February 1, 2013 12:34 pm

Japanese airlines: out of charge

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Dodgy Dreamliner batteries bring ANA and JAL back to earth

Just as Japan’s airlines were getting off the ground, some dodgy batteries have brought them back to earth. Third-quarter results this week from All Nippon Airways hinted at the damage its grounded fleet of Boeing 787 Dreamliners is causing. Japan Airlines – fresh out of a bankruptcy turnround – will reveal the cost of the problem to its bottom line on Monday.

All Nippon Airways

ANA said that grounding its 17 Dreamliners (almost a tenth of its fleet) had cost it Y1.4bn ($15m) in lost revenue. Granted, this is just 0.1 per cent of forecast revenue for the year ending in March but it has stopped investors sharing in the one-fifth take-off in Japanese shares in the past two months. That rally has left ANA and JAL behind, as their shares traded sideways. Have investors been cautious enough?

Dreamliners are an important part of the growth plan for Japan’s airline sector. International routes are its fastest-growing segment – revenues were up 10 per cent in the first nine months from a year earlier, compared with 4 per cent growth domestically. Yet revenues per passenger on international routes are a quarter below domestic ones. Thus Japan’s airlines need Dreamliners, which use a fifth less fuel than traditional planes, to boost profitability on those routes. For as long as the planes remain grounded, ANA could lose Y1bn-Y2bn of operating profit a month, Macquarie calculates.

If that is not bad enough, the cost of fuel, priced in dollars, is rising as the yen weakens. The price of oil is up a sixth since June last year. True, this is still 10 per cent below its peak almost a year ago, but the yen has weakened by a sixth against the dollar in that period.

Even if Japan’s airlines hedge two-fifths of fuel, as ANA did last year, costs will be hurt. ANA’s operating income was down a fifth from a year ago in the latest quarter and its shares trade on 14 times forward earnings. That is elevated, unlike many of its planes.

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