Industrials

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

In theory, a stronger local currency ought to be good for Japan's biggest airline.

ANA Holdings, whose passenger traffic is about 25 percent greater than Japan Airlines,  spends about a fifth of its operating costs on fuel that it buys in dollars. With the yen up 23 percent against the greenback over the past 12 months, it should be cheaper to fill up at the pump.

Kerosene cost ANA 306 billion yen ($3 billion) last fiscal year and aircraft leasing -- another item usually paid for in dollars -- amounted to another 96 billion yen. On the revenue side, a stronger currency should also encourage Japanese to travel overseas, boosting outbound traffic from the domestic passengers who are most loyal to their local carriers.

That's the idea, at any rate. In practice, it doesn't always work out that way. From June 2007 to June 2008, the yen strengthened from 123 to the dollar to 106. ANA's return on equity dropped into negative territory over that period, according to data compiled by Bloomberg.

To the extent that ANA's profitability correlates to the currency at all, it appears to do better when the yen is weak, not strong:

Yen vs ANA and JAL return on equity

There are plausible reasons why this should be the case. Qantas found itself struggling for survival during 2012 and 2013 as a strong Australian dollar encouraged overseas airlines to add services and tap a newly lucrative market. Underlying losses before tax at Qantas's international unit amounted to A$484 million ($367 million) during its fiscal 2012, A$246 million in 2013 and A$497 million in 2014, before a weaker currency and lower fuel prices returned the unit to profit during 2015.

Something similar appears to be happening in Japan currently. At Tokyo's Narita airport, the country's busiest international hub, the number of overseas passengers has decisively overtaken domestic tourists on cross-border flights over the past year. 

Opening of Japan
International passengers now make up the bulk of non-transit traffic through Tokyo's Narita airport
Source: Narita International Airport Corp.
Note: Data not available for December 2014.

That's great news for Japanese retailers: Chinese tourists spent 1.4 trillion yen in Japan last year, a 154 percent increase from a year earlier, Bloomberg's Monami Yui and Grace Huang reported Tuesday. But it's harder for local airlines that have to deal with increasingly aggressive competition.

You can see this most clearly if you look at passenger yield, a measure of revenue per passenger, per kilometer, which gives a good insight into changing ticket prices.

While the measure is holding up relatively well on domestic routes in spite of competition from low-cost carriers including ANA's own Vanilla Air, on international routes it fell in the June quarter to its lowest level since 2012. Adding flights to China isn't leading to better sales: China's share of revenue dropped 3.3 percentage points even as its portion of ANA's seat capacity rose 0.5 percentage points, ANA said in a presentation alongside first-quarter results Wednesday.

Charity Begins at Home
The amount of money that ANA is earning per passenger, per kilometer is holding up domestically even as it slumps on international routes
Source: Bloomberg, company reports

ANA's situation isn't desperate. While net income of 6.7 billion yen in the June quarter was 21 percent below the result a year earlier and barely more than half the 12.6 billion yen analysts had estimated, the carrier's full-year net income forecast was maintained at 80 billion yen. That suggests management confidence that the current trend can be turned round smartly.

They'd better be right. With its shares trading at 10.8 times analysts' estimates of blended forward 12-month earnings, ANA is the most richly valued major carrier in the world after Singapore Airlines and Air China. Japan Airlines, which emerged from bankruptcy in 2011, is still on just 5.7.

Premium Economy
ANA's blended forward 12-month price-earnings ratio is the third-highest among the world's major airlines
Source: Bloomberg
Note: Shows only carriers with at least $10B in trailing 12-month revenues.

ANA can't afford much disappointment given its premium valuation, but the threats from a stronger yen should be quite as alarming as the damage from the opposite movement. You can hedge away the effects of currency movements on your fuel bill, but there's no derivative in the world that will protect you from competition.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Based on revenue passenger kilometers.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net