Annual Report Japan Airlines Corporation at a Glance Consolidated Financial Highlights Consolidated Operating Highlights Message from the Management Interview with the Group CEO Dream Skyward II: Stepping-stone to become "the world' s No.1 airline group" Review of Operations Corporate Social Responsibility (CSR) Activities Management's Review and Analysis of Financial Position Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholder' Equity (Note8) Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Auditors Consolidated Subsidiaries JAL and Its Subsidiaries and Affiliates Directory JAL Group Route Network Board of Directors Investor Information

Message from the Management

		“The completion of the business integration has taken the JAL Group a step further towards standing in the front rank of the world’s air transportation groups. Guided by our philosophy of returning profit to all our stakeholders, under the new business and management structure our prime goal is to improve profitability still further and maximize the soundness of the Group’s financial condition.”
		Isao Kaneko, Group CEO (left) Toshiyuki Shinmachi, President (right)

Business performance

A very harsh operating environment prevailed during the fiscal 2003, impacted by factors such as a succession of serious international events, including the Iraq war and the outbreaks of new infectious diseases in the form of SARS and then of avian influenza, and by a steep increase in the price of aviation fuel.

  In domestic passenger operations, we implemented vigorous sales promotion measures and strengthened competitiveness by steady implementation of the integration plan, including network reorganization. As a result, yield improved and there was a substantial increase in revenues. In international passenger operations, however, the impact on passenger psychology of the external factors referred to above was more serious than anticipated, and we were unable to avoid a decline in revenue caused by the resultant slump in demand.

  We accelerated the integration plan vigorously, implementing a total of ¥45.5 billion of Group-wide emergency countermeasures to improve the financial position. These resulted in consolidated operating revenues of ¥1,931.7 billion (US$18,397 million), an operating loss of ¥67.6 billion (US$644 million), and a net loss of ¥88.6 billion (US$843 million).

On April 1, 2004, the JAL Group achieved complete integration − under the unified “JAL-Japan Airlines” brand − through the reorganization of Japan Airlines Co., Ltd. and Japan Air System Co., Ltd. into Japan Airlines International Co., Ltd., which handles international passenger and cargo operations, and Japan Airlines Domestic Co., Ltd., which handles domestic passenger operations.

  This reborn JAL Group possesses the largest international network originating in Japan and also the largest domestic network, offering customers greater-then-ever convenience. In addition, since April 2004, all products have been unified under the JAL brand in line with the keywords “easy-to-use, easy-to-understand.” All JAL and JAS flight numbers have been unified with the JAL prefix plus four digits, and ticket issuance and airport systems have been integrated, so that all dialing in for reservations has been unified into the existing JAL toll-free system.

  As a result of the integration, the ratio of the domestic and international networks has been improved from 2:5 to 1:1 in terms of revenues. This has rectified the dependence on international routes that was a major pre-integration issue facing the management of the former Japan Airlines. What is more, we have achieved a more even geographical balance of revenues from international routes, 35% coming from Transpacific, 20% from routes to Europe, and 30% from China and other Southeast Asia routes. Provided situations of similar magnitude to the Iraq conflict and SARS do not arise, we believe we are firmly on course to move back into profitability in fiscal 2004. An added factor is that the strengthening of our operations on domestic routes has increased the ratio of passengers traveling as individuals. The rise in the number of individual passengers raises strong expectations of an improvement in earnings.

The airline industry is likely to see a widening of new business opportunities, driven by factors such as growth in airline demand in China and other parts of Southeast Asia and the opening of the Central Japan International Airport. Nevertheless, this is likely to be accompanied by increasingly fierce competition. At the same time it will be essential, given the ongoing instability in the international situation, to continue to ensure that flight safety and all other aspects of safety are pursued painstakingly.

  Amid these circumstances, the JAL Group will continue to be guided by its philosophy of returning profit to all its stakeholders under its new business and management structure, the prime goal being to improve profitability still further and to maximize the soundness of the Group’s financial condition. Its key management indicators are return on equity (ROE) and the payback period of interest-bearing debt as a multiple of operating cash flows, the targets being to raise ROE to at least 10%, and the payback period of interest-bearing debt divided by operating cash flows to within 10 years.

  The JAL Group FY2003-05 Medium-Term Business Plan was formulated with the aim of improving profitability and enhancing the soundness of the Group’s financial condition. To add depth to the plan, the JAL Group FY2004- 06 Medium-Term Business Plan was formulated in March 2004. This new plan lays down targets in individual categories aimed at ensuring an overall integrated impact, including for the fundamental aspects of safety and corporate social responsibility; for Group management strategy in the categories of ensuring deep-rooted customer orientation, the optimization of business processes, and human-resource measures; and for function-specific business planning. The overall aim is to maximize customer value and establish an efficient operating structure.

  For the JAL Group to achieve sustained growth, it is of the utmost importance for it to fulfill its responsibilities as a corporate citizen and to gain the unshakable trust of society. To fulfill the Group’s corporate social responsibility (CSR), the Corporate Social Responsibility Committee has been newly established, and Group-wide efforts will be made in this sphere.

  The Group will work in unison to take maximum advantage of the benefits of the integration and to strengthen the two fundamental components of quality: safety and service. In this way it will aim to be “the world’s No.1 airline group in terms of both service quality and business volume.” For these endeavors we hope to receive the continuing understanding and support of all stakeholders.

Isao Kaneko Group CEO

Toshiyuki Shinmachi President

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