ANNUAL REPORT

Transcription

1 ANNUAL REPORT FISCAL YEAR ENDED MARCH 31, 1996

2 One of the world s premier carriers, Japan Airlines Company, Ltd. (JAL) and its affiliates offer a growing network of services to over 70 international and domestic locations. These services encompass areas as varied as hotels and resorts, catering, maintenance, cargo, information and communications, and trading, as well as air travel. The company has endeavored to adapt to the changing economic climate and increase its competitiveness and managerial efficiency, while upholding its firm commitment to superlative service and total safety. Seizing new opportunities presented by the three ongoing domestic airport projects, the company remains committed to adhering strictly to these two overriding principles, in the future as in the past. CONTENTS Consolidated Financial Highlights... 1 Consolidated Operating Highlights... 1 Message from the President... 2 Aiming for World-Class Competitiveness... 5 Growing Revenues, Lower Costs... 7 Customer Service Initiatives Maintaining the Highest Levels of Safety Review of Operations Passenger Operations Domestic Passenger Operations International Cargo Operations Other Operations JAL Route Network Contributing to Society Consolidated Six-Year Financial Summary Management Review and Analysis of Financial Position Consolidated Financial Statements and Notes Non-Consolidated Financial Statements and Notes Consolidated Subsidiaries JAL and Its Subsidiaries and Affiliates Directory Corporate Organization Board of Directors Investor Information... Inside Back Cover

3 CONSOLIDATED FINANCIAL HIGHLIGHTS JAPAN AIRLINES COMPANY, LTD. AND CONSOLIDATED SUBSIDIARIES FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994 Thousands of Millions of yen U.S. dollars For the Year: Operating Revenues 1,449,041 1,348,417 1,256,612 $13,670,198 Operating Expenses 1,431,726 1,361,048 1,286,240 13,506,849 Operating Income (Loss) 17,315 (12,631) (29,627) 163,349 Net Income (Loss) (9,098) (14,620) (37,463) (85,830) Net Income (Loss) Per Share (yen and dollars) (5.11) (8.22) (21.06) $ (0.048) At Year-End: Long-Term Debt 1,091,993 1,171,365 1,155,808 $10,301,820 Stockholders Equity 268, , ,837 2,531,273 Total Assets 2,111,053 2,155,761 2,149,512 19,915,594 Shares Issued (thousands) 1,778,943 1,778,943 1,778,943 Note: The U.S. dollar amounts in this annual report are translated from yen amounts, solely for convenience, at 106=US$1.00, the exchange rate prevailing on March 31, 1996 (see Note 2 to the Consolidated Financial Statements). CONSOLIDATED OPERATING HIGHLIGHTS JAPAN AIRLINES COMPANY, LTD. AND CONSOLIDATED SUBSIDIARIES FOR THE YEARS ENDED MARCH 31, 1996 AND Change (%) Revenue Passengers Carried: Domestic 20,221,678 19,365, (number of passengers) International 12,204,363 10,869, Total 32,426,041 30,235, Revenue Passenger-Km: Domestic 16,349,218 15,703, (1,000 passenger-km) International 60,371,785 52,824, Total 76,721,003 68,527, Revenue Passenger-Load Factor: Domestic (0.6) (%; percentage point change) International Total Revenue Ton-Km Performed: Domestic 1,535,612 1,479, (1,000 ton-km) International 9,435,444 8,646, Total 10,971,056 10,125, Revenue Weight-Load Factor: Domestic (0.3) (%; percentage point change) International (0.3) 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. Total (0.2) 1

4 MESSAGE FROM THE PRESIDENT For JAL, the fiscal year ended March 31, 1996 (fiscal 1996) proved to be a very important year of transition. The results of the implementation of the fiscal 1995 emergency plan to boost revenues while savagely cutting costs became apparent. Volumes of passenger and cargo traffic on both domestic and international routes showed excellent growth. Consolidated income at the operating level was restored after four years of substantial losses. We have set the stage for a solid return to growing profitability over the coming years. INTERNATIONAL PASSENGER NUMBERS SET RECORD HIGH Looking at the general world economic picture during fiscal 1996, the U.S. and European economies both showed signs of flagging. In contrast, the Asian economic boom continued. In Japan, low levels of private-sector capital investment and flat consumer spending held the economy back and the expected recovery failed to materialize. However, the general economic malaise did not affect JAL s business badly. Thanks to the appreciation of the yen during the first half, international tourist and business travel demand soared. Total passenger numbers easily surpassed the figure for fiscal 1995 itself a very good year growing 7.2 percent to a record 32.4 million people. International cargo demand, domestic passenger and cargo revenues all displayed good growth. BUSINESS RESULTS FOR FISCAL 1996 Total consolidated revenue ton-km performance (including all domestic and international passenger and cargo traffic) rose 8.3 percent over the previous year to 10,971.0 million tonkilometers. Consolidated operating revenues increased 7.5 percent, rising to 1,449.0 billion (US$13.7 billion). Higher personnel costs and the increased volume of business were mainly responsible for the 5.2 percent rise in consolidated operating expenses, to 1,431.7 billion (US$13.5 billion). After four years of losses, we restored the company s profitability at the consolidated operating level, posting operating income of 17.3 billion (US$163.3 million). The net loss for the year amounted to 9.0 billion (US$85.8 million). Unfortunately, this level of loss still does not permit us to pay a term-end dividend. LOOKING BACK: TEN YEARS ON FROM PRIVATIZATION Ten years have now elapsed since JAL passed out of the public and into the private sector, a period that has witnessed momentous change. In Japan, the LDP s long-standing monopoly of political power ended and the bubble economy collapsed. In its wake, widespread concerns about the health of Japan s financial system surfaced. Together with the inexorable appreciation of the yen, these factors conspired to make Japan s post-war economic growth model largely defunct. In 1995, the Kobe Earthquake and Aum affair heavily dented the Japanese sense of security about their society. The old confidences have been shattered from both corporate and individual perspectives leaving great uncertainty over Japan s future path. This pattern of monumental change was also evident abroad. The fall of the Berlin Wall, the subsequent collapse of the Soviet Union, the reunification of Germany and the end of the Cold War were perhaps the most important political events. Combined with the Gulf War and the formation of the EU single market, all these events 2

5 have made the past decade one of the most important in the four since the end of WWII. Turning to business, Japanese companies must now compete in the global marketplace. JAL has been in the thick of the forces of international competition ever since its privatization. We have had to undertake major restructuring to make our services internationally cost-competitive and adapt to the radically new environment. It is my firm belief that privatization provided the necessary impetus for the changes undertaken. In the domestic aviation market, various restrictions surrounding airport slots, particularly at Tokyo and Osaka, have in the past held up the wave of competition and structural reform that has swept through the international sector. However, various recent developments promise to increase competition: the opening of Kansai Airport in 1994, the new discount fare banding regulations that became effective in June 1996, and the planned extensions to Haneda Airport in KEYS TO SUCCESS IN THE NEW AGE OF COMPETITION The planned extensions to Haneda Airport should expand the number of take-off and landing slots per year from the current figure of 210,000 to around 230,000. Obtaining a good proportion of these constitutes an unrivalled opportunity for JAL in our bid to attain and maintain a one-third share of the domestic market. However, even assuming that we can acquire the maximum number of these extra slots and increase our number of daily return flights out of Haneda by, say, 25, this will only afford us a 28 percent share of all Haneda flights our current share is 21 percent. Nevertheless, we must aim to do this. Narita Airport is JAL s main international base. As such, we wait in hope that its capacity can be fully utilized at some point with the construction of a new runway. As a potential giant hub for the Asian region, its full development has important significance for Japan. On June 1, 1996 we announced a new mid-term business plan to transform JAL into a world-class global airline. The main aims and action points contained in the plan for the period up to 2000 as they relate to the separate parts of JAL s business are as follows. INTERNATIONAL PASSENGER OPERATIONS: with planned average increases in numbers of flights per year of between three and five percent, we will cater to passengers desires for lower airfares by increasing the proportion of wet-lease flights managed by our subsidiary Japan Air Charter Co., Ltd. (JAZ). This, combined with greater outsourcing for services, will improve JAL s international cost competitiveness. We plan to expand the number of international trunk routes to Europe and the U.S. out of Kansai Airport, as well as increasing the number of regional connections. We are examining opening new routes within Asia to Delhi, Hanoi, Yangon, Phnom Penh, and a variety of destinations within China. 3

6 DOMESTIC PASSENGER OPERATIONS: the plan calls for an average increase in numbers of flights per year of five percent. We will make at least three flights per day on all existing high-demand routes, bringing flight frequencies on all routes more in line with those of competitors. INTERNATIONAL CARGO OPERATIONS: we plan to achieve average volume increases of three percent per year. We will supplement the use of JAL s own fleet of eight dedicated freight aircraft with the maximal use of hold space on scheduled passenger flights, as well as joint-use and subcontracted capacity. CAPITAL INVESTMENT: over the next five years, we plan to introduce 32 new aircraft to the JAL fleet and retire 14 planes from service, taking the total fleet from 138 to 156 planes. In April 1998 we plan to bring the Boeing B into service. COST REDUCTION PROGRAM: by contracting out some functions and various other measures we plan to reduce employee headcount to 17,000 by the end of fiscal 1998 (March 1998). At the same time we will advance the company-wide program of business process re-engineering currently ongoing. By making fundamental changes to remuneration systems (the first time in 30 years for the company), we will improve JAL s structural competitiveness. To shift costs offshore, in February 1996 we began operations of a servicing and maintenance facility at Amoy, China. FINANCIAL RE-ENGINEERING: by increasing the utilization of the current fleet and making better use of parts and equipment produced externally, we will make a higher return on the investment made in the current fleet. Further, by freezing new investment in affiliated businesses and cutting the amount of capital invested in the core business, we plan to hold down interest-bearing debt and thus put our finances on a stronger footing. OUTLOOK While the Japanese economy is showing signs of gradual recovery, uncertainty makes the general outlook difficult to predict. The general situation does not warrant optimism, with competition intensifying and prices being forced downwards. In this harsh business environment, it is imperative that we forge on with the company-wide program of restructuring to make JAL more costcompetitive. Over the coming year, we will introduce the brand new Boeing B777 Star Jets to our fleet. We also plan to open up several new international routes to expand the JAL network overseas. A variety of service improvement initiatives will center around upgrading Executive Class, which is targeted primarily at business passengers. In the domestic market, we will vigorously promote the new fares to stimulate demand and increase our market share. JAL s mission is to strive to provide an airline service second-to-none, combining uncompromised safety with a quality of service designed to make JAL our customers consistent airline of choice. While this remains our fundamental management policy, we must work to make our products, service and cost structures among the most competitive in the aviation industry. I would like to take this opportunity to thank all our stockholders for your support, and I ask you to continue supporting us in all of our endeavors. July 1996 Akira Kondo President 4

7 Aiming for World-Class Competitiveness JAL HAS ITS SIGHTS FIXED ON BECOMING A WORLD-CLASS COMPETITIVE AIRLINE. FUNDAMENTALLY, THIS MEANS OFFERING AN UNRIVALLED SERVICE AT A PRICE COMPETITIVE WITH OTHER AIRLINES. TO ACHIEVE THESE TWO MAJOR AIMS, JAL IS...

8 ...IMPLEMENTING A COMPREHENSIVE BUSINESS PLAN TO REDUCE COSTS THROUGHOUT THE COMPANY. A GREATER USE OF WET-LEASE FLIGHTS (BELOW) IS AN IMPORTANT ELEMENT OF THE COST-CUTTING STRATEGY. BOOSTING REVENUES THROUGH INNOVATIVE MARKETING CAMPAIGNS AND INCREASING CAPACITY IS THE OTHER HALF OF THE COMPETITIVENESS EQUATION.

9 AIMING FOR WORLD-CLASS COMPETITIVENESS Growing Revenues, Lower Costs During fiscal 1996, in a tough business environment, JAL took firm steps to boost revenues sharply, while at the same time undertaking a thorough operational restructuring to bring the company s international cost competitiveness up to the standard needed for a worldclass, global airline. The initial results of these efforts could be seen quite clearly in terms of higher income. Nevertheless, more progress is needed, and so JAL has encapsulated its two strategic goals product and cost competitiveness into a general business plan Challenge 21 covering the final years of this decade. RESTRUCTURING EFFORTS 4 The general business environment during the fiscal year under 2 review remained harsh owing to a number of factors. The anticipated recovery in the Japanese economy failed to materialize. The value of the yen remained high during the main holiday season, though it eased lower during the second half of the year. Most importantly, deregulation and market forces conspired to create greater competition and the trend towards lower prices continued. JAL s response to these conditions was to attack THE NUMBER OF JAPANESE TRAVELING OVERSEAS (Millions) Years Ended December THE NUMBER OF PASSENGERS TRAVELING OVERSEAS VIA JAL, JAA AND JAZ (Millions) Years Ended March Tourism Business Other 7 Source: Government white paper on travel the cost base using a variety of restructuring measures. First, a large cut in investment served to reduce depreciation and amortization costs and lowered the company s interest burden. Second, JAL squeezed its airportassociated costs and subcontracting expenses. On top of cutting back investment levels, the company also reduced the balance of interest-bearing liabilities and lowered its reliance on borrowed capital. The net result was a healthier balance sheet and a more stable supply of funds. The company plans to reduce the workforce to reach the 17,000 target by offering employees attractive voluntary early retirement and severance packages, by restricting annual salary raises and bonus payments, and by making reductions in recruitment numbers. The restructuring measures also applied to JAL s many affiliated companies. JAZ (Japan Air Charter Co., Ltd.) extended its wet-lease flight services that employ mainly Thai cabin crew to a wider range of routes, basing the new service around the proven Super Resort Express concept. As well as the holiday routes out of Fukuoka, Sapporo and Sendai, this expansion included the core Tokyo-Narita/Osaka

10 Honolulu and Tokyo-Narita Bangkok routes. Aggressive marketing campaigns and company-wide costcutting measures, such as those outlined above, together had a positive impact on the bottom line. Operating income for fiscal 1996 amounted to 17.3 billion, compared with an operating loss of 12.6 billion in fiscal However, there is still a lot of work to be done to improve earnings. NEW FARE-PRICING FLEXIBILITY During the year major reforms were made to the fare-setting regulatory regime. In place of the previous fixed-fare rules, the new pricing model sets an upper limit price the standard fare below which a percentage discount band varies according to passenger type. A typical maximum discount from the standard fare for adult passengers is 25 percent. This zone system gives airlines leave to set prices at their own discretion within well-defined limits. This translates to considerably more pricing freedom for fares on domestic routes. With international fares, a discount market already exists the main driving force in the market remains the high value of the yen. Its strength continues to tempt record-breaking numbers of individual tourists abroad year after year. JAL has taken advantage of this trend with the JAL Goku advance discount fare, which has grown very popular since its introduction in April INDEXED OPERATING COSTS PER AVAILABLE TON-KM (NON- CONSOLIDATED) (Note: 1992=100) NUMBER OF AXESS TERMINALS IN JAPAN (Thousands) JAL S BREAK-EVEN WEIGHT-LOAD FACTOR (%) NUMBER OF EMPLOYEES (JAL ONLY) (Thousands) Ground Staff Cockpit Crew Cabin Crew 8 PULLING IN THE TOURISTS The sudden appreciation of the yen from March 1995 onwards caused a stampede of Japanese holiday makers seeking cheap foreign vacations. During calendar 1995, a record-breaking 15.3 million Japanese traveled internationally. In fiscal 1996, JAL alone carried 10.7 million international passengers, 13.7 percent ahead of the previous year s volume. Routes to Southeast Asia were proportionately busier. For fiscal 1996, volumes in this sector rose 19.1 percent, with routes to Manila, Bangkok and Hong Kong particularly popular. Total nonconsolidated international passenger revenues increased 11.4 percent, international routes accounting for 63.0 percent of JAL s total non-consolidated revenues. The average seat occupancy on these routes over the year was 72.0 percent. Within domestic operations, despite introducing smaller aircraft on some of the regional routes, revenue growth for these less popular parts of the network remained flat. However, the core routes, such as Tokyo-Haneda Sapporo and Tokyo-Haneda Okinawa showed substantial increases in passenger volumes. Overall, non-consolidated domestic passenger volume for fiscal 1996 totaled 18.1 million people, 5.9 percent more than the figure for fiscal Average seat occupancy over the year was 59.3 percent. CONSTANTLY UPGRADING PRODUCT COMPETITIVENESS Making products and services continually that bit better lies at the heart of fulfilling the ever-

11 PRODUCT COMPETITIVENESS IS BEING BOOSTED BY OFFERING A GREATER VARIETY OF DISCOUNT FARES ALLIED TO SUCCESSFUL PROMOTIONAL INITIATIVES, SUCH AS THE RESOCHA CAMPAIGN. JAL S CUSTOMARILY HIGH LEVEL OF SERVICE IS THE OTHER CRUCIAL ELEMENT IN THE MIX. changing needs of customers. Delivering value to ensure customer satisfaction is critical to remaining a competitive global airline. Therefore, constant improvement is built into JAL s marketing and services development strategy. In line with this, JAL extended the Super Resort Express service to Australian route destinations. Coupon books packed with a wide variety of discounts for use on holiday were put on Super Resort Express services to Guam, Saipan, Honolulu and Jakarta. This extra value-added service was done in conjunction with the Resócha campaign undertaken during the year and helped to boost tourist demand on these routes. Another initiative was the operation of the JAL Euro Express Bus, which provides coach travel from selected European airports. Promoted in the JAL Europe 95 campaign, the number of coaches used in the service was increased from two to five during the year to meet increased demand. Two of the B aircraft introduced in 1995 acquired pet names, the Flower Jets, thanks to the 9 flower decorations of cosmos and gentian blooms painted on them. Similarly, the B777 aircraft introduced on domestic routes in April 1996 have been christened the Star Jets. With their fuselages painted with murals of star constellations, one aircraft features Sirius, one Vega and the third Altair. The JAL Dream Express service, which flew its last domestic flight back in December 1995, in its special eighteen month run clocked up 10,844 flights and carried around 2.63 million passengers. In cargo operations, a similar service concept, called Super Logistics, has been introduced in line with a new freight service philosophy launched in July Eight jumbo jet freight aircraft are being painted with the Super Logistics service logo. The core of this new philosophy is that customers diverse logistics requirements demand that JAL Cargo be not just a mover of freight, but offer a general distribution and logistics management service.

12 IMPROVING PASSENGERS IN-FLIGHT COMFORT IS JUST ONE WAY JAL AIMS TO ADD VALUE TO ITS SERVICE. NEW AIRPORT RECEPTION LOUNGES, UPGRADED SALES, RESERVATION AND CHECK-IN SYSTEMS AND SER- VICES SUCH AS PRIORITY GUESTS, WHICH RENDERS A SPECIAL SERVICE TO SENIORS, DISABLED PEOPLE AND THOSE FLYING WITH YOUNG CHILDREN, ARE OTHER REASONS WHY JAL PROVIDES AN EXCELLENT SERVICE.

13 AIMING FOR WORLD-CLASS COMPETITIVENESS Customer Service Initiatives JAL aims to couple unparalleled safety with an attitude towards service that makes the customer feel completely at ease. JAL s service includes a full complement of peripheral benefits that customers have come to expect. For example, JAL set up the JAL Service Center in January 1994 and has since started the frequent flyer programs JAL Sky Plus and the JAL Mileage Bank. Subsequent agreements with American Airlines (January 1995) and Air France (November 1995) have allowed passengers who have accumulated miles with these partner airlines to have them recognized in the JAL COMPARISON OF CUSTOMER INTENTIONS ON USING AN AIRLINE AGAIN (%) North America Europe Company A Company B Company C Company D Japan Airlines programs, and vice versa. The arrangements also allow JAL s loyal customers access to a wide range of benefits of the frequent flyer schemes of both partners. Furthermore, the schemes now benefit from the involvement of Nikko Hotels International and a host of other domestic and overseas hotels (262 in all). As a result of such initiatives, the two schemes claim over one million members. To upgrade airport facilities, JAL has installed new Executive Club Lounges at the airports in Jakarta, Amsterdam, Hong Kong, Frankfurt, San Francisco and Atlanta. In April 1996, JAL became the first Japanese airline to combine its domestic and international telephone reservation services, with a single toll-free number to call to book any JAL flight. JAL and its affiliates are constantly seeking to expand the route network. JTA (Japan Transocean Air Co., Ltd.) took on the Nagoya Yamagata and Nagoya Okinawa routes (May Asia/ Oceania Source: NIKKEI Business News ) and inaugurated a variety of new routes: Kansai Kagoshima and Kansai Oita (June 1995), and the seasonal Fukushima Obihiro route (July 1995). On the international side, the company increased the number of flights on the Kansai Ho Chi Minh route. Through code-sharing agreements with Thai Airways International, a JAL flight between Fukuoka and Bangkok began. Through a similar arrangement with Air New Zealand, a Fukuoka Auckland service commenced. Direct flights have also been introduced between Tokyo and Zurich and the city of Kona on the island of Hawaii, and between Nagoya and Vancouver. The new JALPAS/DII check-in system, installed throughout the domestic network by August 1995, enables passengers to check in for both outbound and return flights at any JAL desk, at any time on the day of departure, thus offering customers a much more convenient service. In June 1995, JAL seized an opportunity with the flourishing of multimedia applications centered on the Internet to create its own home page (location Not only does this provide a wide range of information on domestic and international flights and holiday packages, it also enables people to join the JAL frequent flyer schemes directly. From July 1, 1996, customers have been able to make domestic reservations using this site. It will be developed as a useful adjunct to the company s mainstream marketing activities.

14 JAL PLACES UNPARALLELED EMPHASIS ON SAFETY, SINCE AN AIRLINE S REPUTATION STANDS OR FALLS BY ITS SAFETY RECORD. INSTALLING THE LATEST TECHNOLOGY, JAL ENSURES THAT ALL PERSONNEL ARE FULLY TRAINED IN THE LIFE-SAVING ISSUE OF SAFETY PROCE- DURES AND THAT THE QUALITY OF AIRCRAFT MAINTENANCE IS SECOND TO NONE.

15 AIMING FOR WORLD-CLASS COMPETITIVENESS Maintaining the of Highest Levels Safety Safety is the utmost priority for any airline. Companies must be ever vigilant to see that high standards are maintained constantly. With over 120,000 flights totaling over 400,000 hours flying time every year, JAL regards safety for every minute of every flight as the most important issue that the company has to tackle. Over the past ten years JAL has instituted a variety of safety procedures and systems to raise safety levels. Modern simulators mimic a variety of emergency situations in periodic training sessions targeted at all flight and cabin crews (termed LOFT: Line-Oriented Flight Training). State-ofthe-art computerized electronics back up personnel training by ensuring that planes do not hit the ground (GPWS: Ground Position Warning System), and avoid mid-air collisions with other aircraft (ACAS: Air Collision Avoidance System). Other systems advise the pilot of potentially dangerous conditions, such as wind shear and flocks of birds. Naturally, all cabin crews, flight crews and ground staff are thoroughly drilled in emergency evacuation procedures. Engineering staff have a duty to make sure that safety equipment performance such as the inflation of life rafts and escape chutes, and safe mid-air engine shutdowns matches up to, and surpasses, the highest world standards. Aircraft crews bear most of the responsibility for safety in the air. Although JAL only has 2,615 cockpit crew (as of March 31, 1996), the company set up its own special internal training school for this select group, which includes training within large-bodied aircraft. JAL is currently installing next-generation electronic navigation systems (FANS: Future Air Navigation System), a move that will considerably enhance safety on board. Making use of links with sophisticated communications and navigational satellites, FANS not only permits high-quality two-way data and voice communications, but also allows pilots to plot their course freely without the need for pre-determined flight paths. From both a safety and an economic angle, this system presents enormous advantages over past technology. JAL will be the first Japanese airline to install FANS systems in four B aircraft to be used on flights bound for New York and San Francisco. The maiden flights are scheduled for

16 REVIEW OF OPERATIONS Domestic Passenger Operations 1996 RESULTS Thanks to the contribution of new routes to more regional destinations, demand comfortably exceeded last year s level. With the strategic goal of capturing a one-third share of the Japanese domestic market in mind, JAL continued to expand its domestic network and upgrade the quality and convenience of its service. Total passenger numbers rose 4.4 percent to 20.2 million people, revenue also increasing to billion (US$2.9 billion), 2.2 percent higher than the figure for the previous year. HIGHLIGHTS OF THE YEAR In June 1995, flight frequencies were raised on two routes: Kansai Kagoshima and Kansai Oita. A seasonal flight of four flights per week between Fukushima and Obihiro was initiated. The 150-seater B737- CONSOLIDATED DOMESTIC PASSENGER REVENUES (Billions of Yen) DOMESTIC REVENUE PASSENGER- KM & AVAILABLE SEAT-KM (Billions of Passenger-Km) ASK RPK 400 Flower Jet was introduced on the Kansai Kagoshima route in September To stimulate demand, JAL adapted its discount JAL Tobi-Sasuke fare to the new discount regulatory fare regime, raising the level of discounts available and promoting it vigorously. December 1995 saw the withdrawing of the popular JAL Dream Express service after a successful eighteen months service throughout Japan. The cheerful Disney characters painted on the aircraft s fuselage and the matching cabin decor contributed to high demand for the service and special in-flight sales of a range of associated products. Other successful campaigns during the year included the 95 Okinawa and JAL SKI 96 promotions. The new JALPAS/DII system facilitates quicker and easier checkin, boosting the convenience of the service for the customer. With the new discount airfare schedules JAL offers, families can book in advance on domestic and international routes and receive special discounts. 14

17 The first Boeing B777 Star Jet, which entered service in April To improve services, JAL completed the installation of the JALPAS/DII passenger check-in system at all domestic airport terminals. This allows passengers to complete check-in procedures for a same-day flight at any time during the day, at any available counter. In addition, passengers who are returning on a JAL flight the same day can complete the necessary formalities for the return portion of the journey at the same time. These features considerably enhance the convenience of the service JAL offers. DOMESTIC PASSENGER NUMBERS FOR JAL AND JTA (Millions) JAL JTA NEW DOMESTIC FARES SYSTEM In September 1995, the Economic Planning Agency introduced innovative deregulatory reforms aimed at widening the choice of airfares for consumers. These rules came into effect on June 1, JAL responded to this new zone system by dividing fares into three seasons peak, standard and off-peak. A new Advance 14 fare was also introduced that offers customers a 10-20% discount provided the ticket purchase is completed fourteen days before departure. Future deregulatory moves are anticipated to lower the number of routes monopolized by one airline. As the environment changes, JAL will adapt by differentiating its service on various key routes to compete more effectively for example, by increasing the number of flights on selected routes. 15

18 1996 RESULTS The strength of the yen induced large numbers of Japanese tourists to travel overseas, boosting demand in the international tourist sector. Combined with good growth in business traffic out of Japan, total demand easily surpassed the level in Passenger numbers rose 12.3 percent to 12.2 million people. Revenues also increased to billion (US$5.8 billion), 10.8 percent higher than the figure for fiscal HIGHLIGHTS OF THE YEAR JAL extended the advancebooking discount JAL Goku fare to the China and Vietnam routes to widen the variety of destinations for this popular fare, affording JAL a commanding REVIEW OF OPERATIONS Passenger Operations International CONSOLIDATED INTERNATIONAL PASSENGER REVENUES (Billions of Yen) presence in the discount market. The Mileage Bank frequent flyer scheme was further enhanced. Members can now pool their miles with those accumulated in the respective schemes of JAL s partner airlines, American Airlines and Air France. This enables customers to enjoy substantially improved benefits. By staying at Nikko International Hotels and other establishments, Mileage Bank members can now also gain miles. The company upgraded the level of cabin comfort in Executive Class on the Express service routes out of Kansai (to London, Paris and Los Angeles), extending the space between seats to 50 inches (127 cm). The Super Resort Express service was extended in April 1995 to JAL s Australian routes. The main Pacific destinations Honolulu, Guam, Saipan and Australia were jointly promoted in the Resócha campaign over the summer season. Another major marketing drive was the JAL Europe 95 campaign. The JAL Euro Express Bus service has augmented the attractiveness of this tourist package. The MD- 11s, or J Birds as they have been called, bear the motif of an endangered species of Japanese bird on their fuselages, illustrating JAL s concern with environmental issues.

19 JAL is the only Japanese airline to fly directly to the island of Hawaii (Kona). JAL s individual customer service, given with a characteristic warm smile and an attention to detail, helps to gain customer loyalty and thus secure repeat business. In April 1995, the Nagoya Manila route was inaugurated. Flight frequencies on the Tokyo Milan Rome, Tokyo/ Kansai Shanghai and Kansai Ho Chi Minh and a large number of other routes were increased at the same time. In November 1995, JAL increased flight frequencies on the Sapporo Honolulu, Tokyo São Paolo and Sendai Honolulu routes. In June 1996, JAL inaugurated a route joining Tokyo with Kona, on the island of Hawaii. JAL also gained further route network enhancements by virtue of codesharing agreements with Thai Airways International and Air New Zealand. SUBSIDIARY OPERATIONS: AN INTRODUCTION Japan Air Charter Co., Ltd. (JAZ) is an 80%-owned JAL subsidiary with a fleet of eight aircraft four DC-10s and four B747s. As well as operating regular weekly charter flights, JAZ manages JAL s scheduled routes from Japanese regional airports to Honolulu, and the INTERNATIONAL REVENUE PASSENGER-KM & AVAILABLE SEAT-KM (Billions of Passenger-Km) BREAKDOWN OF INTERNATIONAL PASSENGERS CARRIED BY ROUTE (Millions of Passengers) ASK RPK Korea/China Guam/Saipan S.E.Asia/Oceania Europe Trans-Pacific 17 Tokyo/Osaka Bangkok service, on a wet-lease basis. These services total 46 return flights per week. JAZ s staff complement of about 1000 people comprises mainly aircraft crew: head office and other service personnel account for a mere five percent of the total. JAL has a 90.5% stake in its subsidiary Japan Asia Airways Co., Ltd. (JAA), which celebrated its twentieth anniversary in August Since its first year of operations in 1976, JAA has doubled the number of flights, quadrupled the number of available seat-kilometers, and increased the number of farepaying passengers 4.4-fold, to 1.4 million passengers per year. Thanks to the breathtaking economic growth rates in Taiwan and the rest of Asia, JAA s business looks set to continue its steep climb. To add to the core Japan Taiwan routings, JAA plans to broaden its reach to include a network of shortdistance international destinations within Asia.

20 REVIEW OF OPERATIONS Cargo Operations 1996 RESULTS The speed of delivery that air freight offers helped JAL secure new business during the year. This included consignments of fresh fish from Fukuoka, melons from Kagoshima and the delivery of popular weekly magazines to Okinawa. The company also expanded its core mail traffic operations. Total domestic cargo volumes rose 3.3 percent to million tonkilometers, revenues rising 1.5 percent to 29.4 billion (US$277.4 million). The strong yen continued to boost imports into Japan, and freight exports to the U.S., Europe and Southeast Asia also demonstrated good growth. Total cargo demand rose 2.4 percent to 4,103.3 million tonkilometers, revenues rising to CONSOLIDATED CARGO REVENUES (Billions of Yen) International Domestic billion (US$1,528.3 million), 4.1 percent higher than the previous year. HIGHLIGHTS OF THE YEAR JAL has been able to improve services considerably following the completion of a new cargo terminal at Narita. To make the service more convenient for customers, JAL introduced a customer reservation pick-up service for imported freight to minimize waiting times. Freight handling systems were upgraded at the same time. In July 1995, JAL consolidated the operations of the Tokyo, Nagoya and Osaka cargo sales offices into a unified national operation. With a common logistics database and centralized space management systems, the new organization offers a substantially enhanced service. JAL has secured the services of Southern Air Transport Inc. as a subcontractor for storage and freight transport to meet booming demand. Additional capacity was introduced on the routes to Kuala Lumpur, Singapore and Paris. The Super Logistics logo emblazoned on this dedicated freight aircraft symbolizes JAL s new freight service philosophy to offer customers a general distribution and logistics management service. 18

21 Servicing and loading the JAL Cargo freight fleet. Cargo aircraft are modified so that loading can be done directly into the body of the aircraft after raising the nose. THE SUPER LOGISTICS STRATEGY In line with JAL s Super Logistics philosophy launched in July 1995, the company is in the process of painting the fleet of eight dedicated B747 freighters with the Super Logistics logo. The mid-term business plan for cargo operations covering the period to 2000 envisages utilizing these eight aircraft and space in the holds of regular passenger flights, with surplus demand being farmed out to third-party contractors. A system that can accommodate customer demands flexibly is essential. The tie-up with American Airlines has been extended to cover cooperation in cargo services in line with this goal. JAL is concentrating on a few strategic areas to differentiate its service. With the continued shift of production offshore AIR CARGO IMPORTS TO AND EXPORTS FROM JAPAN (Thousands of Tons) 1,200 1, REVENUE FREIGHT TON-KM PERFORMED (Billions of Ton-km) Imports Exports International Domestic into Southeast Asia by the big Japanese manufacturers, a demand for reliable, highquality freight space between Southeast Asia and the U.S./ European markets has arisen. At the same time, the company offers services such as guaranteed loading for exports out of Southeast Asia and a local delivery service to take freight from the receiving airport in the U.S. or Europe direct to the customer s door. JAL has worked on a cooperative development project in the domestic market with two airlines and a freight forwarder to provide a container supply service. Using the forwarder s own containers, and with the benefit of unified purchasing arrangements, this efficient operation has achieved cost reductions and afforded customers a better service. JAL intends to extend this project into the future. 19

22 REVIEW OF OPERATIONS Other Operations 1996 RESULTS Total revenues from other operations amounted to billion (US$3.4 billion), a rise of 8.2 percent compared with the previous year. STRATEGY In an increasingly competitive global air travel market, provision of first-class products and services within the general transportation and travel services field has become an important source of competitiveness. Naturally, attaining a cost structure that is competitive internationally is the predominant issue that JAL must address. Wholesale restructuring of the entire JAL Group operations is a significant part of reaching this goal and is receiving the Group s full attention. However, excellent products and services in areas related to the main airline business not only boost sales, but they can also enhance the performance IN-FLIGHT SALES (Millions of Yen) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 CONSOLIDATED INCIDENTAL AND OTHER REVENUES (Billions of Yen) of the main divisions through brand name synergies, and thus enhance the quality of earnings throughout the company. To maximize the contribution of other operations to the JAL Group s financial performance, as a general rule JAL has enforced a policy over the past few years of making no significant capital investments other than in projects already under way or those deemed strategically too important to neglect. HIGHLIGHTS OF THE YEAR In the maintenance area, in January 1996 JAL received a contract from the Malaysian airport authorities to undertake AFRS servicing (approval for return to service) on Airbus 330 aircraft. This has resulted in JAL doing AFRS servicing for five airlines. In the trading area, JAL became the world s No. 1 airline in 1995 for in-flight sales value. JAL bought a small island off the coast of Guam to build the Cocos Island Resort, a self-contained sports and fun resort (pictured, the pier). 20 J&N Cruise Pte Ltd., a JAL affiliate, runs Equator Dream mini-vacation cruises around the seas of Singapore.

23 The Ihilani Resort & Spa in Hawaii includes the famous Ko Olina Golf Club, where even U. S. Presidents have played a few rounds. The sales skills of JAL cabin staff, allied to a stream of popular new products, and a growing number of passengers, are the principal factors driving this exceptional performance. Growth in this revenue remains steady during Within hotel and travel services, JAL opened two branches of the JAL City hotel chain during the year. These are small business hotels, priced competitively to appeal to domestic business users. Plans call for a further four openings in this chain by JAL also opened three large luxury hotels during the period: the 576-room Hotel Nikko Kansai Airport, in June 1995; the 453-room Hotel Nikko Tokyo, in March 1996; and, overseas, the Hotel Nikko Kuala Lumpur, in December The Pulau Seribu Marine Resort in Indonesia is located on an idyllic island surrounded by coral reefs in the middle of the Java Sea. The Hotel Nikko Tokyo, which enjoys a spectacular view over Tokyo Bay. 21

24 JAL ROUTE NETWORK JAPAN AIRLINES COMPANY, LTD. AND AFFILIATED COMPANIES AS OF JULY 31, 1996 International Routes Fairbanks Anchorage Gothenburg London Paris Madrid Amsterdam Frankfurt Zurich Milan Rome Moscow Beijing Seoul Pusan Shanghai Vancouver San Francisco Los Angeles Chicago New York Atlanta Taipei Kaohsiung Hong Kong Manila Saipan Bangkok Guam Ho Chi Minh Kuala Lumpur Singapore Jakarta Denpasar Cairns Brisbane Honolulu Kona (Hawaii) Mexico City TOKYO OSAKA Sapporo Matsuyama Obihiro Hiroshima Hakodate Fukuoka Akita Oita Yamagata Kumamoto Sendai Nagasaki Fukushima Miyazaki Niigata Kagoshima Komatsu Okinawa (Naha) Nagoya São Paulo Sydney Auckland Christchurch New route Cargo Freighter only New Cargo Freighter route 22

25 Domestic Routes Sapporo Obihiro Hakodate Akita Yamagata Sendai Niigata Fukushima Hiroshima Matsuyama Oita Fukuoka Izumo Okayama Osaka Komatsu Tokyo Nagoya Narita Nagasaki Kumamoto Miyazaki Kagoshima Yonaguni Hateruma Miyako Tarama Ishigaki Aguni Kume Kerama Yoron Okinawa (Naha) Kita Daito Minami Daito New routes 23

26 Although the prime motive of a business is the generation of profits, this in itself is not enough for a firm to earn the respect and affection of the community at large. One of the main parameters of a good company nowadays is the extent to which it participates in the community and fulfills its role as a corporate citizen. JAL aims to be just such a company. Since its main business is air transport, which is of high public benefit, JAL also has a vested interest in promoting good international and interregional relations. With these aims in mind, the company undertakes a variety of projects The JAL Honolulu Marathon, an important annual event in Hawaii. JAL has been a conscientious supporter of UNICEF for a long time. Contributing to Society regularly and consistently. JAL has conducted a variety of charitable support activities for UNICEF since September In-flight donation bags on flights to New York in the past five years have realized a grand total of 15 million for the organization. The company has also set aside a percentage of the profits made on special sales of Disney goods on the JAL Dream Express service (which ran up to December 1995) to make a special donation to the Japan UNICEF Association. Since December 1995, JAL has been the first airline in the world to organize the onboard sale of UNICEF greeting cards on its international routes. This year celebrating its 6th anniversary, the non-profit making JAL Foundation aims to foster harmonious cross-cultural relations within international society. It also aims to play a role in the development of aviation. Once again this year it helped in sponsoring the third Asia Forum symposium, held in August This brought together many opinion leaders and famous speakers from around Asia and Oceania to discuss various issues, together with university students invited through the JAL Scholarship program. The forum focuses on the possibility of creating a trans-national community within Asia and Oceania. This year s special theme was one society, many cultures. JAL was also involved during the year with enabling sixteen specially-selected middle school 24 students to spend a week sightseeing around Europe and America in August All the children came from the area around Narita Airport and parts of Hyogo Prefecture devastated by the Kobe Earthquake of JAL attaches a great deal of importance to making a positive contribution to the world environment. A scheduled flight is now regularly used partly for atmospheric observation purposes, in order to generate data to shed light on the mechanism of global warming. Furthermore, since the formation of JAL s World Environment Committee in 1990, the company has been actively trying to save energy, boost the proportion of recycling of consumable items, and replace the use of materials that are not environmentally friendly with ones that constitute more renewable resources. For such work as this, in November 1995 JAL received the Nikkei Shimbun s Regional Environmental Technology Award, and in April 1995 was presented with the Fuji Television World Environment Prize. JAL is a frequent sponsor of sports events. As just one example, since 1992, the company has sponsored the JAL Cup, a soccer tournament played between many of the top South American league sides. In April 1996, the finals of this year s competition took place in Kobe. As well as sports, JAL also participates as a corporate sponsor in the staging of a wide variety of art exhibitions and other cultural events.