The JAL Group is a global player bridging the world with safety, security and quality as our top priorities.

Transcription

1 The JAL Group is a global player bridging the world with safety, security and quality as our top priorities. Annual Report 2007 Year ended March 31, 2007

2 CONSOLIDATED FINANCIAL HIGHLIGHTS Japan Airlines Corporation and Consolidated Subsidiaries For the Years Ended March 31, 2007, 2006 and 2005 Thousands of Millions of yen U.S. dollars Years ended March 31, For the Year: Operating Revenues 2,301,915 2,199,385 2,129,876 $ 19,499,491 Operating Expenses 2,278,997 2,226,220 2,073,727 19,305,353 Operating Income (loss) 22,917 (26,834) 56, ,129 Net (loss) Income (16,267) (47,243) 30,096 (137,797) Net Income (loss) Per Share (yen and dollars) (6.52) (23.88) $ (0.055) At Year-End: Long-Term Debt 838,827 1,084,521 1,178,932 $ 7,105,692 Stockholders Equity 194,746 Net Assets 331, ,103 2,811,291 Total Assets 2,091,233 2,143,280 2,162,654 17,714,807 Shares Issued (thousands) 2,732,383 1,982,383 1,982,383 Note: The U.S. dollar amounts in this annual report are translated from yen amounts, solely for convenience, at =U.S.$1.00, the exchange rate prevailing on March 31, 2007 (see Note 3 to the Consolidated Financial Statements). For fiscal 2004, the period ended March 2005, the previous accounting standards are employed. Accordingly, the figure for Net assets is not available for fiscal Operating Revenues (Billions of yen) 2,500 2,129 2,000 1,500 2,199 2,301 Operating Income (loss) (Billions of yen) , (26) CONSOLIDATED OPERATING HIGHLIGHTS Japan Airlines Corporation and Consolidated Subsidiaries For the Years Ended March 31, 2007 and 2006 Years ended March 31, Change (%) Revenue passengers carried (number of passengers): Domestic 43,984,840 43,848, International 13,467,241 14,187, Total 57,452,081 58,036, Revenue passenger-km (1,000 passenger-km): Domestic 33,187,684 32,910, International 62,597,923 67,434, Total 95,785, ,345, Revenue passenger-load factor (%; percentage point change): Domestic International Total Revenue ton-km performed (1,000 ton-km): Domestic 2,968,868 2,938, International 10,481,369 10,954, Total 13,450,237 13,893, Revenue weight-load factor (%; percentage point change): Domestic International Total Notes: 1. Ratios and percentages have been rounded to the nearest tenth of a percent. 2. Other figures less than one thousand, except for passengers carried, have been discarded.

3 PROFILE Aiming to be the airline of choice for every customer by ensuring constant safe aviation and total dedication to the customer s standpoint As an air transportation group with comprehensive strengths, and with safe aviation our overriding priority, we bring peoples, cultures and hearts together, and contribute to the peace and prosperity of Japan and the world as a whole. Through accurate identification of what customers want, and the painstaking provision of services from the customer s perspective, we will continue to provide an ever-greater standard of comfort, convenience, and on-schedule service. Inspired by a Group vision that: The JAL Group is a global player bridging the world with safety, security and quality as our top priorities, we have a fundamental policy of returning profit to all stakeholders, and will make the utmost effort to maximize corporate value. We are committed to ongoing progress to ensure that the JAL Group is the first-choice airline for every traveler and shipper. The JAL Group consists of 247 subsidiaries and 87 affiliates, engaging in air transportation, airline-related, travel service, credit card and leasing, and other businesses. >> Air transportation Our air transportation segment involves 9 consolidated subsidiaries. This massive network includes not only JAL International, a major subsidiary, but also Japan Asia Airways Co., Ltd., Japan Transocean Air Co., Ltd., JALways Co., Ltd., JAL Express Co., Ltd., Japan Air Commuter Co., Ltd., J- Air Co., Ltd., Hokkaido Air System Co., Ltd., and Ryukyu Air Commuter Co., Ltd. >> Airline-related business Airline-related businesses include passenger services and cargo handling, in-flight catering, aircraft and ground equipment maintenance, and aviation fuel supply. This business involves 105 subsidiaries and 71 affiliates. >> Travel services A total of 49 subsidiaries and 2 affiliates are engaged in the travel services business, developing and marketing travel packages that include air travel using our 9 air transportation subsidiaries. >> Credit cards and leasing A total of 31 subsidiaries are involved in the finance, credit card and leasing businesses. >> Other businesses Hotel and resort business The hotel and resort business is conducted through 20 subsidiaries and 2 affiliates. Commercial, retailing and other business This category includes trading/wholesaling/retailing, real estate, printing, construction, temp staffing, information and advertising, and cultural events, involving 33 subsidiaries and 12 affiliates. Revenue Composition ( bln) Card, Lease 65.8 Other Travel Service Airlinerelated Air Transportation 1,801.5 International Cargo Domestic Cargo 28.9 Other Domestic Passenger International Passenger CONTENTS Message from the President & CEO Interview with the President & CEO Corporate Governance Feature: Becoming an airline that sustains stable profits and is the first choice for every traveler and shipper Review of Operations Board of Directors Organization Management s Review and Analysis of Financial Position...22 Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Changes in Net Assets Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Auditors Consolidated Subsidiaries JAL Group Route Network Investor Information

4 MESSAGE FROM THE PRESIDENT & CEO Greetings to our stockholders and investors. Profile of Mr. Haruka Nishimatsu, President & CEO 1948 Born in Hamamatsu, Shizuoka Prefecture 1972 Joined Japan Airlines Company, LTD. After spells in the Corporate Planning Department, the Frankfurt Branch, and the Finance Department, Mr. Nishimatsu was appointed as an executive offi cer in charge of Finance in Appointed Board of Director 2006 Appointed President & CEO Hobbies: Visiting sites of historical interest, Golf During fiscal year 2006, the year ended March 2007, we at the JAL Group carried out a reorganization of our route network, focusing our management resources on more profi table routes while ensuring that flight safety remained our No. 1 priority at all times. As part of our overall plan to restructure our business base for improvement in profi tability, we undertook various measures to enhance our services from the customer s perspective. We also took important steps to reduce costs in every possible fi eld, such as continuation of a 10% reduction in basic salaries originally introduced in April 2006, further reductions in the number of staff from our workforce, as well as the thorough review of contracts with companies outside the JAL Group. As a result of these cost-cutting measures combined with better-than-expected recovery in customer numbers in the January-March quarter, we achieved a solid and significant yearon-year improvement in both operating income and ordinary income. Both figures were well above targets made on February 6, indicating that we are firmly getting back on a recovery track. Meanwhile, we decided to remove 44.7 billion yen of deferred tax assets from the FY2006 balance sheet, as over the past years the company has been negatively affected by such external factors as 9/11, SARS, and an unprecedented surge in fuel prices, inhibiting our ability to achieve profi t targets. These circumstances have led the company to remove part of its deferred tax assets by estimating more prudently than ever future taxable income. This is in addition to the removal of 9.7 billion yen of deferred tax assets from the FY2006 balance sheet resulting from a reduction in the company s pension costs by returning management of the public part of pension reserves to the Japanese government ( daiko henjo ). Additionally, for the reporting term we recognized 6.0 billion in extraordinary losses for payouts made in the first quarter of fiscal 2007 to employees of general manager level who voluntarily accepted an early retirement plan. The result of this was that in spite of a substantial increase in earnings at the operating income and ordinary income levels, we registered a net loss for the term of 16.2 billion and have been forced to announce the non-payment of dividends for the term. The management of the JAL Group regards it as extremely regrettable that the Group was unable to attain its targeted net income figure of 3.0 billion, but the reduction in deferred tax assets means the removal of one of the negative risk factors that might otherwise have caused a decline in net income over the next few years. By steadily implementing the measures laid down in our FY Medium-term Revival Plan, announced in February of this year, we will do our best to rebuild the Group s financial position on a sound and healthy basis. In April of this year the JAL Group became a fully-fledged member of oneworld TM, the world s leading quality global multilateral airline alliance. As a member of oneworld, we are able to offer our customers more choice, convenience, better value, quality air travel options and benefi ts beyond the reach of any individual airline or bilateral partnership. Customers now have access to a more extensive global network, more opportunities to earn frequent flyer miles and tier status points, more opportunities to redeem those miles, more lounges to use, and prioritized check-in at more airports throughout the world. We can therefore look forward to further revenue growth through greater interlining passenger traffic, greater service and product competitiveness, and increased brand awareness overseas. Within the current fiscal year the year ending March we are carrying out a thorough revision of our services and products to increase our competitive edge, which includes the introduction of a First Class service on domestic flights and a JAL Premium Economy service on international flights. Our new corporate vision is for the JAL Group to be a global player bridging the world with safety, security and quality as our top priorities. In accordance with this vision, I have positioned fiscal 2007 as the turning point from defense to offense. You can be certain that all our staff will pull together to regain the trust of our stakeholders and achieve the full revival of JAL, and make our airline the customer s fi rst choice. We appreciate the continued support of all of our stockholders and investors. August 2007 Haruka Nishimatsu, President & CEO 2

5 INTERVIEW WITH THE PRESIDENT & CEO We are achieving a steady improvement in business performance, and it is accelerating gradually Q In FY2006, your expected shift into profit at the net income level failed to materialize, and you moved back into the red. What are your thoughts on the past year? In FY2006 the pace of recovery in demand by individual passengers on domestic routes, particularly among business travelers, was slower than we had expected, and it was factors such as this that caused revenues in our Air Transportation Segment to be below expectations. On the cost side, jet-fuel (Singapore Kerosene) prices soared to an all-time high above US$90 per barrel from the summer, pushing up fuel costs to well above year-earlier levels. One the other hand, we also took steps to reduce costs by pushing through a thorough, cost structure reform leaving no sacred areas. We implemented full-scale business foundation reforms aimed at enhancing profi tability, such as the reorganization or suspension of operations on underperforming routes, the concentration of management resources on highly profi t- able and fast-growing routes, and the downsizing of our aircraft. As regards curbing our costs, our painstaking efforts have been bearing fruit, and I feel that a kind of cost-cutting DNA has come to deeply pervade our entire organization. This has included a 44.1 billion cut in personnel costs in our Air Transportation Segment, including by means of a 10% reduction in basic wages and the transfer to the government of the substitutional portion of our welfare pension funds, which had been managed by the Company ( daiko henjo ). Financial Results (Billions of yen) FY06 Result Operating Revenue 2,301.9 Air Transportation International Passenger Domestic Passenger International Cargo Other Total 1,801.5 Other Segment Operating Cost 2,278.9 Air Transportation 1,798.9 Other Segment Operating Income 22.9 Ordinary Income 20.5 Net Income (16.2) The net result of all this was that we were able to post operating income of 22.9 billion for the fi scal year on a consolidated basis, which was an improvement of around 50 billion compared with our operating loss of 26.8 billion in the previous term. The uptrend in both passenger and cargo demand became clearer in the fourth quarter in particular, enabling me realize that our current improvement in performance is making solid progress. At the consolidated net income level, factors such as a partial removal of deferred tax assets caused us to post a net loss of 16.2 billion, but that was purely a procedure for accounting purposes, and will not have a lasting impact on FY2007 and beyond. That removal of deferred tax assets has eliminated a future cause of reduction in net income. Fleet renewal by retiring large aircraft and introducing small and medium-sized types will position us to seize as many opportunities as possible presented by the increases in takeoff and landing slots at airports in the capital sphere. Q You made a major capital increase in July last year for the purchase of cutting-edge aircraft. Would you care to explain the necessity for that. To secure funds to acquire economically efficient small and mediumsized aircraft, the JAL Group increased its capital through a global offering in July 2006, raising billion. The global aviation market is currently undergoing a major change from the era of large aircraft to one of small and mediumsized models, and that applies to the JAL Group, too. Accelerating the renewal of our fleet is one of our most important priorities. There are quite a number of reasons why we must make haste to switch to small and medium-sized aircraft. First, as far as international routes are concerned, the world aviation market, in particular the tourism market, has come to be heavily influenced by the emergence of various risks, for example of terrorism and wars, contagious diseases such as SARS and avian flu, and natural disasters, and this has given rise to a tendency for demand fl uctuations to be greater and longer-lasting than they were in the past. On the other hand, aviation demand is growing robustly, in particular in China, India, and Russia, as well as Southeast Asia, and it is expected to continue to grow strongly in the future. 3

6 INTERVIEW WITH THE PRESIDENT & CEO Comparison of Fuel Consumption by Fleet Type ( )=standard number of seats International fleet (384 seats) ER (292 seats) ER (237 seats) 787 (200 seats) International comparison of average number of seats on domestic flights The average number of seats on an airplane using Haneda airport for a domestic route flight is far higher than the international average for domestic flights, owing to the need to use large aircraft because of the relatively small number of slots per day at Haneda compared with the traffic volume. Seats/flight Haneda Heathrow Gatwick Frankfurt Charles de Gaulle 131 Domestic fleet J.F. Kennedy ER (261 seats) 100 Newark (165 seats) 57 Seoul (Kimpo) 187 * For international fleet, fuel consumption of flying 4,000nm =100. For domestic fleet, fuel consumption of ER flying 1,000nm =100. Source: Official Airline Guide 2006 (compiled by JAL from the annual air flight statistics for Haneda) In ways such as these, the environment for the aviation market is changing constantly and significantly. Under these circumstances, it is advantageous to operate small and medium-sized aircraft, as they facilitate flexibility in making finely tuned supply-demand adjustments. What is more, whereas in the past it was not possible to fly nonstop on long-haul routes to places such as the U.S. East Coast, Europe, and Oceania without using large-sized aircraft such as jumbo jets, steady technological advances have greatly increased the fl ying ranges of small and medium-sized aircraft, making it perfectly possible for them to cover long-range international routes. The fact that aviation fuel prices are far more expensive today is another major reason for us to switch to the latest small and mediumsized aircraft with superb fuel-effi ciency and low fuel consumption. And another factor that cannot be ignored is the limitation on takeoff and landing slots in airports in the Tokyo metropolitan area. There are currently no spare slots at Narita Airport, so naturally we need many large aircraft to meet growth in passenger and cargo demand, but that will change in In that year the second runway at Narita will be extended to 2,500 meters from its current length of 2,180 meters, and with that, the number of slots will be boosted by 20,000 annually: from 200,000 to 220,000. On top of that, the fourth runway will be completed at Haneda Airport, which formerly specialized in domestic routes, and it is planned that 30,000 slots annually will become available for scheduled flights on short-haul international routes. These increases in the number of slots will be a huge business opportunity for us, and to ensure that we seize those opportunities and harness them to drive ongoing corporate growth, we are making active moves to renew our fleet by incorporating small and mediumsized aircraft such as Boeing 787s and Boeing s. The use of fuel-effi cient planes of this type and more frequent services will not only enhance customer convenience, but also give a big boost to our profi tability, so I believe it is an indispensable measure for us to ensure future survival and growth. As far as domestic routes are concerned, the lack of slots at Haneda Airport, their key hub, makes it diffi cult to increase fl ights, so the present reality is that we must meet the strong demand by operating widebody jets such as Boeing s. For JAL, the number of available seats per flight on domestic routes into and out of Haneda is more than double what one would find at major airports overseas, which shows the extent to which the present configuration of our domestic flight operations is weighted towards widebodies. With the completion of the fourth runway in 2010, however, the number of slots for domestic routes at Haneda is planned to be increased in stages by around 80,000. When that happens, it will be possible to operate frequent services using small and medium-sized aircraft, enabling us to fine-tune our response to demand trends on domestic routes, too. Of course, the increase in the number of flights will also greatly enhance customer convenience, and so will enable us to improve the competitiveness of air transportation vis-ā-vis other forms of transportation such as the Shinkansen. That explains the need for, and the background to, our capital increase last year, but the recent capital increase involved not only a public offering domestically, but also an offering in the U.S., and 4

7 therefore it is subject to a variety of domestic and overseas legal restrictions such as U.S. securities laws. Despite these unavoidable backdrops, there may have been aspects that we were unable to explain or provide enough information on to shareholders. In addition, I deeply regret the fact that this has meant the dilution of share values and has discomforted our shareholders. Nevertheless, this capital increase has greatly improved our financial condition and enabled us to implement our strategic fleet renewal. I am confident that ultimately, this will enable us to live up to shareholders expectations by achieving a steady recovery in business performance and corporate growth, and so I ask them to understand our position and to look forward to improved profi tability. Details of Fleet Renewal Plan (# of aircraft) Medium/ Small-size aircraft 42% 84 International Passenger Medium/ Small-size aircraft 61% Q I now understand the need for strategic fleet renewal, but what are your thoughts as to the future schedule for this, and your plans for the future fleet structure? As of the end of March 2007 we were operating 23 conventional passenger and cargo Boeing 747s, but all of them will be retired by the end of FY2009. Meanwhile, the new aircraft we plan to introduce will be Boeing 777s, a size smaller than the 747s, and other small and medium-sized airliners. As regards small planes, we took delivery of our first Boeing in November 2006, and in FY2007 we began introducing them actively on both domestic and international routes. We plan to introduce around 30 to 40 of this variant, and it will become JAL s mainstay small-capacity airliner. With regard to mediumcapacity aircraft, we will be introducing the Boeing 787, which is highly economical and comfortable. We have already ordered more than 30 of these, and they will be phased in from FY2008. For cargo, we are introducing the mid-sized Boeing 767 freighter from FY2007, and will ensure efficient operations by combining them with large freighters and belly spaces of passenger flights to match the scale of demand on each route. The progress of this aircraft downsizing process is an essential component of our current Medium-Term Revival Plan. It will be particularly evident on international routes, where the ratio of small and medium-sized planes will rise from 42% at the end of FY2006, to 61% at the end of FY2010. Large-size aircraft 58% Large-size aircraft 39% FY06 (E) FY07 E FY08 E FY09 E FY10 E Large Medium/Small Domestic Passenger (# of aircraft) Medium/ Small-size aircraft 90% Medium/ Small-size aircraft 93% Through steady progress with the Medium-Term Revival Plan we will build a business structure able to generate stable profits. Q You announced the FY Medium-Term Revival Plan in February What are the main points of the plan? Large-size aircraft 10% Large FY06 (E) FY07 E FY08 E FY09 E FY10 E Large F Medium/Small (including regional) Classification of Aircraft Medium A Small Large-size aircraft 7% MD90 MD81 MD The aim of the FY Medium-Term Revival Plan is to build a business foundation that will generate stable profi ts without excessive reliance on revenues, targeting the year 2010, when the takeoff and landing slots at both Narita and Haneda airports will be increased. The four main planks of the plan are to enhance profitability by means of cost reductions, to implement downsizing through aircraft renewal and so enhance the competitiveness of our fl eet, to shift to highly profi table routes and strengthen overall product competitiveness, and to concentrate businessresources on our air transportation business. 5

8 INTERVIEW WITH THE PRESIDENT & CEO Management Plan The JAL Group Medium-Term Revival Plan Through rigorous pursuit of safety, and by adopting the customer s viewpoint in all things, the JAL Group aims to redesign its business base so that the Group s operations will yield a constant stable level of earnings. For this purpose, we have drawn up the Medium-Term Revival Plan covering the four-year period from fiscal 2007 to fiscal The JAL Group s objectives and basic policies FY2010 onwards: Sustained and stable level of earnings Becoming the airline of customers first choice FY2007-FY2009: Redesigning our business base PREMIUM Customer Strategy (strengthening total product competitiveness) Improvement of business profitability (reorganization of fleet and route network) 10% improvement in productivity (raising personnel productivity) Reorganization and rehabilitation of non-core businesses (radical review of affiliated enterprises engaged in non-core businesses) Reforming our corporate culture and fostering of human resources Adopting the customer s standpoint Ensuring flight safety at all times The increase in slots creates opportunities to expand business, but is also expected to generate fiercer competition. We need to ensure that we seize on these major changes in the airline infrastructure as business opportunities, and harness them to drive our continuing corporate growth. To this end, it is essential to reduce costs radically, including personnel costs, and at the same time to further enhance product and service quality from the perspective of our customers. As regards international routes, our basic strategy is to use aircraft downsizing to raise load factors and cut costs, leading to a substantial improvement in profi tability. As for domestic routes, we consider it essential to provide travelers with greater convenience by increasing the frequency of flights, not least because of the competition from the Shinkansen, which has expanded its network nationwide. Switching to smaller aircraft is also expected to boost profitability, and will aid the expected expansion of our services to cover regional cities. In the fi eld of cargo, too, the downsizing of our aircraft will bring cost savings, and by creating the optimum mix of widebody freighters, medium-capacity freighters, and usage of cargo capacity on passenger flights, we will build the most appropriate supply structure to match demand, and so achieve better profi tability. With regard to the shift to highly profitable routes, a core component of our strategy from FY2007 onwards is to concentrate management resources on routes that offer promise as regards generating higher earnings in the future. I am convinced that, to improve the convenience of our services for business passengers in particular, it is important for us to combine the introduction of small and medium-sized aircraft with the operation of more frequent flights. Through joining oneworld, we will make the best use of merit of global alliance Q Since April 2007, JAL has been a member of the oneworld, which includes American Airlines and British Airways, but where exactly do your expectations for this lie? The oneworld promises to provide a uniform standard of high-quality services throughout the world. To give you an example, depending on the class used by customers and their mileage status, they can use airport lounges and priority check-in counters and other facilities at more than 400 airports worldwide, including in cities that JAL does not serve, which is a major plus for our customers. In addition, JAL MileageBank members are now able to collect air miles on eligible fares when they fly with other oneworld member airlines, and the range of travel destinations for award tickets has been widened considerably, making it a mileage program in which it is easier to collect points and to use them. On top of this, the products that we are able to offer as a result of joining oneworld, especially the round-the-world tickets, have really resonated with our customers and have proved very popular. 6

9 At present, most of JAL s customers are based in Japan, but an important issue for us to address in future is raising our profile overseas, so that we can also become the airline of choice for overseas customers. On this point, we have high expectations for the impact of our membership of oneworld, given that its members are high-profile airlines overseas. I would add that in the 2006 World Travel Awards, oneworld was voted the World s Leading Airline Alliance, for the fourth consecutive year, by 170,000 travel professionals, including more than 110,000 travel agents in 200 countries worldwide. I envisage that JAL will play an important role as the driving force for oneworld s Asian market in the future. being to provide top-quality products and services that are unbeatable by our competitors, and that therefore help us to recover our competitiveness, increase customer yield, and enhance profi tability. The introduction of a First Class section on domestic flights is to respond to feedback from customers who desire a high-quality service that exceeds the level of our well-reputed Class-J service. It offers the highest-ever level of service on domestic routes. We plan to introduce it on Boeing 777s, each having 14 seats fitted. The routes chosen for it are planned to be major business routes such as Haneda-Itami and Haneda-Fukuoka, and we are projecting that it will generate some 4 billion more revenue annually. The Premium Economy service to be introduced on international routes mainly targets customers who use economy class for business purposes. It will provide more comfortable seating than in ordinary economy class cabins, and we are considering it for business routes to Europe and North America. We also plan to introduce it on the Boeing 777, each of which will have around 40 seats fi tted. The seat arrangement will give more space than in ordinary economy class, with 20% more room in front and behind, and be fi tted with a large center console. Also, the use of shell-type seat-backs for the first time anywhere in premium economy class means that when the seat in front is reclined it does not come close to the head of the passenger behind, but leaves them with sufficient private space. We project that this also will generate some 4 billion more revenue annually. Following the introduction of these new products we are planning the introduction of new seats for First Class and Executive Class on international routes, so as to upgrade our products and services still further. Improvement of L/F (%) 75 72% 74% 72% % 68% 69% 69% 68% 67% 66% Through our Premium Strategy we will provide the finest quality products and services, unrivaled by our competitors. 60 FY06 (E) FY07 E FY08 E FY09 E FY10 E Medium Term Revival Plan IP DP Q One of your priority measures in FY2007 is your Premium Strategy for high-yield passengers. Could you outline this for us please? JAL has always put great importance on its image as a high-quality airline, and so it has been highly regrettable that that image has been tarnished somewhat in recent years. It is essential for us now to restore customer confidence in the spheres of safety, on-schedule service, and improvements to the level of service, and to give our products a true feeling of good quality. The Premium Strategy is targeted mainly at business and other high-yield passengers, its aim Improvement of Yield (per capita) (FY06=100) FY06 (E) FY07 E FY08 E FY09 E FY10 E Medium Term Revival Plan IP DP 7

10 INTERVIEW WITH THE PRESIDENT & CEO Q As regards cost, you have announced particularly large cuts in personnel costs. Could you give us some specifics as to how those cuts are to be made? Under the Medium-Term Revival Plan we plan to slim the workforce by 4,300 employees during the period from FY2006 to the end of FY2009, by means of raising business efficiency and raising employee productivity. However, it takes quite some time to make staff cuts of more than 4,000 people, so in FY2007 we are reducing employees bonuses and cutting back on the retirement benefi t plan through revisions, as well as by implementing a special earlyretirement scheme. The combined effect of these measures should be to cut personnel costs by 50 billion compared with FY2006 on a consolidated basis. Using a variety of means, including by using production methods used by Toyota, we aim to improve operating efficiency while at the same time reducing personnel in a way that avoids labor intensification. Consolidated Headcount Reduction Target (# of employees) 55,000 50,000 45,000 40,000 53,100* 50,800 FY06 (E) FY07 E FY08 E FY09 E FY10 E Medium Term Revival Plan *Sale of Non-core Assets is not deducted 50,100-4,300 employees 48,800 49,500 We are devoting our full energies to maintaining safe aviation and regaining trust. committee of experts, in April 2006 we established the Corporate Safety Division, which has overall charge of the safety management structure within the Group. This should strengthen and expand our safety management structure. As regards the development and improvement of the maintenance system and other hardware areas, we have been making constant progress, but no matter how much progress we make on the hardware side, human error can bring everything to a halt. Many aviation accidents around the world in recent years have been the results of human error, showing how central the elimination of human error is to safety measures. Last year we established the Safety Promotion Center for the purpose of ensuring that the lessons drawn from past accidents are not forgotten, and of reaffirming the importance of safe aviation. The items it has on display include remnants of aircraft involved in past accidents. It is used to provide safety education to employees, so as to raise their awareness of safety issues. In addition, examples of incidents that came close to becoming accidents are compiled, giving employees the opportunity to conduct case studies for example on situations in which people are more error-prone, and on ways of saying things that can unintentionally cause other people to misunderstand the intended meaning. Errors that have occurred in the past are not indiscriminately punished or subjected to penalties, as we may prefer to gain information about factors such as their causes and background and the remedies adopted, and this is then shared widely. I want to build a corporate culture in which people feel that they can say what they want, and opinions are exchanged freely, and in which we strive to enhance the effi ciency of our operations, hoping to minimize errors as a result. Above all, it is important to raise morale in the workplace and to enable our employees to work with a lively and positive attitude. There is a close correlation between employee morale and safety, and I believe that one way of boosting morale is to transfer as much authority as possible to the workplace, and broaden the room for discretion given to front-line staff. It is important to find a balance between areas that are managed in accordance with manuals, and areas that are not. Meanwhile, we have been striving to enhance operating efficiency by such means as introducing maintenance, quality control, and safety methods used by Toyota, and by reducing the burden on front-line employees and cutting wasteful operations. These methods have also had the benefi cial effect of injecting new vitality into the Group. (Note: This interview was conducted in May 2007.) Q Please tell us about your measures to build the foundation for safe aviation, your most important priority, and restore confidence in JAL. As part of our efforts to ensure safe aviation, based on the recommendations of the Safety Advisory Group, which is an external 8

11 CORPORATE GOVERNANCE The Corporate Safety Division and Customer Satisfaction (CS) Improvement Division, which both report directly to the CEO, were established to ensure operational safety and meet the expectations of our customers. These oversee operations in the following six divisions Flight Operations, Engineering & Maintenance, Cabin Attendants, Airport Operations, Cargo & Mail, and Passenger Sales & Marketing as we aim to achieve effi cient and competitive organizational operations. The Corporate Safety Division was established in April 2006, based on proposals from the Safety Advisory Group for the establishment of a central structure responsible for safety to serve as a powerful advisory group for top management, and is located in Terminal 1 at Haneda Airport. The CS Improvement Committee was established in April 2007 to reflect accurately the desires and opinions of our customers. The CSR Committee was established in April Since then, the JAL Group has worked in unison to promote CSR activities. Directors responsible for each business area serve as CSR Committee members, with the executive offi ce located in the Corporate Planning Bureau. No full-time department related to CSR has been established: we have worked to spread awareness throughout the group that each individual department is responsible for CSR. General Meeting of Shareholders CSR Committee Global Environment Working Group/ Environmental Sub-Committee Safety Enhancement Task Force Corporate Auditor of the Board Board of Directors Corporate Compliance & Business Risk Management Committee Corporate Auditors President CS Steering Committee JAL Midterm Revival Plan Steering Committee Strategy Conference Corporate Safety Division CS Improvement Committee JAL Group Management Board Alliance Steering Committee Flight Operations Division Engineering & Maintenance Division Cabin Attendants Division Airport Operations Division Cargo & Mail Division Passenger Sales & Marketing Division 9

12 CORPORATE GOVERNANCE Internal Control Systems Basic Principles Through fair competition, the JAL Group fulfills the economic role of providing a good product for which it obtains profi ts by ensuring operational safety. We also aim to be a corporate group that contributes on a broad basis to society. As a result, the company established its Basic Policy on Internal Control Systems in line with the rules laid down in Japanese corporate law in order to ensure the validity and effectiveness of operations, the authenticity of fi nancial reports and compliance with related laws and regulations. The Safety Enhancement Task Force, which establishes policies and responses to operation risk. This met on 21 occasions during fiscal 2006 The Corporate Compliance and Business Risk Management Committee, which establishes policies and responses to business risk. This met twice in fiscal 2006 Information gathering related to risk management and channels of reporting have been established and divided into standard and emergency situations, while precautionary measures and timely reporting systems have been set up for cases when incidents occur. The company has also laid down rules stipulating the responsibility of the company directors in cases where emergency situations arise. JAL Group Internal Control Systems General Meeting of Shareholders Information Security and Protection of Personal Data 1. Establishing the System and Structure Audits by Corporate Auditors Board of Corporate Auditors Corporate Auditor Bureau Audits Board of Directors President Risk Management System In addition to basic policies and rules common to the whole group, the company has established a set of standards for informationsecurity measures in compliance with ISO This protects JAL computer systems against data leaks and tampering, service outages and computer viruses. Each department also conducts its own checks to ensure that relevant in-house procedures conform to these standards and reports its circumstances to an information-security subcommittee. Corporate Compliance & Business Risk Management Committee Safety Enhancement Task Force 2. Employee Education and Development Business Risk Prevention Task Force Information Security Task Force Business Risk Crisis Management Task Force Flight Safety Steering Committee Operation Risk As well as implementing e-learning-based training for all JAL Group staff, the company promotes educational activities concerning data leaks as part of our risk management. Internal Audits Auditing Division Audits Head Office, Branch Offices and Group Companies 3. Gaining Accreditation JAL Group companies are actively engaged in activities aimed at acquiring various forms of accreditation, including the Privacy Mark, a Japanese certification granted to private enterprises that adopt sufficient measures to properly protect personal data, and the Information Security Management System (ISMS) standard. In May 2007, placement agency JAL Business Co., Ltd. and cargo and logistics enterprise JAL Logistics Inc. were awarded the Privacy Mark. Risk Management System At JAL, we divide risk into two broad categories: risk from engaging in air transport (operation risk) and risk from other business operations (business risk). We have established two councils made up of board members to manage risk: Internal Whistle-Blowing In April 2006, JAL established a system for internal whistle-blowing in line with the enforcement of the Whistleblower Protection Act. In addition to widely publicizing this system throughout the JAL Group, we take steps to respond in a timely and appropriate manner to protect the privacy of the informant where such information has been brought forward. The company has also established liaison desks 10

13 relating to human rights and sexual harassment for the purposes of receiving enquiries and listening to complaints and grievances of group employees. Audits Group Hotline (Operations Supervision Division) 1. Corporate Auditor of the Board In-house Response System (Timely and proper handling through cooperation between each division) , telephone JAL Group employee Sexual Harassment Liaison Desk (Human Resources) Each year, the corporate auditors attend important meetings with the JAL Board of Directors. In addition, along with staff of the Bureau of Corporate Auditors, they audit approximately 100 corporation departments, operational branch offi ces and group companies and report the results to the CEO. They also exchange information with internal-control divisions and auditing companies, and hold meetings three times a year with full-time auditors at JAL subsidiaries to share information with the aim of enhancing and strengthening corporate auditing. The JAL Group is moving to strengthen the overall auditing system, including that at Japan Airlines International Co., Ltd., where in addition to two auditing-operations offi cers assisting the auditors, the company has appointed fi ve group auditors to audit 26 subsidiaries that contract operations from Japan Airlines International. Accounting Audits We conduct audits at the divisional level (each operational base) to ensure that procedures for complying with accounting regulations and standards are being followed. Group Audits We audit each group company to promote business operations based on group management practice and the operational mission given to each company. This is also performed to improve each company s internal controls, compliance and risk-management functions. Environmental Audits We audit the entire group with the objective of promoting business operations based on compliance with environmental laws and ordinances in addition to group policies, rules and regulations related to environmental issues. Safety Audits The in-house safety auditors verify safety-related operational procedures from an independent third-party stance. Apart from operations in the cockpit and passenger cabin, all safety-linked operations from ground handling at the airport to operations at JAL headquarters are subject to these audits. If problems are found, timely corrective measures are taken and a report submitted to top management. Audits of 22 domestic branches, 17 overseas branches and 24. Compliance At the JAL Group, we view compliance as an important function of the internal-control systems and at the same time position compliance as a CSR fundamental. The company interprets compliance to mean not merely adherence to laws and ordinances but conforming to internal rules, social norms and agreements decided in contract (or amongst ourselves), and through this to comply with the requests and demands of society and increase corporate value. 2. Internal Audits Improving corporate value To strengthen internal control and check functions, the JAL Group implements the following internal audits. Yearly assessments and reviews of areas subject to audits and audit methods are conducted. Operational Audits Departmental We audit general operations at the department and office levels, focusing on their overall area of operations. Operational Audits Specified Areas We select a subject area and audit across companies and organizations with respect to group policies, systems and management. Fiscal 2006 saw audits carried out of risk management in sales activities and information-security response status. Winning the trust of society Realizing corporate ideals Promoting sincerity The ongoing practice of sound business activities 11

14 FEATURE: Becoming an airline that sustains stable profits and is the first choice for every traveler and shipper Japan Airlines will be renewing its fleet, including actively introducing highly economical medium- and small-sized aircraft, to ensure that it seizes new business opportunities and uses them to empower sustainable corporate growth. Principal among these opportunities are the expansion of Haneda Airport, the planned inauguration of scheduled international flights to and from that airport, as well as the increase in the number of slots at Narita Airport, scheduled for In addition, we will be taking steps to enhance competitiveness by providing higher-quality products and services, a prime focus being the introduction of First Class on domestic routes and Premium Economy Class on international routes, with emphasis on routes with high demand from business passengers. With this aircraft downsizing and our Premium Strategy as the main pillars, we are building a very robust business foundation that will be able to generate stable profits without excessive dependence on demand growth. Aircraft downsizing BOEING-787 We will be expediting the retirement of aircraft, including widebodies such as the conventional Boeing 747, which we have operated for many years, and in their stead we will actively introduce strategic cutting-edge small and medium-sized aircraft such as the Boeing 787s and Boeing s, our aim being to enhance the competitiveness of our products and services and to cut costs. The Boeing 787 is relatively light because of its use of carbonfiber composite materials, giving it superior fuelefficiency and a long range. Thus, despite being a medium-sized aircraft, it can fl y directly from Japan to destinations such as the U.S. East Coast and Europe in the same way as widebody jets. It is our intention that the JAL fleet of smalland medium-sized airliners will be gradually unified into these Boeing 787s and strategic small-capacity Boeing s. As a result of accelerating downsizing in this way, the proportion of large-sized aircraft in the JAL fleet will be reduced rapidly, the ratio on international routes where the cost-cutting impact will be particularly great expected to decline significantly from 58% at the end of FY2006 to 39% at the end of FY2010. In addition, downsizing will lead to reduction in average number of available seats per aircraft, but the number of seats allocated designed for business passengers will increase and load factors will rise, making it possible to achieve a substantial increase in profitability. From 2010 onwards, when there will be a steep jump in the number of airport slots in the Tokyo metropolitan area, Aggressive Introduction of Medium/Small Size Aircraft and Accelerate Retirement of Older Aircraft Medium/ Small-size aircraft 71% Medium/ Small-size aircraft 79% BOEING Large-size aircraft 29% FY06 (E) FY07 E FY08 E FY09 E FY10 E Large-size aircraft 21% Large fleet Medium fleet Small fleet (including regional fleet) 8 models* 7 models* Start introduction: 787(FY08~), New regional jet (FY08~) Complete retirement: MD87(FY07), 747(FY09), MD81(FY10) Start retirement: 767(FY08~), / (FY10~) Introduction: 85 aircraft Retirement: 64 aircraft Note: International passenger operations fleet plan, Domestic passenger operations fleet plan, see appendix for large/medium/small fleet breakdown 12

15 our ability to offer more frequent services mainly with our small and medium-sized airliners will further enhance both customer convenience and our profitability, and will strengthen our resilience with regard to the risk of fluctuations in demand. Cost Restructuring Effects by Fleet Downsizing Effective Seat Supply by Changing Class Mix (Available Seat: FY06 as 100) Model case: Europe route (325 seats) ER (292 seats) Profitability improvement effect of approx bln per year/per route <Cost Restructuring> Fuel cost -7.0% Airport facility usage -1.5% Others -1.5% Revenue Operating Income Cost -1% Cost -10% Revenue Operating Income Cost (FY06=100) FY06 (E) FY07 E FY08 E FY09 E FY10 E Medium Term Revival Plan F+C+YP Y TTL IP yield Before fleet downsizing After fleet downsizing Note: F: First Class YP: Premium Economy C: Business Class Y: Economy The Premium Strategy Since the 9/11 terrorist attacks on the United States in 2001 there has been a succession of events that have shook the world, such as the Iraq war and the SARS outbreaks, and these have more than ever exposed the airline industry to the risk of fluctuations in demand. In general, tourist traffic is especially susceptible to risk of this kind, and it takes longer time before demand recovers. In contrast, demandfluctuation risk is relatively small in the case of business passengers because demand has been growing firmly on most routes. Demand for business travel between Japan and other parts of Asia is expanding particularly robustly, boosted by factors such as the increasingly rapid pace at which Japanese companies are establishing operations in the BRICs countries and expansion of trade and business outsourcing with these countries. Worthy of special note is China, with its rapidly expanding economy and prospects of upsurges in business from the Beijing Olympics in 2008 and the Shanghai World Expo in Business travel in both directions between Japan and China is expected to show strong growth. Amid this scenario, for JAL to ensure stable growth of revenues, it must address the key issue of establishing itself as the first-choice airline for those business travelers. Cognizant of this, we have made our Premium Strategy a core pillar of our FY Medium-Term Revival Plan, and are endeavoring to enhance our premium-quality products and services targeted principally at business and other highyield passengers. On domestic routes, we are introducing First Class, making JAL the first Japanese airline to offer this highest class domestically. This is being done to satisfy the desire of our valued passengers for a service that exceeds the level of our Class-J service, and offers the highest level of service. On international routes, meanwhile, we are introducing Premium Economy Class to cater to the wishes of business passengers who usually use Economy Class for a little more comfort than in ordinary Economy Class cabins. Another step forward in the strategy was JAL s joining of oneworld in April 2007, a global alliance of the world s finest-quality airlines. This has raised the level of service we provide yet further, by offering an array of benefi ts that include greater convenience in the exchange of air miles and availability of connecting flights, the use of airport lounges in cities worldwide, priority check-in services, and 260 thousand staffs to offer support around the globe. First Class (Domestic) Premium Economy (International) 13

16 REVIEW OF OPERATIONS International Passenger Operations Progress was made in rebuilding the route network to better meet trends in demand and place greater emphasis on profitability. Though enhancing efficiency and services by such means as shift to more profitable routes and aircraft downsizing, our passenger load factor recorded a 1.7 point year-on-year growth. 14

17 Activities and accomplishments during the term Route operations Taking advantage of the outcome of the air transportation agreement between Japan and China reached in July 2006, we increased flights on routes such as Tokyo-Shanghai and Tokyo-Guangzhou and expanded codesharing operations with other airlines, enhancing still further what was already the largest network between Japan and China. We increased flights on routes with heavy business passenger demand, such as Tokyo-Delhi and Tokyo-Moscow, while suspending flights on routes with low ratios of business passenger demand, such as Osaka-Los Angeles and Tokyo-Las Vegas. The fleet was adjusted by downsizing to Boeing 777s on almost every European route, thereby reducing costs and raising load factors. Such efforts in selection and concentration of routes and aircraft downsizing to match the scale of demand led to a significant increase in profitability. We also transferred some Asian routes, such as the Jakarta route, to JALWays, a Group s less cost airline, so as to bolster costcompetitiveness still further. Marketing Passenger comfort was enhanced still further by increasing the number of routes on which aircraft are fitted with the popular JAL SHELL FLAT SEAT in Executive Class, and inaugurated exclusive security lanes at Narita International Airport to offer smoother security check for First Class passengers and frequent fl yers for the first time at international airports in Japan. Service was also enhanced in the sphere of in-flight catering. For example the Takitate Gohan (freshlycooked rice) service, which has been well-reputed on European and North American routes, was also started on some Southeast Asian routes. In addition we catered vigorously to business demand by further enhancing services to business travelers. Steps taken included making improvements to the JAL Corporate Flight Merit program for companies, and providing the With JAL You Can Choose! Europe/Mainland US Routes Okaeri Service (free limousine service from the arrival airport) and the JAL China Business Gateway Program to support travelers making business trips to China. As a result of the enhanced effi ciency of route operations, passenger capacity fell by 9.5% in terms of available seat-kilometers, but demand fell by only 7.2% in terms of revenue passenger-kilometers, with the result that the passenger load factor showed a year-onyear improvement of 1.7 points, to 71.1%. Revenues rose by 5.0% year-on-year, to billion, bolstered by a 13.1% increase in passenger yield as a result of factors such as the increase in business demand, the revision of fares and the addition of fuel surcharges. Future Development and Strategy: Medium-Term Revival Plan Under the FY Medium-Term Revival Plan we will make every effort to ensure that we seize the business opportunities presented by the planned increase in takeoff and landing slots at Tokyo International Airport (Haneda) and Narita International Airport in 2010, doing so by rebuilding our business foundation and enhancing the competitiveness of our products and services. In fiscal 2007 we will increase the numbers of flights on the New York and Paris routes, where business passenger demand is strong, and also further expand fast-growing routes to China, Russia, India, and Vietnam. At the same time we will suspend operations or reduce flights on certain routes such as Tokyo-Zurich. We expect these steps to improve profi tability by 7 billion a year. We have also been placing emphasis on strengthening measures for our high-yield premium passengers. On April 1, 2007, we established our Corporate Sales Center and Priority Customer Desk for both international and domestic routes, strengthening the sales structure for corporate customers and priority individual customers. On April 1, 2007, we offi cially became a member of oneworld, the major global alliance of the world s highest-quality airlines, including American Airlines and British Airways. This should enable us to boost business performance by expanding our network and at the same time to improve services substantially in such areas as e-ticketing, mileage member services, airport lounges, and passenger connection services. (y/y)(%) (yr/yr)(%) 20 ASK -9.5% Revenue Analysis International Passenger Impact of FOREX APP. +1.9% RPK -7.2% Yield 13.1% Revenue 5.0% Revenue bln (y-y bln) Load Factor 71.1% (y-y +1.7%pt) Demand and Supply of International Passenger by Routes RPK ASK Americas Hawaii Europe S.E Asia Oceania Guam Korea China 15

18 REVIEW OF OPERATIONS Domestic Passenger Operations Demand by individual travelers has been slow to recover, with particularly lackluster recovery in business travel. Supply increased by 0.9% year-on-year, but demand rose by only 0.8% in terms of revenue passenger-kilometers. 16

19 Activities and accomplishments during the term Route operations In domestic passenger operations the numbers of flights and the aircraft used were fine-tuned to match changes in demand according to season and time of the day. With the key aim of operating the optimum aircraft at the optimum frequency in each demand time-band, in November 2006 we inaugurated the Weekend Big timetable in which larger aircraft were used and the frequency of fl ights was increased on Saturdays and Sundays on certain routes, for example from Haneda to Sapporo, Kagoshima, Kumamoto, and Okinawa. This both boosted customer convenience and maximized revenues. We also expanded our less-cost operating structure by transferring the operation of the small aircraft MD81 to Group airline JAL Express, and in March 2007 we took steps to enhance profi tability still further by inaugurating highly fuel-efficient next-generation Boeing s on the Haneda-Yamaguchi/Ube and Haneda-Miyazaki routes. Marketing The Class-J seats, which have enjoyed considerable popularity among customers since their introduction in 2004, were increased in number on large and medium-sized aircraft and were also fi tted progressively on smaller planes such as Boeing 737s and MD90s. Additionally, since October the JAL IC Check-in Service, which enables passengers to access boarding gates directly without the need to go to check-in counters or have boarding passes issued, has also been made available to passengers on package tours. Fares were increased as a means of countering high fuel costs, but on the other hand, we introduced the new special Sakitoku (Advance) Discount Fares for people booking up to 28 days in advance, and advertised it extensively. We also widened the available usage periods of Bargain Fares, Birthday Discount Fares, and other discount fares, in order to stimulate demand. In spite of implementing these measures, demand was slack among individual passengers and among business travelers in particular. In consequence, supply was increased by 0.9% year-onyear in terms of available seat-kilometers, but demand rose by only 0.8% in terms of revenue passenger-kilometers. Passenger yield increased by 1.5%, and revenue was up by 2.4% year-on-year, to billion. Future Development and Strategy: Medium-Term Revival Plan We will suspend underperforming routes in line with one of the key points of the FY Medium-Term Revival Plan, namely to shift to highly profi table routes and strengthen total product competitiveness. In carrying this out, nothing will be treated as sacrosanct, and we are projecting an improvement of some 6 billion in revenues. In addition, in December 2007 we will introduce First Class on major domestic routes such as the Haneda-Itami and Haneda-Fukuoka routes, thereby increasing passenger yield. On these trunk routes, passengers will be able to choose from three classes of seat: ordinary, Class-J, and First Class. Also, fiscal 2007 will see the active introduction of Boeing s, and by doing this primarily on routes into and out of Haneda, our competitive edge will be enhanced. Meanwhile, as part of our ongoing steps to increase operating effi ciency by renewing our fleet, during fiscal 2007 all our MD87 airliners, which totaled eight at the outset of the term, will be retired. In addition to these measures, profitability will be improved by the use of a seat-management system and fleet optimization system, and we are expanding the JAL Dynamic Package, which enables customers to create and book packages that include domestic flights and accommodations on a website. We are also implementing an array of promotional campaigns. Thanks to measures such as these, we project a better performance than in the previous year in terms of passenger numbers and passenger yield. (y/y)(%) ASK 0.9% Revenue Analysis Domestic Passenger RPK 0.8% Yield 1.5% Revenue 2.4% Revenue bln (y-y bln) Load Factor 64.0% (y-y ±0%pt) 17

20 REVIEW OF OPERATIONS Activities and accomplishments during the term Route operations & marketing An active program of conversion of passenger Boeing s to all-cargo transport freighters was implemented to improve fuel effi ciency and enhance profi tability, and we strengthened the route network by bringing a freighter into service to Manila, and by inaugurating late-night cargo fl ights to Shanghai from Kansai International Airport. In regard to tie-ups with other operators, we formed an agreement with Florida West Airlines, a specialist airfreight company, to meet demand for the shipping of cargoes into and out of Miami and Dallas. As for inland China, we supplemented the existing truck forwarding service by the start of an airline forwarding service in partnership with China Eastern Airlines. The JAL Group s total cargo transportation volume fell by 0.6% year-on-year in terms of revenue ton-kilometers, but factors such as increased fuel surcharges enabled the yield to rise by 6.1% and thus revenue to increase by 5.5%, to billion. Future Development and Strategy: Medium-Term Revival Plan With regard to large-sized freighters, we will continue our steady switchover to the fuel-effi cient Boeing transport freighters and will fi rst introduce the medium-sized Boeing 767 freighter. We are aiming to build an effi cient operating structure designed to correspond with the scale of demand on routes. In addition, by making it possible to operate direct flights on routes to the U.S. West Coast, we will reduce flight times substantially, and reduce costs. International Cargo Operations Cargo exports to Europe slackened off, but recovered to North America, while shipments to China remained robust. On the import side, demand was sluggish for cargoes from Europe and Southeast Asia. Overall, total cargo volume fell by 0.6% year-on-year in terms of revenue ton-kilometers. 18

21 Airline-related business In airline-related business, in-flight catering companies suffered declines in revenue as a result of sluggish restaurant business, but increased their profits by boosting productivity, thus cutting costs. Companies engaging in the supply of electricity to aircraft achieved revenue growth as a result of factors such as increased income from the power-supply business and the expansion of management and maintenance business commissioned at Narita and Kansai International Airport. In consequence, revenues in this segment totaled billion, with operating income of 8.3 billion. Travel Services Business In the travel services segment, overseas travel business increased on tours to China and Europe, but the revision of routes in international passenger operations led to a reduction of supply capacity on routes to resort areas, with the result that there were declines in both the number of passengers handled and revenues. Meanwhile, in domestic travel operations there was growth in revenues as a result of increases in unit prices for tours, but profi t fell as a result of enhancements made to product content and higher purchasing costs. As a result, revenues in this travel services business segment totaled billion, with an operating loss of 800 million. Credit Card and Leasing Services Business JALCard used a variety of measures to recruit new cardholders, leading to an 11% year-on-year increase in their number, which rose to approximately 1.76 million. Achievements such as this led to substantial growth in business volume and to increased revenues. Total revenues in this segment totaled 65.8 billion, and operating income totaled 5.8 billion. Other Businesses In trading and distribution business, there were brisk sales of aircraft parts to customers outside the JAL Group, and the BLUE SKY domestic airport sales outlets recorded sales growth. In hotel business, meanwhile, revenues declined overall, because in spite of having won new commissions to manage nine hotels since April 2005, this was offset by factors such as the sales of Hotel Nikko Narita and Kawasaki Nikko Hotel, and the switch from a business model of managing self-owned hotels to one of managing hotels on a commissioned basis. As a net result of these factors, revenues in this segment totaled billion, and operating income totaled 7.2 billion. Related Operations In related operations, numerous Group companies performed well during the term. As a result, JAL Group revenue in this segment (after consolidation adjustments) rose by 2.5% from the previous fiscal year, to billion. 19