Rocked by the rising yen and an economic downturn, Japan Airlines Co. thought it had finally found a way to slash costs earlier this summer. JAL was elated after reformist politicians said they were willing to end the government's habitual meddling in the airline business. So JAL planned to offer early retirement to some flight attendants, whose annual earnings average a hefty $80,000, and replace them with low-wage part-timers. Then, the bureaucrats weighed in. Top officials in the Transport and Labor Ministries not only dumped on the plan but threatened retaliation. Within days, the airline backed down. "We had no choice," says one bitter JAL official.

Japan's reversal on deregulation only adds to the woes of its airline industry. JAL, the country's leading carrier, has lost about $1 billion during the past three years (chart). JAL and its rivals, All Nippon Airways Co. and Japan Air System, are burdened with some of the world's highest costs as they compete with more efficient Asian airlines and aggressive American carriers. Yet efforts to chop their labor forces are now being ruled out by a Liberal Democratic-Socialist coalition government opposed to any job cuts. This leaves the carriers scrambling to trim expenses by such tactics as attrition, joint-marketing agreements, and through-ticketing with foreign carriers on strategic international routes.

Last year was a rough ride for all three carriers, with only ANA eking out a profit--and that by selling off planes. Industry watchers say 1994 will not be much kinder. JAL is expected to enjoy increased revenues as international traffic rebounds, but its operating losses are likely to hit $120 million for the year. Even though demand is up, revenue per passenger is down because of international fare discounts. At home, domestic air traffic remains sluggish--up a mere 0.1% from last year.

JUMBO FEES. JAL's efforts to cut costs are further frustrated by the built-in expense of operating in Japan. Airlines must pay nearly $10,000 to land a Boeing 747 at Narita, Tokyo's main international airport. That's double the amount charged in Frankfurt and more than four times the fee in New York. Combined with other fees and taxes, airport-usage charges account for nearly 15% of the carriers' total operating costs. And at the new Kansai International Airport scheduled to open on Sept. 4, landing fees match those at Narita, while hangar and office space costs even more.

Faced with unrelenting expenses elsewhere, JAL is looking to find some way to reduce personnel costs. Labor represents 23% of operating expenses. Given the government's resistance to wholesale cuts, JAL is relying on attrition, skimpy wage increases, and curbs on hiring. The Transport Ministry has also given JAL its blessing to form money-saving tie-ups with foreign carriers. JAL recently reached an agreement with Royal Dutch Airlines for ticketing Tokyo passengers to Zurich, with a transfer to a KLM flight in Amsterdam. JAL is also talking to American Airlines about linking frequent-flyer benefits.

In other budget-trimming moves, JAL has curtailed purchases of new aircraft. It's still smarting from the blunder it made in the 1980s by agreeing to an 11-year contract committing it to buy Boeings at the fixed rate of 184 yen to the dollar. That high purchase price means that the company will have wasted nearly $2 billion by the time the agreement expires at the end of 1996.

JAL's hopes for future growth are now pinned to the domestic market, where it is safe from fierce foreign competition and currency fluctuations. Because it must stay in the Transport Ministry's good graces in order to boost its share of the domestic market, JAL won't risk defying the bureaucrats over such issues as part-time flight attendants. Instead, it's counting on special promotions and gimmicks like fancy plane paint jobs featuring Disney characters.

VIRTUAL HELP. That's not to say that all is lost for airline deregulation. The Transport Ministry has loosened up in some ways. It recently approved the airlines' request to use flight simulators in pilot training. Currently, pilots must be trained in actual jets at a cost of around $25,000 an hour, vs. about $1,000 an hour in simulators.

Critics are skeptical that the airlines will enjoy real relief soon. "I don't see the government moving toward genuine deregulation," says Mitsuhiro Kusumi, an airline consultant with Kusumi & Associates in Tokyo. To further cut costs, JAL can shift maintenance facilities abroad and curtail new investments. But so long as real deregulation remains grounded, so are JAL's fortunes.

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