Results of Operations (consolidated basis)

Operating revenues in the fiscal 2004, fell by 7.3% year-on-year, to ¥1,931.7 billion (US$18,397 million). A major factor in this revenue decline was the substantial fall in the number of passengers on international routes because of the Iraq situation and the SARS epidemic.

The criteria for categorizing business segments have changed as of the year under review. Previously, airline-related business, credit card and leasing business, and retailing and distribution business were combined together and presented as “Air Transport-Related Business (“Other” segment).” Beginning with the term under review, however, airline-related business is presented independently as “Airline-Related Business” in line with our new segmentation strategy, under which these operations are clearly labeled as fulfilling functions auxiliary to our mainstay air transportation business. This change enables segment information to be presented more clearly. In addition, hotel and resort operations, previously presented separately, have been scaled down as the Company has switched to development based on operations on a commissioned basis. As a result, from the standpoint of importance they are from now on to be presented as part of “Other Business,” together with the credit-card and leasing business, the retailing and distribution business, and other businesses.

On a segment basis, the revenues of the air transportation business totaled ¥1,548.8 billion (US$14,750 million), down 6.2% from the previous year; those of airline-related business were ¥243.7 billion (US$2,321 million), down 0.9%; those of travel services fell by 12.4% to ¥381.9 billion (US$3,637 million); and those of other business slipped by 1.5% to ¥258.1 billion (US$2,458 million). Revenues in all segments were down, and the decline in air transportation business revenues, which account for the majority of total revenues, was instrumental in accelerating the fall in revenues in the travel services segment, given the close direct linkage between the two segments.

However, within the air transportation business segment, operating revenues from international passenger operations declined by 17.8% from the previous year, to ¥549.7 billion, while those from domestic passenger operations rose 6.3% to ¥668.8 billion. This is a graphic illustration of how the integration is impacting the domestic market. In addition, whereas domestic revenues were ¥1,093.0 billion, down just 1.8% year-on-year, the fall was greater on international routes. Revenues on American were down 7.1% at ¥302.2 billion; on European they fell 11.2% to ¥187.9 billion; and on Asia and Oceania they were down 19.6% at ¥348.4 billion. The fall was particularly marked on Asia and Oceania, which were severely impacted by the outbreaks of SARS and avian influenza.

Operating expenses fell by ¥73.5 billion from the previous year, to ¥1,999.3 billion (US$19,041 million). In spite of the rise in the unit price of Singapore Kerosene, fuel costs declined by ¥1.5 billion overall, as the number of flights was reduced substantially. The yen’s appreciation also contributed to the decline in expenses.

The implementation of the integration plan was accelerated, and ¥45.5 billion in emergency remedial measures for income were also implemented Group-wide. Nevertheless, the decline in revenues was substantial, and an operating loss was posted in the amount of ¥67.6 billion (US$644 million), compared with an operating income of ¥10.6 billion for the previous term.

An analysis of operating profit and loss by segment reveals that in the air transportation segment, domestic routes performed relatively well, but the slump on international routes gave rise to a ¥72.1 billion (US$687 million) operating loss. The travel services segment was adversely affected by factors that tended to depress demand, such as anxiety about the international situation, and these resulted in an operating loss of ¥3.9 billion (US$37 million).

In the airline-related business segment there was a substantial fall in the number of passengers on international routes, which led to a decline in the revenues of subsidiaries engaging in the sale of in-flight meals, but there were strong increases in revenues from the supply of electric power to aircraft and the sale of auxiliary power units and foodservice carts. As a result, this segment was able to post operating income of ¥1.8 billion (US$18 million). In the “other business” segment, hotel and resort operations generated robust revenues from guest accommodation, particularly within Japan, while in credit-card business, the initiatives to attract new card members were successful, resulting in a considerable increase in the number of cardholders. These and other factors enabled the generation of operating income of ¥6.3 billion (US$60 million) in this segment, which was around the previous year’s level.

With regard to non-operating income and expenses, interest expense - the largest expense item − was cut by ¥6.1 billion as a result of refinancing at lower interest rates, facilitated by the integration. However, a ¥12.8 billion decline in flight equipment purchase incentives and the liquidation of affiliates were key factors that caused net non-operating expenses to increase by ¥7.9 billion from the previous year, to ¥14.5 billion.

As a result of all of these factors, there was a net loss for the term of ¥88.6 billion (US$843 million), representing a deterioration of ¥100.2 billion.