Excerpt
Table of Contents
Glossary
1 Strategic Analysis
1.1 External & Internal Analysis
1.1.1 Briefly Defining the Industry
1.1.2 Macro Environment: PESTEL-Analysis
1.1.3 Micro Environment: Porter’s Five Forces
1.1.4 Resources & Capabilities
1.2 SWOT Analysis & Key Strategic Issues
1.3 Strategic Options
1.4 Implementation Issues
2 References
3 Bibliography
4 Appendix
Glossary
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1 Strategic Analysis
1.1 External & Internal Analysis
1.1.1 Briefly Defining the Industry
JAL is the leading full-service airline in Asia operating in the domestic and international passenger air-transport industry.
1.1.2 Macro Environment: PESTEL-Analysis
The impact of the global economic crisis still slows-down worldwide transportation demand (IATA,2010). Additionally, natural disasters (e.g. volcano eruption, Iceland), terrorist attacks and epidemics often threaten the industry. However, in the long-term demand in air travel is forecasted to grow considerably (50%) until 2050 (Euromonitor,2008b).
By scanning regions it was noticed that air-traffic is shifting towards emerging markets in Asia-Pacific – especially to China, India and Vietnam – and the Middle East. Well-established markets (North Atlantic, EU) remain weak probably further depressed by current currency crises (Euromonitor,2008b;2009a,b; FT 2010c). This indicates that Asia-Pacific and Middle East provide the best future opportunities for marketers.
Japan’s economy, however, recovers only slowly, persisting job-cuts, high public debt and deflation. Therefore, Japan is becoming a more price-sensitive market (Economist 2010a,b). However, demand of premium long-haul routes remains rather stable as premium travellers here expect best value-for-money (FT,2010c).
A major uncertainty remain rising fuel costs. However, the completion of “open-skies” agreement between US and Japan is likely to open up new opportunities of consolidations and strengthening alliances (FT,2010a,b;2009a).
Another factor is increasing public awareness of pollution. Customers demand “green” transportation and governments will tighten regulations regarding CO2-emissions but also offer tax incentives to environmentally-friendly businesses (Euromonitor,2009a;2008b).
Also growing internet access and the rise of social networks reveal opportunities. Increasing online sales and well-informed customers might enable the dismissal of middle-men (Euromonitor, 2009c).
1.1.3 Micro Environment: Porter’s Five Forces
As individual customers cannot organise themselves, buyers’ bargaining power can be assed as low. Contrarily, suppliers have rather high power as fuel prices are consistently high, lacking more favourable providers. Even if such providers can be found, switching costs are very high making short-term switching inefficient (Capon,2008,p.65).
The threat of new entrants is assessed as low, as entry barriers are high, e.g. high capital requirements for establishing fleet; high airport/government taxes. Strong business networks are needed to get access to limited slots and achieving EoS. Currently the industry experiences a crisis, observing numerous bankruptcies and failures which is likely to discourage new entrants. This, however, might change if above mentioned growth appears.
The threat of substitutes is high regarding short-haul routes, as rail transport gains market share. Especially in Japan and China passengers prefer rail for providing less arrival time in advance, greater energy efficiency, etc. Regarding long-haul routes, air is still dominating (shorter travel time, travelling more convenient). Another threat arrives from LCC as they gain airport slots e.g. at Japans major and expanded international airports Tokyo&Narita (Euromonitor 2010d;2009d;2008b). LCC accounted for 15.7% of seats in Asia-Pacific in 2009 forecasted to reach 20% in 2011 (CAPA,2010b).
Summarising, competitive rivalry is intense. Limited airport capacities and similar airline offerings make it difficult to stand out. Airlines tend to consolidate and EoS are an important factor. Fixed costs and entry barriers are overall high. LCC are tackling the industry by setting out price-wars whereas full-service carriers are corporately increasing prices for survival. There is a fierce fight for market share as demand still stagnates. The open-skies agreement (USA&Japan) will probably further enhance price pressure and competition.
1.1.4 Resources & Capabilities (Appendix)
JAL is still market leader in the Asian market, offering 84 bn revenue passenger-kilometres in 2009 – its major competitor ANA offering 19 bn (Figure 1.1). However, ANA has already exceeded domestic passenger numbers, even though they are in dispose of 11% less domestic routes and about 60 planes less.
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Figure 1.1 Comparison of JAL/ANA’s Key Operations
Regarding international operations, JAL is still ahead operating over 600 flights/day on about 260 routes – ANA offers 34 international routes and 89 flights/day. However, it must be considered that over 60% of airports, JAL operates on, are situated in weak markets (USA&EU) and only 18 airports in important emerging markets (Asia, India & UAE), which brings up concerns on the future success (JAL Corp,2009;2008; ANA Co,2009; JAL Corporate Information,2010; ANA web site,2010).
JAL is still major employer (~50,000 employees, 2009) of Japan’s airline industry, but in order to receive bankruptcy protection, 1/3 of its workforce has to be released bringing it on about the same size as ANA (~33,000 employees). In this context, JAL is also forced to reduce its routes, planes and non-core operations such as travel agencies. However, JAL’s business structure is rather complicated hindering quick reactions on changes (Euromonitor,2009a).
Conversely, JAL still possesses a strong positive image especially within Japan, which refers to its historical background symbolising Japan’s growth. Probably therefore, JAL was offered a total of ¥900bn governmental aid in form of public money and loans (FT,2010a,d; JAL Corp,2009; ANA Co,2009). JAL is also appreciated for its premium strategy e.g. first-class suites, high safety standards, latest on-board entertainment) and innovative R&D especially concerned with fuel-reduction (e.g. low-weight cabin equipment, efficient engine cleaning, “tailored arrival”). However, the crisis might harm JAL’s image. As ANA follows the same strategy a loss in image might be dangerous, especially as ANA is one step ahead regarding environmentally-friendly business: renewed fleet and is governmental certificate for self-imposed CO2-restrictions (ANA web site,2010).
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Figure 1.2 Comparison of JAL/ANA’s Operating Incomes FY 2006-2008
Regarding financial resources, JAL is badly positioned. 2009 was completed by a ¥51bn operating loss (Figure 1.2), representing a decrease of ¥140bn from previous year. ANA in return managed to stay in the black (¥7.6bn). Noticeable is also that JAL during the last three years consistently lagged behind ANA concerning operating income margin (Figure 1.3). JAL has two times expenses compared to ANA by only achieving about 1/3 more in sales (Appendix). Also JAL’s immense debt load (¥2,300bn) is alarming (FT,2010a). With an equity ratio of 10% JAL is clearly poorer positioned than ANA (18.3%).
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Figure 1.3 Comparison of JAL/ANA’s Operating Margin FY 2006-2008
All in all, JAL misses out on clear defined core competences to differentiate itself. Former CA will probably soon be caught up by competition. Their poor financial position makes them vulnerable to their competitors who are consistently gaining ground.
1.2 SWOT Analysis & Key Strategic Issues
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The most obvious strategic issue for JAL is its financially stricken condition. Governmental support will keep up business in the short-term. However, the restrictions coming along with this (route/fleet/workforce reductions) and the possible image loss might harm JAL’s strategic position in the long-term.
Also JAL’s premium strategy focusing on innovation and safety requires considerable financial resources. As these resources are missing, JAL is endangered of losing its already weak CA. This means that its financially healthier competitor ANA is about to challenge JAL for their market leading position (FT, 2010a,d). Therefore, JAL needs to quickly find ways to recapitalize.
Another key issue is the enhanced competition in the airline industry. There is an obvious polarisation between luxury and low-cost brands which will progress. This means that not only LCC detract market share of established airlines but also previous middle-class airlines will be entering the high-price segment. Therefore, it gets more and more difficult for JAL to differentiate itself from global competitors such as Emirates, Singapore Airlines, Etihad Airways etc. (Euromonitor, 2008b).
In addition, the already mentioned liberalisation of markets is progressing globally, putting enormous pressure especially on regional airlines. For JAL this means it will get harder to achieve EoS and compete against competitors who are consistently becoming bigger. JAL seems to already being aware of this issue which can be seen in its expansion of codesharing agreements, e.g. with Vietnam Airlines, Air France, British Airways, etc. in 2008 (Euromonitor, 2009a). Also the entry into the ‘oneworld alliance’ can be put in this context.
However, JAL still needs to consider possibilities of growth especially with respect of their financial position. Due to JAL’s access to promising key markets in Asia, the other alliances as well as competitors are eager to attract JAL as partner (Euromonitor, 2010a; FT, 2009a). Therefore JAL should carefully reassess their position in this direction.
The third major issue is the ongoing rise in fuel-costs. As JAL cannot afford further increases in operating costs, rising fuel-costs will hit them hardly. Therefore, possibilities of compensating or lowering costs have to be considered. Currently, JAL has managed this by successful hedging and increasing their fuel-surcharges (Euromonitor, 2009b). However, in future this might not be possible anymore. As competition is fierce and also quality-sensitive markets such as Japan are becoming more price-sensitive, further price increases might lead to further losses of passengers and market share.
1.3 Strategic Options
Three future strategic options have been identified using a TOWS-Matrix (Appendix):
1. Focus on international business and expand in emerging markets;
2. enter the low-cost market;
3. merge with ANA.
The first option combines JAL’s strengths of strong route network and innovative R&D to overcome the weak Japanese economy and JAL’s loss of domestic market share. Expansion into emerging markets would be consistent with former strategies strengthening international business and reducing less efficient domestic routes.
This strategy can be described by focused differentiation on Faulkner & Bowman’s strategy clock (Capon, 2008; Johnson, Scholes and Whittington, 2008). Entering fast-growing emerging markets such as China, India, Vietnam or Russia and Latin America at a broader scope would mean entering markets with less competition.
JAL would benefit from their innovative R&D and experience and therefore build up CA again by offering premium and innovative service to well-funded customers, as long-haul customers are likely to pay more for added value in the future.
Even though JAL has the skills/capabilities, financial resources are weak. New airports have to be entered and new infrastructure has to be built up. Governmental requirements (FDI or social commitments) in the target markets are also likely to consume finance. Therfore, JAL would need to give up its domestic operations to raise capital.
This leads us to the acceptability of the option. Stakeholder mapping identified Japanese government as a key player in JAL’s decision making process (Appendix) as JAL depends on bankruptcy protection. Japan is unlikely to accept a quitting of JAL’s domestic operations. Also JAL’s oneworld partners are likely to reject the strategy, as they are interested in JAL’s access to Asian key markets. A dangerous consequence could be that oneworld turns away from JAL. This would have immense effects as JAL depends on the codesharing agreements.
A second possibility is to enter the low-cost market. This aims at reducing JAL’s high expenses and debts. To achieve this, the implementation of strict cost-leadership (Porter, 1980 cited in Capon, 2008) is necessary. The second aim is to minimize the threats of a price-sensitive climate. Numerous successful examples such as Ryanair or EasyJet serve as benchmarks. However, as there are already LCC on the Japanese and Asian market, JAL would not profit from first-to-market opportunities. Moreover, it represents a completely renunciation of current and previous strategies.
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