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CEO Interview - Feeling Inspired

Shinichiro Ito - CEO, ANA

Opportunities and challenges will determine the future of All Nippon Airways (ANA). Interview with Shinichiro Ito, President and CEO

Ana announced losses for the fiscal year 2009 but expects to show a profit in fiscal year 2010 and 2011. How confident are you?

Export-driven businesses, such as electronics and automobiles, suffered tremendously after Lehman Brothers went bust in 2008. But the situation is improving. Business traffic increased significantly in February and March 2010. This has helped to raise yields on routes that were being sustained with leisure traffic.

Our performance in the first quarter of 2010 confirms that we are recovering in line with our stated expectations. But the seed of the financial crisis was planted deep and there is still a lot of ground to recover.

How do you see Japan’s fortunes compared to China’s?

In April, I met with the President of Air China. He reported that they were growing at 20% during the first quarter of 2010. This is not the case in Japan, where we are still not seeing real GDP growth.
There is great demand for Chinese travel to Japan. If you go to Tokyo’s Ginza shopping area, you will see many Chinese travelers in our high-end luxury boutiques. The spend per traveler is tremendous.
I believe that China should be a key element in Japan’s tourism strategy. They have recovered strongly from the economic recession and every country is trying its best to attract Chinese tourists. Japan’s efforts need to improve. Instead of making it easy for Chinese travelers, our visa process acts as a deterrent for some. We still have work to do if we are to handle the potential influx of Chinese visitors and meet their travel needs.

ANA is looking at strengthening its presence in China. It serves 10 destinations with about 160 flights a week. Most of these destinations are along the coast. In the next stage of development, we must look further inland to take advantage of latent markets. Our partner companies, including Air China, also see this as a great opportunity.

How big an impact will the infrastructure developments in Japan have on ANA’s business?

Haneda Airport will become a fully international facility from October 2010. There are a very limited number of international slots available now but from October, 90,000 slots a year will be opened for international use. At the same time, Narita is adding 20,000 more slots. Combined, these represent a big chance for ANA to grow and particularly to strengthen its ability to serve the China market.

A dual-hub strategy is guiding our corporate plan. Haneda’s convenient location is very popular with passengers who are willing to pay a premium for this. I expect to see a big shift in international business travel from Narita airport, particularly in the daytime when slots will be concentrated on Asian destinations.

Our vision is to make Haneda compete with Seoul Incheon as a gateway to Asia, particularly China. Connecting Haneda’s large domestic network to Asia will be a major step in the right direction. Adding the US West Coast will further strengthen this concept. Of course, we must do this with cost efficiency. Haneda will need to compete with Narita in this respect.

Our vision for Narita is to improve its competitiveness as a transit hub—particularly its ability to provide connectivity between North America and Asia. This will be supplemented by local leisure traffic and growth in our European operations. For example, from July we are starting Munich-Narita services to increase our connectivity to Southern Europe.

How is this different from the opportunities that were created with the completion of Kansai airport?

ANA had an aggressive approach when Kansai opened and we started a number of routes. But these were not sustainable because of the weak business market in the Kansai area. With the strength of Tokyo to anchor Haneda’s hub operations, I am confident that we will be successful.
At the same time, Narita has a rich international network. It has an important role in facilitating trans-Pacific traffic to Asia. Narita’s international slot volume will ensure that it continues to be an important international hub. We intend to keep a strong presence there.

How important will your international operations be?

Our plan is to grow international revenues from $2.25 billion (JPY212 billion) in the 2009 fiscal year to $3.8 billion (JPY357 billion) in the 2011 fiscal year. One of the key issues is our application with United and Continental for antitrust immunity in the Japan-to-US market.

We are preparing to start a joint venture as soon as we receive government approval. This will improve our competitiveness and allow us to better serve our customers. We are also considering a similar arrangement for European markets, but we do not have any concrete plans.

At the same time as the expansion at Narita and Haneda, Ibaragi has opened. This will also serve the Tokyo area. Do you see it as an opportunity for low-cost services in the Japan market?

Ibaragi is a considerable distance from Tokyo. It is being promoted as an airport for low-cost carriers (LCCs) but usually they want facilities with long operating hours and low costs to support intense aircraft use. Ibaragi only fulfills some of their requirements.

It would also be difficult for LCCs to find the appropriate fare structure. There might be some scope to reduce fares by increasing ancillary revenue opportunities—charging for non-core items such as blankets, meals and inflight entertainment. But I don’t think that we could just import an existing model into Japan.

ANA won’t use Ibaragi, but that is not to say that we are not interested in low-cost services. We are researching the budget terminal at Singapore’s Changi Airport to understand if there is an opportunity to replicate it in Japan.

ANA is planning to reduce costs by $900 million (JPY 86 billion) in the medium term. After a decade of cost cutting, is there still room for maneuver?

This is not about cutting direct costs. We don’t have plans to cut staff by 20%, for example. Our approach will focus on productivity improvements. We want to reduce our unit cost.

As international operations will drive our growth, reducing unit cost will be a critical element in dealing with the greater volatility that this market presents. The Japanese are fickle travelers, reacting quickly and acutely to uncertainty. When Influenza A (H1N1) hit, the atmosphere in Japan was near paranoia. To cope with volatility, we need a flexible cost structure with lower unit costs. Along with improving productivity, we will make broader use of instruments such as aircraft leasing.

We are also strengthening our revenue generation capabilities. Networks are the key to success. Our strategy is to focus on services to our Star Alliance partner hubs. We are also gathering some great talent in our network management department to change our thinking. Until now we have looked more at individual seats on specific routes rather than at network revenue opportunities.

I also want to change ANA’s way of thinking about domestic and international services. We have managed them as separate businesses with separate products and aircraft. But our domestic flights to Okinawa are longer than our international flights to Seoul. So I want to rethink our product, the way that we use our resources and the way that we sell.

ANA has been a pioneer in using information technology to improve airport processes. What is next?

Technology should ensure that passengers are not stressed by airport processes. We aim to make processes simple and convenient. Inspiration comes from a big challenge—our domestic Boeing 747s have 565 seats. To operate these efficiently, processes must indeed be efficient or we could not turn the aircraft around in time.

Most of our IT investment has been in the domestic market, sometimes differing from global standards. We can make the investments pay because of the volumes. Now we must provide the same convenience for our international customers. We are particularly interested in self-service options that will improve customer service and allow us to reduce costs.

The real bottleneck today is security—which is the responsibility of governments. It would be great if we could find a scanner that works as a passenger walks through. That would eliminate the queues that we face at security checkpoints.

Is the environment a big issue in Japan?

Yes, and we are proud that ANA is the first transport company to be recognized by the Japanese government’s Eco First program. Our goal is to reduce our CO2 emissions by 10% by 2011 compared to 2006.

We assumed we would have the 787 in our fleet at this point in time. With the delays, the target has become more challenging. Since last year we have been giving our passengers the opportunity to use a carbon offset program. To make it simple, passengers can purchase the offsets using their mobile phone. The uptake is small, but it is growing.

Also, our environment group is working with Boeing, Japan Airlines (JAL), Tokyo University and fuel companies on alternative fuels. We are particularly interested in algae. Cost is a big hurdle though. The price difference between jet fuel and biofuel is still too great. Production volumes must drive prices down.

How do you view IATA’s Agenda for Freedom?

It was not that long ago that airlines were like a nation’s storefront sign. In the case of Japan our international airline was JAL, a state-run company.

Just like telecommunications, aviation was a national industry that governments chose to protect. Even now in Japan, the limit is 30% foreign ownership. It is interesting to note that the US, where everything is meant to be left to the power of the market, is still holding on to a 29% foreign ownership limitation.
It is inevitable that these restrictions will be relaxed. Companies must prepare for this. At present, Japan’s aviation industry is weak. We need time to ensure that any liberalization process is orderly, and there is a level playing field. For us, along with the possibility of welcoming foreign ownership of Japanese companies, there is also the possibility of investing in Asia where there are cost advantages and market opportunities.

What are your top priorities for the next 12 months?

We must achieve profit in the next fiscal year. We must make Haneda’s international expansion a success. And we must successfully integrate the 787 into our fleet. Along with that we are working on a new branding for ANA—Inspiration of Japan. You will hear more about this in the coming months. 

More on www.ana.co.jp

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