Change Flies Into Japan: JAL’s Airbus order shows economic transformation is happening anyway, even as grand plans falter in Tokyo

Change Flies Into Japan

JAL’s Airbus order shows economic transformation is happening anyway, even as grand plans falter in Tokyo.

JOSEPH STERNBERG

Oct. 9, 2013 12:29 p.m. ET

The case for optimism about Japan’s economic future, such as it is, is that change has to come eventually. Demographic decline at home and economic changes abroad will make the old ways unsustainable, at which point the Japanese will have to change course. And wouldn’t you know it, but this week Japan Airlines 9201.TO +1.25% , of all companies, offered further evidence that the theory is true.Former flag carrier JAL announced Monday it is ordering 31 widebody A350 passenger jets from Europe’s Airbus, breaking America’s 60-year near-monopoly on the sale of aircraft to Japanese carriers. At the moment, all of JAL’s fleet are Boeings, as are 91% of cross-town rival ANA’s planes. That’s an unusual degree of concentration, particularly since BoeingBA -0.84% isn’t a Japanese company. Air France and Germany’s Lufthansa, major carriers in Airbus’s home turf, operate fleets that are “only” 70% and 80% Airbus respectively, according to the Centre for Asia-Pacific Aviation, or CAPA.

Japan’s Boeing-heavy fleets were no accident. In the 1970s and ’80s, as Japan’s rapid growth brought it into political conflicts especially with the U.S., purchases of big-ticket American airliners were a convenient way to dent contentious trade surpluses in a hurry when necessary.

Steering Japanese airlines toward Boeing also allowed the government to pursue other goals. The importance of Japan as a customer encouraged Boeing to bring aboard Japanese companies as suppliers in return, particularly Mitsubishi, Kawasaki and Fuji. Tokyo’s purpose was to eventually enable Japanese firms to produce a purely Japanese airliner. They’re still waiting, but hey, it seemed like a good idea in the ’80s.

Politics aside, the commercial arguments in favor of one Boeing purchase after another weren’t entirely nonsensical. All-Boeing fleets provided large pools of easily interchangeable parts, and Boeing manufactured planes that were suitable for Japanese carriers’ perceived needs. The iconic Boeing 747 jumbo jet, of which JAL once operated more than any other carrier, was the perfect aircraft for a developing economy with millions of people ready to go on the move.

Times change. The trade balance with the U.S. no longer has the political urgency it once did. Tokyo’s heavy-industry policies are further out of synch with the global economy, and with Tokyo’s own green-and-modern enthusiasms, than they once were. The marketplace is no longer what it used to be.

Shrinking population means fewer passengers at home, while fiercer regional competition, especially from low-cost carriers, is finally starting to reach Japan and is sparking more intense battles for that stagnant customer base. Fortunately for JAL and ANA, Japan still features high demand for deluxe and profitable seats in business- and first class. But at that end, Japanese carriers also face ever more intense competition from other airlines investing heavily in beefing up their amenities.

The result is a combination of subtle and not-so-subtle deflation. Japanese carriers must slash ticket prices to compete at the bottom while offering more service for more or less the same fare at the upper end.

This deflation, brought about by demographics and greater competition (another term for which would be “trade in services”), is stimulating a realignment of existing businesses, and also a wave of capital investment that is likely to be more efficiently allocated than the investments of yore that were steered as much by politics and bureaucratic planning as by commercial merit.

First JAL was pushed into bankruptcy in 2010, a process in which by all accounts new managers have created a leaner, meaner going concern out of a bloated shambles. New chairman Kazuo Inamori slashed an oversized workforce, rationalized routes and focused like a laser on improving customer service.

And now the A350. The Airbus is larger than the new Boeing 787 Japanese carriers also have embraced, but has a slightly smaller passenger capacity than the latest Boeing 777 that currently does the bulk of JAL’s long-haul flying, CAPA notes. It also is smaller than the new 777 model Boeing is developing.

As a replacement for those existing 777s, the Airbus order represents JAL management’s attempt to adapt to new conditions. The fuel efficiency Airbus promises will be crucial if fuel turns out to be one of the few cost savings JAL can eke out of an operating environment in Japan that otherwise features higher costs than Europe, let alone the rest of Asia.

A lingering question for JAL is whether managers can maintain the reforms started by Mr. Inamori now that he has stepped down. From this perspective, the important factor will be whether managers, employees and creditors believe the last bailout was the last bailout. The strategic direction implied by this week’s Airbus order suggests that so far they do think so.

Which raises an interesting point. Everyone assumes Japan’s future hinges on what the government does do, notably whether Prime Minister Shinzo Abe can push forward with his reform agenda. JAL suggests that what the government doesn’t do (in this case, another bailout in the future) could be equally important, if not more so. There’s something to be said for Tokyo stepping out of the way and letting nature take its course.