Name of the Company: All Nippon Airways (ANA)
Business Sector: Aviation
Operating Geography: Asia, Japan, Global
About the Company: All Nippon Airways (ANA) is the largest airline in Japan and headquartered in Tokyo, Japan. The company offers air and cargo transportation, travel, ground handling and trading services through various subsidiaries. The company operates in air transportation segment by mix of full service airlines like All Nippon Airways, ANA Wings and Air Japan; and low cost carriers like Vanilla Air. It provides airline related services. It also provides tour packages. The company also operates in trade and retail segment through ANA Trading Co. It has a total of 20,000+ (2016) people working for it.
Revenue: ¥1,791,187 million – FY 2016
SWOT & PESTLE Analysis
|1. Strong market presence in domestic and international services|
2. Complementary Service portfolio by presence in ancillary services
3. Member of Star Alliance network
|1. Decline in revenues from cargo and travel segments
2. Dependence on Japan for majority of revenues
|1. Business expansion plan can help in identification of future growth opportunities|
2. Growth in tourism in Japan due to Tokyo Olympics and Paralympic Games in 2020
|1. Aging population in Japan leading of reduction in growth opportunities
2. Intense competition in both domestic and international fronts
3. Volatility in jet fuel prices which is significant operating expense for the company
4. Regulatory issues pertaining to continuing operations in both domestic and international segments
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1) Strong market presence in domestic and international services: According to the ranking given by IATA, the company is currently 8th among global airlines in terms of the number of passengers carried within the domestic services and 14th in terms of total number of passengers, including those within international services. ANA is also the largest domestic carrier in Japan providing service to 42.664 million domestic passengers and holds a share of 44.41% in the Japanese domestic passenger services market. Moreover, ANA carried 8.2 million international passengers in 2016. Such strong market presence enables the company to maintain a leadership position and provides a competitive advantage over its peers.
2) Complementary Service portfolio by presence in ancillary services: The company has business operations in following segments: Air Transportation, Airline Related, Travel Services, Trade and Retail and Others. In air transportation segment the company provides domestic and international passenger transportation services along with cargo and mail operations. The Airline Related segment includes ground support services such as baggage handling, passenger check-in and cargo loading services. The Travel Services segment carries out the sales of tickets and branded travel packages. The Trade and Retail segment includes operations of ANA FESTA airport shops, ANA Duty Free stores and the ANA Shopping style mail-order site. Other business segment provides building maintenance and real estate business services. It also offers information systems, product sales, logistics and aircraft parts and repair services. The strong and extensive service offerings through both vertical and horizontal enhance the revenue stream of the company by balancing the overall business risk and providing synergies across segments. It also creates a unique value chain for the company and acts as a differentiation in the highly competitive market segment of operations.
3) Member of Star Alliance Network: ANA is a member of Star Alliance Network, which has 28 member airlines serving through more than 4,631 aircraft across 1,300 airports in 190 countries. Founded in the year 1997, Star Alliance was the first and is the largest airline alliance carrying over 689.98 million passengers annually. The alliance enables its members to provide more services and benefits than any airline cannot provide on its own. Services offered include a broader route network, Co-location at selected airports, opportunities to earn and redeem frequent flyer miles across the combined Star Alliance network along with access to more than 1100 airport lounges. As a result of this the company is able to offer more seamless mode to transportation across destination to its customers and improve its load factor which ultimately results in increased profitability.
1) Decline in revenues from cargo and travel segments: We can see from the annual report that the revenue from cargo declined by 2.59% from ¥32584 million in 2015 to ¥31740 million in 2016 for domestic operations and 9.1% from ¥124772 million in 2015 to ¥113309 million in 2016 for international operations. This can be attributed to the fact that cargo volume decreased by 1.8% and 3.7% in domestic and international segment caused due to decrease in shipments in both domestic and international markets as a result of softening demand conditions. For the travel segment the revenues declined by 1.02% from to ¥169078 million in 2015 to ¥167349 million in 2016. The domestic segment revenue increased but the international segment was down which can be attributed to yen depreciation and unforeseeable terrorists attack in Europe. This can have material impact on the revenues of the company and lead to lower financial performance.
2) Dependence on Japan for majority of revenues: ANA gets substantial portion of its revenue from domestic operations. This can be substantiated from the annual report where 82.3% of the total revenues was attributed due to operations in Japan and rest was from overseas operation. This high dependency on Japanese market may have an adverse effect on the health of the company due to some negative local conditions or lower than expected growth conditions. It makes the company vulnerable to changes in the economic and political situation of the country. Thus, the company’s high reliance on home market exposes it to risks of downturns created by the country’s macroeconomic conditions resulting in risk in revenue generation.
1) Business expansion plan can help in identification of future growth opportunities: In January 2016, ANA announced its new growth strategy for 2020. Its expansion strategy focuses on five parts: Overall business portfolio, Expansion of the airline business, Fleet strategy and Value creation for shareholders. Under Overall business portfolio, the company plans to expand its market position, which includes domestic air transportation, cargo and its LCC segment. Through Expansion of the airline business, it intends to expand its international presence by seeking a new partnership or integrate more joint venture with other carrier, continuing to strengthen its existing routes and expand new services to Asia and South America. By the end of FY2020, ANA plans to achieve its international passenger ASK rate by 151% compared to FY2015. It intends to capture growing demand of inbound tourist to connect domestic flights to Asia region. By the end of FY2020, ANA plans to achieve its domestic passenger ASK rate by 96% and operating revenue by 100% compared to FY2015. The company focuses on increasing its fleet of aircraft to 300 by FY2020 compared to 250 at the end of FY2016. ANA also plans to develop logistic services to Asia, which could expand its cargo capacity by 138% in FY2020 compared to FY2015. The successful execution of its strategies could further strengthen its operational capabilities.
2) Growth in tourism in Japan due to Tokyo Olympics and Paralympic Games in 2020: Major global events are going to be held in Tokyo in 2020 i.e. Olympics 2020 and Paralympic Games. Such major events is going to generate a lot of amount of demand for airline travel especially in the International segment. The company can tie up with airlines around the world based on the expected tourists which are expected to visit Japan and have flight sharing agreements in place so that the company can expand its presence across the globe by way of increased passenger load and introduction of new services in newer markets based on demand conditions. This can not only lead to increased revenues but also create brand awareness in those markets. The event has also lead to expansion of Haneda Airport and Narita International Airport airports leading to increased capacity. So, the company can leverage this favorable opportunity to expand and at the same time increase its revenue.
1) Aging population in Japan leading of reduction in growth opportunities: According to World bank statistics in 2015 Japan had 26.34% of total population which was greater than the age of 65 years. Coupled with the fact that the birth rate in the country is 1.42% which is on the lower side, so it creates an aging society in the future. For ANA, it means that the growth prospects in future are going to be limited, so the company needs to diversify into more markets for future growth.
2) Intense competition in both domestic and international fronts: The airline industry is a highly competitive one. The competitive factors are based on fares and services offered along with it. Profits of airlines are sensitive to even small changes in fares and demand conditions. ANA competitors include low-cost carriers, traditional airlines and regional airlines. Some of its competitors are Cathay Pacific, China Southern Airlines, ANA, China Airlines, Japan Airlines among many others. Intense competition is usually based on fares and it may lead to decrease in profitability due to discounting and promotional offers offered by competitors and put a dent on the margins of ANA.
3) Volatility in jet fuel prices which is significant operating expense for the company: Fuel consists of the largest operating cost for the company consisting of approximately 20% of the total operating costs. The fluctuation of such an important factor in the operating cost is caused due to external factors which are out of the control of the company. The risk of volatility can be reduced by hedging the price risk. But, the amount of hedging is limited and nevertheless have material impact on the operating cost for the company thereby affecting margins and ultimately the profitability of the company.
4) Regulatory issues pertaining to continuing operations in both domestic and international segments: The airline industry is highly regulated and legal compliance requirement results in significant costs. The company's operations are subject to numerous regulations, laws and restrictions in both domestic and international areas. Non-compliance with these laws, regulations, and restrictions could expose the company to penalties, fines, suspension, or debarment, which could have an adverse material effect on the financials. The company is also subject to numerous statutory environmental protection regulations. These regulations are imposed on airline companies with regard to issues such as aircraft emissions of greenhouse gases, use of environmentally polluting substances and their disposal, and energy usage at major offices. ANA shoulders a considerable cost burden in order to adhere to such statutory regulations. Thus, if the current regulations are strengthened or if new regulations, such as environmental taxes, are introduced, the company may incur large additional costs, which could impact ANA's operating margins.ANA SWOT analysis has been conducted by Vipul Varkar and reviewed by senior analysts from Barakaat Consulting.
1. ANA Annual Report 2016: https://www.ana.co.jp/group/en/investors/irdata/annual/pdf/16/16_E_00.pdf
2. Star Alliance facts https://portal.staralliance.com/employees/about/bottom-left/the-star-alliance-network
3. Financial ratios http://financials.morningstar.com/ratios
4. Population report Japan http://data.worldbank.org/indicator/SP.POP.65UP.TO.ZS?locations=JP&name_desc=false
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