500 word memo paper

W16023

ALL NIPPON AIRWAYS: ARE DUAL BUSINESS MODELS SUSTAINABLE?1 Wiboon Kittilaksanawong and Elise Perrin wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Copyright © 2016, Richard Ivey School of Business Foundation Version: 2016-01-15

In 2014, All Nippon Airways (ANA), a flag and full-service carrier (FSC) of Japan, was facing several major challenges on the development and sustainability of its two low-cost carriers (LCC): Peach Aviation (Peach) and AirAsia Japan (AAJ). Both LCCs were launched in 2012, Peach in March and AAJ in August.2 ANA held 38.67 per cent of shares in Peach and 51 per cent of shares in AAJ. Peach made a great start in March with 67,000 passengers boarding its flights and with a load factor reaching 83 per cent, which was more than the 75 to 80 per cent it had expected.3 However, in May 2014, only two years following the launch, Peach announced that it was cancelling 894 flights in July and August, which represented 20 per cent of its overall flights.4 AAJ had instead suffered from a slow start that failed to meet its initial targets,5 so ANA decided to acquire full ownership of AAJ in October 2013, thus ending joint operation with AirAsia.6 ANA rebranded the ceased AAJ as Vanilla Air (Vanilla), which started operations in November 2013. Was ANA too ambitious in launching two LCCs in the same market at the same time? Would the company be able to successfully run the dual business models of FSC and LCC in the same market in the long run? Would more synergies be required between ANA and its two LCC subsidiaries to embrace the concurrent differentiation and low-cost strategy? HISTORY ANA celebrated its 60th anniversary as a prominent Japanese air transportation company in 2012. Since its first passenger flight in 1953, the company had diversified into air transportation (e.g., cargo and passenger services), travel, and other businesses (e.g., information technology, trading, and product sales). ANA operated regional flights by creating a wholly owned subsidiary, Air Nippon, in 1974. It opened the first international route in 1986 between Narita International Airport and Guam Island. Since then, ANA had enjoyed the advantage of deregulation in Japan’s airline industry. The company developed a code-sharing system with the first wave of Japanese LCCs, including Air Do and Sky Net Asia. This collaboration enabled ANA to become a direct shareholder in the LCCs. To strengthen international expansion and to compete with its main competitor, Japan Airlines International (JAL), ANA entered the Star Alliance in 1999. In 2004, ANA launched Air Next, a low-cost carrier based in Fukuoka. In 2010, the entity was merged into ANA, operating under ANA flight numbers.

For the exclusive use of H. KASSA, 2018.

This document is authorized for use only by HAIMANOT KASSA in FA18-MGT362-Strategy-1-1 taught by LY PHAM, Golden Gate University from Aug 2018 to Dec 2018.

Page 2 9B16M007 In 2012, ANA entered the second wave of LCCs by holding 38.67 per cent and 51 per cent of equity in Peach and AAJ respectively. The two LCCs began operations in March and August 2012 accordingly. Along with this important diversification strategy, ANA created a new corporate structure — ANA Holdings — to reinforce integration and efficient management among affiliated companies and to adapt to the dynamic airline market.7 ANA operated four main business lines: air transportation, airline related business, travel services, and trade and retail (see Exhibit 1). The company derived 73.5 per cent of revenues from air transportation. The shareholding structure was largely diversified with Japanese financial institutions and individuals representing 19.77 per cent and 58.68 per cent respectively.8 CHARACTERISTICS ANA was ranked as one of the top 10 best airlines and one of eight five-star airlines worldwide in 2014.9 The key success factor for such high recognition was the truly consistent and high-standard delivery of airport ground and on-board services. The company was a pioneer in quality of service and innovation. Remaining true to its motto, “Trustworthy, Heart-Warming, Energetic,”10 ANA strove to provide high-end services that maximized customer satisfaction. Although its regular airfares were higher than the industry average (JP¥23,00011 for Tokyo–Osaka and ¥41,000 for Tokyo–Okinawa),12 ANA offered unique in-flight experiences such as the MyChoice program, on-board women-only toilets, and wireless mobile phone chargers.13 ANA boasted a strong operating and sales network, as well as industry knowledge and experience. These resources allowed ANA to build reputation and to clearly differentiate itself from other Japanese airlines. During its fiscal year for 2013, the company dominated the domestic market, with 42.5 per cent, followed by JAL with 33.7 per cent.14 Efficiency in its fleet operations and management allowed the company to achieve high levels of asset utilization, on-time performance, and market penetration. That same year ANA achieved a resounding on-time performance rate of 83 per cent and glowing reports for in-flight service experience at 85 per cent. Its flight cancellation rate was a very low 0.22 per cent.15 ROUTES AND REVENUES ANA operated over 1,000 daily flights on 49 international and 132 domestic routes.16 In FY2013, ANA’s available seat kilometres (ASK) 17 increased by 61,000 million domestically and 41,000 million internationally. ANA’s revenues were primarily derived from passenger air transportation in the domestic market, where its market share was ¥675 billion (of a total ¥1,395 billion), accounting for almost 50 per cent of total market revenue.18 That same year ANA acknowledged an increase in overall revenues of ¥102.4 billion, but declared a decrease in overall profits of ¥23.7 billion over the previous year. STRATEGIC DIRECTIONS ANA focused on international expansion via alliance networks.19 The expansion of Tokyo International Airport (Haneda Airport) would allow for new operating slots from 2015. By 2016, ANA expected the ASK in international flights to overtake that of domestic flights. While ANA was relying on the domestic market, its diversification into the LCC market would create new demands for the long run.20 ANA made three key strategic moves for the period of 2014 to 2016: (1) strengthen and develop revenue platforms to achieve higher revenues and profitability; (2) emphasize domains that would bring higher revenues, such as choosing international routes, sharing group knowledge and experience, and strengthening brand reputation; and (3) pursue cost restructuring via new key performance indicators.21 These strategic goals would be particularly challenging, considering ANA’s diversification into the LCC markets.

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This document is authorized for use only by HAIMANOT KASSA in FA18-MGT362-Strategy-1-1 taught by LY PHAM, Golden Gate University from Aug 2018 to Dec 2018.

Page 3 9B16M007 JAPANESE AIRLINE INDUSTRY The Japanese Ministry of Transport (MOT) had long held strong power over the country’s airline industry.22 In 1985, it allowed two companies to operate on routes with more than 700,000 annual passengers and three companies on routes with more than 1 million annual passengers.23 This increased competition among airline companies operating in the same route. It also allowed new airline companies to enter the market. However, this deregulation policy was unable to break the monopoly of ANA and JAL. Legacy carriers continued to cannibalize market share from new entrants. For example, ANA suffered a loss in the high- end market share, but deregulation allowed it to gain profits from its subsidiary Air Nippon (ANK), which operated in the domestic market. The domestic airline industry experienced a market boom before 1990. To re-establish competitiveness in the industry, the MOT adopted a zone fare system in 1996.24 The new system created discount fares that were about 25 to 35 per cent lower than regular fares, enabling airline companies to deal with peak and off- peak periods. New entrants such as Air Do and Skymark, which had entered the low-cost domestic market, successfully achieved a high load factor. In 1996, the MOT ended the supply/demand regulation in the domestic air transportation market.25 More LCCs, such as Sky Net Asia and Star Flyer, were created in 2000, but the MOT still controlled licencing for new routes. In international routes, the Council for Transportation Policy allowed carriers from Japan to enter the United States domestic market and U.S. carriers to enter the Japan domestic market in 1986. Until then, JAL had been the only carrier to operate overseas flights, as well as some domestic flights. That same year ANA began international services with the Tokyo–Guam route and competition continued to rise between the two airline companies in overseas routes. In 1996, Japan and the United States agreed to allow U.S. airline companies to operate more point-to-point flights in Asia, and for Japanese airline companies to be given more opportunities to enter the U.S. market.26 Japan was the third largest aviation market in the world in terms of market turnover.27 However, in 2012, the LCC market represented less than 10 per cent of the industry.28 The LCC market was expected to grow significantly due to expensive FSC airfares. The Japanese government saw the aviation industry as a means to stimulate economic growth, so it invested in Peach, through the Innovation Network Corporation of Japan (INCJ), to boost the country’s innovation and competitiveness. Japan planned to attract 25 million inbound tourists by 2019, and a year later the 2020 Tokyo Olympic Games would be a key event to stimulate demands in the country’s airline industry.29 In Europe, LCCs had operated for 30 years with Ryanair as the first mover in 1985. These LCCs were able to drastically cut costs because less costly secondary airports were available to serve major metropolitan and regional areas. The deregulation also reduced taxes on LCCs and allowed them to simplify operation procedures, such as refuelling while boarding passengers, for example. Simplified operations allowed European LCCs to focus more on sales and distribution. The LCC markets in Europe were the first to implement full online booking services and charge additional fees for extra services such as reserved seating, extra baggage weights, and extra on-board services including foods and beverages.30 To defend their market share, European FSCs had tried to reduce costs, while many were considering adopting the dual-pronged strategy. Of Japan’s major airports (see Exhibit 2), Narita was the leader in international flights, and Haneda in domestic flights. However, LCC operations began in the second terminal of Kansai International Airport.31 Unlike airports in the European airline industry that operated 24 hours a day, both FSCs and LCCs in Japan operated during limited hours, which created entry barriers for LCCs, who were charged the same high government taxes and airport fees as their FSC counterparts.32

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Page 4 9B16M007 Although in many countries non-qualified staff could operate the opening and closing of aircraft doors, in Japan only qualified engineers were allowed to perform this ancillary task. Moreover, passenger boarding was not allowed while refuelling the plane. This security measure hindered a 25-minute inter-flight connecting time, which LCCs in other countries could achieve to reduce operational costs. Also, high and regulated labour costs associated with such tightened security measures and higher costs of other operations all continued to add to the cost of operating an LCC in Japan. The main cost gaps between FSCs and LCCs in Japan was mainly achieved by reducing the number of workers on services and wages for some key functions (e.g., pilots).33 COMPETITIVE SITUATION OF LCC MARKET IN JAPAN ANA and JAL were the two main players in the industry. JAL was more specialized in international flights, which represented 57.6 per cent of the company’s revenue passenger kilometres (RPK).34 During the different phases of deregulation, JAL had continued to expand its market share. However, in 2010, the company faced huge losses and was about to go bankrupt. After a government bail-out, the company rebranded in 2011 to help restore its image. In 2012, JAL formed a joint venture with Qantas with equal equity of 45.7 per cent to launch Jetstar Japan in the LCC market.35 Code sharing and other synergies were key factors for operating in the domestic market. LCCs such as Air Do and Sky Net Asia tried to compete, but their airfares were still not competitive enough due to particularities of the Japanese airline industry. To defend market share, legacy carriers also differentiated and adjusted their prices to the marginal cost to drive out new entrants. ANA later developed a non-equity alliance with Air Do36 to become one of the main shareholders of Sky Net Asia. 37 Of the independent Japanese LCCs, only Skymark survived the competition through its hybrid business model of low cost and differentiation. Deregulation had given competitive advantage to the incumbent FSCs, whereas consumers had partly suffered from the continuing high airfares.38 The new wave of LCCs, with further deregulations in 2012, had come with a broader competitive scale and scope. However, the two main players ANA (with Peach and AAJ) and JAL (with Jetstar Japan) still largely drove this wave. Boeing and Airbus were the main suppliers in Japan’s airlines industry. Boeing provided 82 per cent of ANA’s fleet and contributed to the company’s overall innovation. ANA was also the first company to use the Boeing 787 in September 2011.39 General Electric and other suppliers developed leasing supply contracts in the market. Therefore, in terms of aircraft and engine manufacturing, supply in Japan’s airline industry was largely oligopolistic.40 Shinkansen high-speed trains were the most utilized transportation means among Japanese passengers because of their convenience and reliability. The train stations were situated in downtown locations that were well connected to airports. Trains and airport routes were appropriately scheduled. The number of local trains was also increasing, in an effort to compete with Shinkansen, which together became a potential substitute for airline travel. However, that substitute had to be considerably reduced if airfares were to become cheaper, and if the airline companies strengthened their consumer awareness and promotion strategies. Japanese consumers still had strong loyalty to legacy carriers. Quality and safety were the main criteria for the success of LCCs in Japan. Japanese consumers were sensitive to price, but they were willing to pay more for service quality and safety. Japanese consumers relied on the airline’s experience and brand reputation, implying that switching costs were rather high. However, with the Japanese economy in recession for many years, an increasing number of consumers had become more open to low-cost options. In fact, Japanese passengers had increasingly been using foreign LCCs.41

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Page 5 9B16M007 A RISKY BET ON A DUAL LAUNCH IN THE SAME MARKET ANA’s decision in 2012 to enter the LCC market was based on several factors. The Japanese national and local governments had increasingly deregulated, granting more licenses and providing more support for domestic LCC operations. The number of landing slots, particularly in Tokyo areas, had increased with the improvement of airport infrastructure.42 Airline companies were trying to secure a sufficient number of slots to meet a growing number of passengers. In Asia, 47 LCCs already existed, while new entrants were expected in the coming years.43 However, an increasing number of aging consumers and a decreasing number of working populations had clearly signalled the overall decline in the number of airline passengers in Japan. Airline companies had to target the right consumers while looking for other sources of revenues. The entry of Asian LCCs (e.g., AirAsia and Tigerair) would increase competition in Japan and international markets. In international markets, ANA would also be competing with traditional FSCs such as Singapore Airlines, Cathay Pacific Airways, and Korean Air, among other foreign LCCs. Particularly, the collaboration between JAL and Jetstar would be a significant threat to ANA, so it had to move quickly into the LCC market to defend and extend its market position. It was in response to these challenges that ANA launched Peach and AAJ in 2012, a joint venture with AirAsia. This new multi-brand strategy aimed at capturing markets not already covered by its current customer segments.44 However, ANA had to appropriately position each brand in each customer segment to maximize overall earnings. The two LCCs were based in Kansai International Airport and in Narita International Airport. In August 2012, Peach was operating four domestic routes (Sapporo, Kagoshima, Nagasaki, and Fukuoka) and two international routes (Hong Kong and Seoul); AAJ was flying three domestic routes (Okinawa, Fukuoka, and Sapporo). Peach was jointly founded by ANA, INCJ, and First Eastern; each held an almost equal proportion of equity and voting shares. INCJ was a public-private partnership between the Japanese government and 19 major corporations with the objective of promoting the competitiveness of Japanese enterprises through capital and managerial support. First Eastern was a private equity and a venture capital firm based in Hong Kong investing in the airline industry for the first time. Despite Peach’s marketing team promotion of “low price,” Junya Okamura, chief financial officer and legal director of Peach, also underlined “differentiation” from typical LCCs as its strategy. Differentiation included “taste of Japan” features such as cuteness, contemporary brightness, hospitality, reliability, safety, cleanliness, and the characteristic Kansai humour.45 The management structure of Peach was rather independent from ANA.46 Peach mostly decided its own strategic directions, business planning, and branding. However, on operational issues, ANA staff was asked to join Peach’s human resources.47 Both companies shared the best legacy operational practices, including safety. The scope of such supports was prescribed in an agreement, and ceased as soon as the LCC was able to operate independently. By then, ANA would stop dispatching its employees to Peach and would enhance the independence of the two entities. Peach leveraged its operational costs through ANA at the beginning, but management emphasized that independence was the long-run plan, and to establish Peach as a proper LCC with an equal relationship toward its three major shareholders. To move further quickly into the LCC business, on August 2011 AAJ was founded as a joint venture between ANA and the Malaysia-based AirAsia Group, which held 49 per cent of equity in the venture, while ANA held 51 per cent.48 ANA obtained majority control over the venture and kept 67 per cent of the voting rights shares and 84 per cent of non-voting shares. Throughout the joint venture, ANA was able to leverage the resources (including aircraft) and brand strength of AirAsia. The joint venture also provided ANA with the opportunity to learn the LCC business, to extend international markets, and to share costs between the partners. AirAsia

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Page 6 9B16M007 could also quickly enter the highly regulated Japanese market. However, this joint venture was seen as an experimental attempt for ANA to readily tackle the LCC segment.49 In-flight experience, including fun and good humour, was an expectation of passengers of Peach and AAJ. Both LCCs provided exceptional quality services (see Exhibit 3) with low-price tickets in their attempt to increase competitiveness over FSCs and market substitutes (e.g., Shinkansen and local trains). Peach’s tickets were roughly 50 per cent lower than those of ANA on some routes. ANA hoped that its low-cost and differentiation business model would make the two LCCs successful in the highly competitive airline market. However, their fare price was quite low compared to Japanese FSCs, but not as low as the price of foreign LCCs such as AirAsia and Ryanair. Peach targeted a new customer segment including female passengers (half of the overall customers), and first-time travellers who wanted to try out low-cost flights. In Japan, about 40 per cent of women stayed at home and were not in the formal employment system.50 It was believed that this potential customer segment might be attracted by the colourful and fun atmosphere Peach was promoting. The company tried to attract this customer segment through advertising campaigns to create impulsive purchases, including affordable day trips.51 AAJ did not target a specific customer segment, but instead offered low-price airfares to attract a broad range of customers who were not willing to pay for more expensive legacy carriers and other means of transportation. ANA, Peach, and AAJ realized some synergies. Consignment of ground handling services among these airlines was implemented to economize operations costs, as was the flow of human resources. ANA’s employees were transferred to join Peach’s employees. Cross-training programs were also implemented, particularly for crewmembers. The chief executive officers of AAJ and Peach were assigned from ANA.52 ANA and AirAsia shared best practices in the joint venture, so ANA learned the best practices of operating LCCs from AirAsia. Meanwhile, Peach also enjoyed technical knowhow spillovers from ANA. The creation of ANA Holdings in April 2013 was expected to promote flexible, efficient operations, and optimal allocation of resources within the ANA group. 53 However, the main challenges underlying ANA’s diversification into the LCC market was the multi-brand strategy and the risk that both Peach and AAJ would like to operate from Kansai Airport in the long term. In FY2012, the cost per available seat kilometre (CASK) of Peach was relatively high, 29 per cent higher than that its competitor Skymark. Peach achieved its high CASK rate through on-time time performance (73 per cent), high load factor (78 per cent), and low cancellation rate (1 per cent on domestic flights). AAJ, however, had a low reputation with respect to on-time performance (64 per cent on domestic flights in FY2012), lower load factor (67 per cent), and higher cancellation rate (2.1 per cent), and its operating costs were 16 per cent higher than Peach. AAJ focused on a low-cost strategy, which was AirAsia’s key success factor. However, with Tokyo’s two airports as ANA’s main operational base, the risk of cannibalization by AAJ was very high. ANA had expected AAJ to attract new customers, instead of cannibalizing ANA’s existing customer base. However, ANA was still a major shareholder of AAJ, so the loss was not expected to be serious. TROUBLES IN THE SKY Positive forecasts did not last long. AAJ ceased its operations in October 2013, underlining the dissolution of the joint venture between ANA and AirAsia. AAJ’s performance decreased below that of other Japanese LCCs. AAJ’s low-cost strategy failed to meet the needs of the Japanese airline market. In particular, AAJ was not able expand its customer base at an early stage by utilizing available slots at Narita International Airport, and to leverage AirAsia’s brand and resources. The online booking system was not adapted for Japanese consumers, so it was not available in Japanese. AAJ also had difficulty finding local travel agents, which was

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Page 7 9B16M007 one of the main sales channels for flight tickets in Japan.54 The alliance, therefore, hardly achieved its objectives, as far as operations management was concerned. Both partners also had different views for the future of the LCC market. In order to succeed in Japan AAJ needed to leverage the best practices of AirAsia, which was a model that was proven successful in Asia,55and adapt them to the specific operating environment of the Japanese market. AirAsia wanted to follow its successful LCC expansion strategy by focusing mainly on the very low cost of operations management, but ANA was more focused on differentiation of the LCC in the Japanese market, trying to satisfy the highly demanding Japanese customers with a hybrid model. Ultimately, AAJ was not able to achieve concurrent cost leadership and differentiation. Both partners spent considerable time and effort trying to resolve their disagreements. Since this was AirAsia’s first attempt at an FSC partnership, the lack of experience itself might have been a factor causing conflicts between the partners. Jetstar Japan benefited from the dire situation of AAJ. More slots became available in Narita International Airport, enabling Jetstar to expand its market share.56 At the time, Peach was rumoured to take over AAJ, but because Peach was an independent entity of ANA, the acquisition process would take a very long time. As the main shareholder of AAJ, ANA finally decided to acquire 49 per cent equity from AirAsia in AAJ, and dissolve the joint venture to establish a new company. Vanilla was created as a wholly owned subsidiary of ANA in October 2013, and began operations in November 2013. Like AAJ, Vanilla operated from Narita International Airport on three domestic routes (Sapporo, Okinawa, and Amami) and two international routes (Seoul and Taipei). ANA seemed to have learned from the failure of its joint venture with AirAsia, so unlike AAJ, Vanilla targeted specific customer segments, similar to Peach’s approach, promoting its services to families, retirees, groups, and couples. Vanilla seemed to emerge as a profitable new LCC venture for ANA, with its new ownership structure and market approach, similar to Peach, but with more integrated operations. However, it was too premature to rule out a second failure with Vanilla still in its early stages. There were several changes in the operation of Vanilla, but ANA was still its major shareholder, as had been the case with AAJ. The newly appointed president of Vanilla, Tomonori Ishii, had an international background and was known for his bottom-up management style.57 He was also a former ANA employee and a fervent supporter of the radical management practices. Since its launch in March 2012, Peach had cannibalized some passengers from ANA,58 but after one year of operations, it was recognized as the first “real” LCC to successfully enter the Japanese air transportation market, and as the most successful venture among the three new LCCs launched in the same year (Peach, AAJ, and Jetstar Japan). Its key performance indicators (e.g., on-time performance, load factor, cancellation rate, and in-flight experience) showed great promise. However, Peach’s financial performance was less successful. In FY2012, Peach had an operating loss of ¥900 million and a net loss of ¥1.2 billion.59 In terms of operations management, an April 2014 incident was a concern. One of its planes reached an unusually low altitude before landing in Okinawa due to miscommunication between the pilot and air traffic controllers.60 The company later announced that it would cancel a number of flights operating in May and June.61 Later it would cancel 894 flights for July and August due to pilot shortage. Peach had to act fast to find ways to keep up its reputation and brand image. The pilot shortage problem was linked to low wages in the LCC industry, which further led to a decrease in overall performance. Meanwhile, Vanilla grew very slowly from the dissolution of AAJ62 and planned to operate 10 aircraft by March 2016. This was considered by industry specialists as the slowest rise among Japan’s LCCs, including Peach, AAJ, and Jetstar.

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Page 8 9B16M007 STRATEGIC CHALLENGES AND FUTURE CHOICES ANA faced upheavals in what was supposed to be a promising business for LCCs in Japan. The first concern was the decline in its overall brand image following the collapse of its joint venture. The second concern was a latent risk of misunderstanding from the customers who were not able to differentiate between brands. The third concern was how to apply potential synergies among its companies. Vanilla had been operating since November 2013, but experienced difficulties in expanding its operations due to ANA’s conservative management style. In particular, Vanilla expected a slow fleet development of only 10 aircraft in two-and- a-half years, in contrast to Peach’s development of 12 aircraft in two years. ANA was unsure how to make use of synergies with Peach, Vanilla, or both. Should ANA introduce code sharing, as JAL was doing with Jetstar? The pilot shortage problem called for an opportunity to leverage costs and share resources among the ANA companies. QUESTIONABLE MOVE TOWARD SUSTAINABILITY The LCC market in Japan became increasingly crowded with new companies entering the LCC market, such as Spring Airlines Japan, which was 33.3 per cent owned by a Chinese LCC. The question of LCCs operating over the long term was of great concern. The LCC boom in the Japan airline market created a new competitive landscape for the industry. Sustainability was a critical question for incumbents and new entrants in this relatively young market. ANA might not survive another failure of either of its two LCCs. The company had to find the right strategies to ensure sustainability, having to choose between increasing its commitment for success in the low-cost airline segment, or discontinuing this experimentation phase.

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Page 9 9B16M007

EXHIBIT 1: THE ANA GROUP (AS OF MARCH 31, 2014)

Company Name Amount of Capital

(¥ in Billions)

Ratio of Voting Rights Holding

(%)

Principal Business

Air Transportation Business       All Nippon Airways 25 100 Air transportation Air Japan 0.05 100 Air transportation ANA Wings 0.05 100 Air transportation Vanilla Air 7.5 100 Air transportation Airline Related Business       Overseas Courier Service 0.12 73.4 Express shipping business ANA Systems 0.08 100 Innovation and operation of IT systems Travel Services Business      

ANA Sales 1 100 Planning and sales of travel packages, etc. Trade and Retail Business       All Nippon Airways Trading 1 100 Trading and retailing

Source: All Nippon Airways Co., Ltd., “Annual Report 2014,” www.anahd.co.jp/en/investors/data/pdf/annual/14/14_00.pdf, accessed January 8, 2016.

EXHIBIT 2: NUMBERS FOR JAPAN’S MAJOR AIRPORTS (AS OF MARCH 2014)

Rank Airport City Served Region Passenger Aircraft Cargo 1 Haneda Airport Tōkyō Kantō 68,577,825 403,242 954,359 2 Narita International Airport Tōkyō Kantō 32,465,439 223,388 2,019,844 3 Fukuoka Airport Fukuoka Kyūshū 18,951,652 170,640 253,797 4 New Chitose Airport Sapporo Hokkaidō 18,674,344 134,312 226,905 5 Kansai International Airport Ōsaka Kansai 17,660,809 131,930 682,343 6 Naha Airport Naha Okinawa 16,039,825 147,302 388,387 7 Osaka International Airport Ōsaka Kansai 13,823,922 136,132 137,824

8 Chūbu Centrair International Airport Nagoya Chūbu 9,552,867 88,578 168,993

9 Kagoshima Airport Kagoshima Kyūshū 5,042,755 65,830 34,806 10 Sendai Airport Sendai Tōhoku 3,075,633 54,554 7,006

Source: Ministry of Land, Infrastructure, Transport and Tourism, www.mlit.go.jp/en/index.html, accessed April 30th, 2014.

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Page 10 9B16M007

EXHIBIT 3: ANA BUSINESS MODEL’S KEY POINTS FOR LOW-COST CARRIERS

 Flight operations primarily using a single type of narrower medium-body aircraft  Maximum aircraft utilization via point-to-point routes with the pre-set turnaround time at

airports  Renting of aircraft to increase flexibility  Design to maximize seat capacity  Secondary cities and trunk routes  Simplified reservations and sales through the Internet  Simplified check-in and boarding through automated procedures  Simplified in-flight services and additional charges for ancillary services such as baggage

fees and in-flight foods and beverages  Straightforward fares and promotional sales  Availability of international flights  Quality on-board services and optional amenities to ensure high customer satisfaction

All Nippon Airways Co., Ltd., “ANA Holdings Inc. Annual Report,” www.anahd.co.jp/en/investors/data/pdf/annual/ 12/12_11.pdf, accessed December 5, 2015; Airline Trends, “Innovative Airlines 2012: #10 All Nippon Airways,” May 14, 2012, www.airlinetrends.com/2012/05/14/innovative-airlines-2012-all-nippon-airways/, accessed December 5, 2015.

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Page 11 9B16M007 ENDNOTES

1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of All Nippon Airways Co., Ltd., or any of their employees. 2 All Nippon Airways Co., Ltd., “Annual Report 2014,” www.anahd.co.jp/en/investors/irdata/annual/, accessed December 5, 2015. 3 The Japan Times, “Make Way for Low-cost Carriers,” April 18, 2012, www.japantimes.co.jp/opinion/2012/04/18/editorials/ make-way-for-low-cost-carriers/#.VL-5a6k6YUs, accessed December 5, 2015. 4 Kyodo, “Peach to Cancel 894 Flights in July and August Due to Pilot Shortage,” May 20, 2014, www.japantimes.co.jp/news /2014/05/20/business/corporate-business/peach-cancel-894-flights-july-august-due-pilot-shortage/#.VL-9r6k6YUs, accessed December 5, 2015. 5 CAPA Centre for Aviation, “Japan's LCCs' Financial and Performance Results in: How Did They Fare in Their First Year?” August 29, 2013, http://centreforaviation.com/analysis/japans-lccs-financial-and-performance-results-in-how-did-they-fare-in- their-first-year-124410, accessed December 5, 2015. 6 CAPA Centre for Aviation, “Vanilla Air’ New Name for AirAsia Japan under ANA's Control — Will it be Sweet or Plain Vanilla?” August 21, 2013, http://centreforaviation.com/analysis/vanilla-air-new-name-for-airasia-japan-under-anas-control-- will-it-be-sweet-or-plain-vanilla-124409, accessed December 5, 2015. 7 All Nippon Airways Co., Ltd., “ANA 2012–13 Corporate Plan,” www.ana.co.jp/eng/aboutana/corporate/ir/stream/ 201202/index.html, accessed December 5, 2015. 8 “Annual Report 2014,” op. cit. 9 Skytrax, “The World’s 5-Star Airlines,” www.airlinequality.com/StarRanking/5star.htm, accessed December 5, 2015. 10 All Nippon Airways Co., Ltd., “Our Mission Statement and Management Vision,” www.anahd.co.jp/en/company/vision/, accessed December 5, 2015. 11 ¥ = JPY = Japanese yen; All currencies in JPY unless otherwise stated; JP¥1 = US$0.0082 on December 9, 2015. 12 Japan Guide, “Domestic Air Travel,” www.japan-guide.com/e/e2365.html, accessed December 5, 2015. 13 Airline trends, “ANA to Monetize Business Class Perks with ‘MyChoice’ Program,” November 4, 2009, www.airlinetrends.com/2009/11/04/ana-mychoice/, accessed December 5, 2015. 14 HatenaBlog, “Domestic Flight Passengers Market Share in Japan, 2013,” November 13, 2014, http://nbakki.hatenablog.com/entry/2014/11/13/125332, accessed December 5, 2015. 15 CAPA Centre for Aviation, “AirAsia Japan Collapses,” June 26, 2013, http://centreforaviation.com/analysis/airasia-japan- collapses-after-airasia-group-was-too-bearish-while-ana-lacked-experience-114196, accessed December 5, 2015. 16 Armagebedar, “Domestic Flight Passengers Market Share in Japan, 2013,” November 13, 2014, www.flyertalk.com /forum/all-nippon-airways-ana-mileage-club/1353616-read-first-all-nippon-airways-amc-master-thread.html, accessed December 5, 2015. 17 ASK is a measure of an airline flight’s passenger carrying capacity and is calculated by multiplying the number of available seats by the number of kilometres flown. 18 All Nippon Airways Co., Ltd., “Annual Report 2014,” www.anahd.co.jp/en/investors/irdata/annual/, accessed December 5, 2015. 19 CAPA Centre for Aviation, “All Nippon Airways to Have More International than Domestic Capacity — But Revenue Still in Japan,” March 5, 2014, http://centreforaviation.com/analysis/all-nippon-airways-to-have-more-international-than-domestic- capacity---but-revenue-still-in-japan-154191, accessed December 5, 2015. 20 “Annual Report 2012,” op. cit. 21 All Nippon Airways Co., Ltd., “ANA Group Corporate Strategy 2014-16,” www.anahd.co.jp/en/company/pickup/ pickup_strategy2014_1.html, accessed December 5, 2015. 22 H. Yamauchi, “Toward a More Liberal Sky in Japan”, January 2000, www.nber.org/chapters/c8481.pdf, accessed December 5, 2015. 23 Center on Japanese Economy and Business — Columbia Business School, “Air Transport Policy in Japan,” September 1996, www8.gsb.columbia.edu/rtfiles/japan/WP%20124.pdf, accessed December 5, 2015. 24 Ibid. 25 Y. Ohara, “Competition in Industries Recently Deregulated in Japan,” 1999, http://ir.lawnet.fordham.edu/ cgi/viewcontent.cgi?article=1711&context=ilj, accessed December 5, 2015. 26 U.S. Department of State, “Memorandum of Understanding Between the Government of Japan and the Government of the United States of America,” January 20, 2009, http://2001-2009.state.gov/e/eeb/rls/othr/63081.htm, accessed December 5, 2015. 27 International Air Transport Association (IATA), “Strengthening Japan’s Aviation Competitiveness — Reducing Cost of Infrastructure,” September 19, 2012, www.iata.org/pressroom/pr/pages/2012-09-19-01.aspx, accessed December 5, 2015. 28 CAPA Centre for Aviation, “LCCS Help Japanese Domestic Market Grow for First Time in Six Years but Market Situation Still Dire,” August 8, 2013, http://centreforaviation.com/analysis/lccs-help-japanese-domestic-market-grow-for-first-time-in- six-years-but-market-situation-still-dire-121716, accessed December 5, 2015. 29 Nikkei, “Japan Looking to Expand Airport Network Ahead of Olympics,” August 6, 2014, http://asia.nikkei.com/Politics- Economy/Policy-Politics/Japan-looking-to-expand-airport-network-ahead-of-Olympics, accessed December 5, 2015. 30 International Air Transport Authority, “Airline Cost Performance,” July 2006, www.iata.org/whatwedo/Documents /economics/airline_cost_performance.pdf, accessed December 5, 2015. 31 Ministry of Land, Infrastructure, Transport and Tourism, “Tokyo International (Haneda) Airport,” www.mlit.go.jp/koku/15_hf _000051.html, accessed December 5, 2015.

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Page 12 9B16M007 32 H. Murakami, “Empirical Analysis of Inter-firm Rivalry between Japanese Full-Service and Low-Cost carriers,” Pacific Economic Review, 2011, 103–119, http://econpapers.repec.org/article/blapacecr/v_3a16_3ay_3a2011_3ai_3a1_3ap_ 3a103-119.htm, accessed December 5, 2015. 33 International Air Transport Authority, “Airline Cost Performance,” July 2006, www.iata.org/whatwedo/Documents/ economics/airline_cost_performance.pdf, accessed December 5, 2015. 34 RPK is a measure of traffic for an airline flight and is calculated by multiplying the number of revenue-paying passengers aboard the airline by the distance traveled; Japan Airlines, “JAL Annual Report 2013,” https://www.jal.com/en/investor/ library/report/pdf/index_2013.pdf, accessed December 5, 2015. 35 Jetstar, “Qantas Increases Share in Jetstar Japan,” October 31, 2013, www.jetstar.com/mediacentre/latest- announcements/detail?id=6d2f01e8-d9b4-4889-ac8e-a5d6937fbb1e&language=en, accessed December 5, 2015. 36 CAPA Centre for Aviation, “Air Do, Product of Japan’s Quixotic Airline Market, Likely to Remain Independent Pending Reform,” September 18, 2013, http://centreforaviation.com/analysis/air-do-product-of-japans-quixotic-airline-market-likely-to- remain-independent-pending-reform-128487, accessed December 5, 2015. 37 Zipanguflyer, “CoachFlyer 6J034: NGS — HND on Solaseed Air's Boeing 737,” February 6, 2014, http://zipanguflyer .blogspot.jp/2014/02/flying-lq34-ngs-hnd-with-solaseed-air.html, accessed December 5, 2015. 38 H. Murakami, op. cit. 39 Usine nouvelle, “Boeing Délivre Enfin son Premier 787,” September 26, 2011, www.usinenouvelle.com/article/boeing- delivre-enfin-son-premier-787.N159540, accessed December 5, 2015. 40 International Air Transport Authority, “Profitability and the Air Transport Value Chain,” June 2013, www.iata.org/whatwedo/ Documents/economics/profitability-and-the-air-transport-value%20chain.pdf, accessed December 5, 2015. 41 CAPA Centre for Aviation, “AirAsia Expansion,” December 14, 2012, http://centreforaviation.com/analysis/airasia- accelerates-fleet-expansion-as-battle-with-indonesias-lion-air-moves-up-a-gear-91790, accessed December 5, 2015. 42 S. Nomura, “Keys to the Success of LCC Business in Japan,” Japan Tourism Marketing Co, October 6, 2011, www.tourism.jp/en/column-opinion/success-lcc-business/, accessed December 5, 2015. 43 CAPA Centre for Aviation, “Eight North Asian Low-cost Airline Trends to Watch in 2013,” December 31, 2012, http://centreforaviation.com/analysis/eight-north-asian-low-cost-airline-trends-to-watch-in-2013-92301, accessed December 5, 2015; CAPA Centre for Aviation, “Southeast Asia Low-cost Airline Fleet to Expand by Almost 20% in 2014. Are More Deferrals Needed?” March 11, 2014, http://centreforaviation.com/analysis/southeast-asia-low-cost-airline-fleet-to-expand-by- almost-20-in-2014-are-more-deferrals-needed-156726, accessed December 5, 2015. 44 All Nippon Airways Co., Ltd., “Annual Report 2012-2013,” www.anahd.co.jp/en/investors/irdata/annual/, accessed December 5, 2015. 45 J. Okamura, “Peach Aviation Limited Business Summary,” January 8, 2013, www.pp.utokyo.ac.jp/ITPU/en/seminar/2013- 01-08/documents/itpu20130108-Okamura.pdf, accessed December 5, 2015. 46 CAPA Centre for Aviation, “AirAsia Japan Collapses after AirAsia Group was too Bearish while ANA Lacked Experience,” June 26, 2013, http://centreforaviation.com/analysis/airasia-japan-collapses-after-airasia-group-was-too-bearish-while-ana- lacked-experience-114196, accessed December 5, 2015. 47 All Nippon Airways Co., Ltd., “Creating New Demand: Development of the LCC Business,” www.anahd.co.jp/en/investors/ data/pdf/annual/12/12_11.pdf, accessed December 5, 2015. 48 All Nippon Airways Co., Ltd., “Annual Report 2011,” www.anahd.co.jp/en/investors/irdata/annual/, accessed December 5, 2015. 49 AirAsia, “ANA Part Ways Over Management Clashes,” June 25, 2013, www.japantoday.com/category/business/view/ airasia-ana-part-ways-over-management-clashes, accessed December 5, 2015. 50 The Economist, “Japanese Women and Work,” March 29, 2014, www.economist.com/news/briefing/21599763-womens- lowly-status-japanese-workplace-has-barely-improved-decades-and-country, accessed December 5, 2015. 51 J. Okamura, “Peach Aviation Limited Business Summary,” January 2013, http://www.pp.u- tokyo.ac.jp/ITPU/en/seminar/2013-01-08/documents/itpu20130108-Okamura.pdf, accessed December 5, 2015. 52 CAPA Centre for Aviation, “AirAsia Japan Launches as Country's Third New LCC and Positive Force of Change for Partner ANA,” August 1, 2012, http://centreforaviation.com/analysis/airasia-japan-launches-as-countrys-third-new-lcc-and- positive-force-of-change-for-partner-ana-79360, accessed December 5, 2015. 53 All Nippon Airways Co., Ltd., “Annual Report 2012-2013,” www.anahd.co.jp/en/investors/irdata/annual/, accessed December 5, 2015. 54 World Finance, “Lost in Translation,” September 13, 2013, www.worldfinance.com/strategy/investor-relations/lost-in- translation, accessed December 5, 2015. 55 B. Forrey, A. Schotter, J. Doh, and T. Lawton, “AirAsia X: Can the Low Cost Model Go Long Haul?” Ivey Publishing, February 2012, Ivey product no. 9B12M013, available at https://www.iveycases.com/ProductView.aspx?id=53634, accessed December 5, 2015. 56 CAPA Centre for Aviation, “Jetstar Japan Settles in for the Long Term as AirAsia’s Departure Eases Domestic Market Competition,” September 24, 2013, http://centreforaviation.com/analysis/jetstar-japan-settles-in-for-the-long-term-as- airasias-departure-eases-domestic-market-competition-129445, accessed December 5, 2015. 57 CAPA Centre for Aviation, “ANA to Re-launch AirAsia Japan with New Brand, Oversight — Can ANA Get it Right This Time Around?” August 1, 2013, http://centreforaviation.com/analysis/ana-to-re-launch-airasia-japan-with-new-brand- oversight--can-ana-get-it-right-this-time-around-121471, accessed December 5, 2015. 58 CAPA Centre for Aviation, “Spring Airlines Moves to Establish Japanese Base While ANA Sees Cannibalisation from New LCCs,” December 7, 2012, http://centreforaviation.com/analysis/spring-airlines-moves-to-establish-japanese-base-while- ana-sees-cannibalisation-from-new-lccs-90656, accessed December 5, 2015.

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Page 13 9B16M007 59 Kyodo, “Peach Aviation Logs ¥1.2 Billion Loss,” August 17, 2013, www.japantimes.co.jp/news/2013/08/17/national/peach- aviation-logs-¥1-2-billion-loss/#.VfQVUKmXwUs, accessed December 5, 2015. 60 S. Hradecky, “Incident: Peach A320 at Okinawa on Apr 28th 2014, Descended below Minimum Safe Height,” April 30, 2014, http://avherald.com/h?article=473b1d49, accessed December 5, 2015. 61 Kyodo, “Peach to Cancel 894 Flights in July and August Due to Pilot Shortage,” May 20, 2014, www.japantimes.co.jp /news/2014/05/20/business/corporate-business/peach-cancel-894-flights-july-august-due-pilot-shortage/#.VUOSS6k6aRs, accessed December 5, 2015. 62 CAPA Centre for Aviation, “Japan’s Expanding LCCs Drive Growth but Need Cultivating; Spring Airlines and AirAsia Re- entry Loom,” April 5, 2014, http://centreforaviation.com/analysis/japans-expanding-lccs-drive-growth-but-need-cultivating- spring-airlines-and-airasia-re-entry-loom-160039, accessed December 5, 2015.

For the exclusive use of H. KASSA, 2018.

This document is authorized for use only by HAIMANOT KASSA in FA18-MGT362-Strategy-1-1 taught by LY PHAM, Golden Gate University from Aug 2018 to Dec 2018.