The Wall Street Journal-20080128-Under Nishimatsu- Japan Airlines Tries to Rise Above Legacy- Ex-State-Owned Company Tries New Tacks to Fend Off More Nimble Home Rival ANA

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Under Nishimatsu, Japan Airlines Tries to Rise Above Legacy; Ex-State-Owned Company Tries New Tacks to Fend Off More Nimble Home Rival ANA

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Tokyo -- Fed up with sluggish decision-making, Haruka Nishimatsu, chief executive and president of Japan Airlines Corp., last June yanked all 10 of the company's headquarters-based directors out of their respective departments and bunched them together in an open-plan office with identical plain wooden desks.

Today, he says, JAL's top executives can chat more readily with one another and focus better on the day-to-day challenges of running the airline from their single command post on the 24th floor of their main building.

"Management should be visible," says the CEO, who chips away at other internal barriers with companywide emails he calls "Nishimatsu Direct."

Japan Airlines is a national icon, flying more passengers farther than any other carrier in Asia. Government-owned until 1987, the Japanese flag carrier has an extensive international network and operates the world's largest fleet of wide-body planes. It enjoys a duopoly with All Nippon Airways Co., or ANA, in its protected home market and has been spared competition from low-cost carriers that have chewed into the profits of full-service airlines elsewhere.

JAL should be flourishing.

Instead, it is languishing. Burdened by a bureaucratic, public- sector mentality, it has hemorrhaged money for two years in a row, posting a loss of 16.3 billion yen ($152.6 million, for its fiscal year ended March 31). A rash of safety lapses and a series of strategic blunders have spurred an exodus of high-margin business passengers to ANA and bruised JAL's public image.

ANA, by contrast, has always been independent of the government. In September it launched Japan's first all-business-class service on flights to Mumbai, India, with a Boeing 737 containing just 36 roomy seats. ANA has honed its image as hip and customer-focused, painting black and white panda-bear spots on a plane it flies to China and portraying its staff as doting animated sunflowers in ads. ANA's net profit rose 22% to 32.7 billion yen in its fiscal year, also ended in March, despite soaring fuel costs.

JAL's predicament, and ANA's success, show how a complacent corporate psychology can undercut any number of advantages that bless a company. Now JAL is racing to restructure ahead of a game-changing expansion of Japan's two biggest airports.

Looming just ahead are JAL's third-quarter results, due Feb. 8. Analysts expect a modest narrowing of the year-earlier period's loss of 10.8 billion yen, thanks to aggressive cost-cutting and sales of noncore assets. But given stagnant growth in the domestic market, JAL also must find ways to boost revenue.

"They need to show us how they will compete in the global airline market in the coming five to 10 years," says Makoto Murayama, an analyst at Nomura Securities Ltd.

It falls to Mr. Nishimatsu to right the company. An airplane fanatic and 18-handicap golfer who joined JAL one month after graduating from Tokyo University, he spent much of his career in the finance department before taking the helm in June 2006. Today, the 59-year-old CEO is pushing for change on multiple fronts to catch up with ANA.

Hoping to win back some of the high-margin business it lost, JAL introduced domestic first-class service last month, offering a new menu every 10 days and leather seats that recline to an angle of 132 degrees. The carrier expects the new service to generate an additional four billion yen in annual revenue. Revenue in the last fiscal year was 2.3 trillion yen.

JAL has been selling off a slew of assets it considers noncore, from hotels to a stake in a jet-maintenance business. It is reviewing bids for a minority stake in its successful JAL Card Inc. credit-card subsidiary, aiming to raise funds to rejuvenate its fleet.

Mr. Nishimatsu has kept in place a 10% cut in employee salaries made two years ago and swallowed a 60% drop in his own pay; he now earns 9.6 million yen -- less than the average JAL salary when 40 top executives' pay is excluded.

Meanwhile, the airline is studying its rival's playbook, replacing fuel-guzzling jumbo jets with smaller planes like the Boeing 737-800. Downsizing its planes on certain routes should also help it fill more seats per plane, resulting in better passenger yields.

"I think ANA was really ahead of us on that. . . . They've always been more agile," Mr. Nishimatsu says.

Some analysts credit Mr. Nishimatsu for putting the company on the road to a turnaround. They say his financial skills are particularly useful as JAL haggles for better terms with its bankers and negotiates with potential investors.

A former JAL executive says Mr. Nishimatsu can be irritable at times but is "a clear-thinking, pragmatic guy, oozing common sense." JAL spokesman Stephen Pearlman responds that the CEO "can look stern, and people might misconstrue that. In fact, people say he has a good sense of humor."

JAL slipped up badly four years ago, under then-President and Chief Executive Isao Kaneko, when it decided to cut back on canapes and drinks and eliminate dedicated check-in counters for its premium passengers on domestic flights. Instead, it tried to broaden its appeal by offering a new premium product that encouraged families with children to mingle with the captains of industry in the front of its planes. Aggrieved business travelers stampeded to ANA.

Unlike ANA, which signed up with the Star airline alliance in 1999, JAL didn't join the rival oneworld grouping until last year, slow to capitalize on this lure for high-margin corporate travelers.

Mr. Kaneko's successor, Toshiyuki Shinmachi, recognized the need to address JAL's structural weaknesses but didn't seem to know how to go about it. He lasted just a year and lost his job in a boardroom revolt unprecedented at JAL that was prompted in part by a string of safety glitches -- including a tire-blowout on a landing and an engine fire after a takeoff -- and a government reprimand.

JAL's problems became so acute that analyst Satoru Aoyama of Fitch Ratings says the carrier was little better than "a zombie company." Although JAL is faring somewhat better today, Mr. Aoyama credits external factors like strong demand and says he doubts JAL will ever catch up with ANA.

Under Mr. Nishimatsu, the company expects a net profit of seven billion yen for the current fiscal year -- its first annual net profit since the year ended March 2005. JAL forecasts annual revenue at 2.24 trillion yen, for a slender profit margin of 0.3%.

But the imminent expansion of Tokyo's two main airports presents both JAL and ANA with their sternest test in years. The Transportation Ministry will welcome new entrants at Haneda and Narita, including foreign airlines and possibly -- for the first time in Japan -- true budget carriers.

ANA President and Chief Executive Mineo Yamamoto calls this expansion a "Big Bang" for Japanese aviation. "From 2010, things are going to get much more fierce," he says.

JAL, for its part, is scrambling to get ready, adding flights to high-growth markets like China and Vietnam, introducing a "premium economy" class on overseas routes and opening a new training base in Manila for its low-cost JALways unit. In one of many incremental efforts to save on fuel, JAL in 2006 began equipping galleys with spoons two grams lighter than the old ones.

Meanwhile, on a big screen facing their cluster of desks, the company's directors monitor live Webcam broadcasts of JAL aircraft at each of Japan's nine biggest airports.

"You have to remember the history of JAL," says Mr. Nishimatsu, who insists that even low-level staffers address him using the common honorific san rather than shacho, or president. "It was a government- owned company. There were bureaucratic overtones in the company for many years. . . . I think now we're at a good place."