, more generally, is not meeting its profit margin goals, and it’s underperforming in the shadow of one of the industry’s all-time great turnarounds. As its archrival Japan Airlines achieves stunningly high profit margins—14% at the operating level last year and 16% the year before—ANA has not even once this decade met the 10% goal it set for itself, even when a strong yen made conditions especially favorable. Operating…
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