Financial Results Announcement (October 30, 2020)

I would like to explain our consolidated financial results for the second quarter of fiscal 2020.

I will begin with a summary of our consolidated operating results.

With the continued spread of COVID-19, revenue in the first half declined 74% from the previous year to 194.7 billion yen. Although we made efforts to control variable costs and reduce fixed costs through flexible supply adjustments to counteract the significant decrease in demand, we were unable to make up for the decline in revenue. As a result, we posted an EBIT loss of 223.9 billion yen and a net loss of 161.2 billion yen, both extremely low figures as in the first quarter.

In international passenger operations, as countries worldwide continue to restrict entry, passenger traffic fell 97.7% from the previous year and passenger revenue decreased 96.6% from a year ago to 9.1 billion yen. On the other hand, entry restrictions have been eased for some countries, allowing entry of mainly business travelers, and we expect travel will gradually resume in the future. Looking ahead, we will consider reinstituting flights based on demand trends, while keeping watch of developments in the relaxation of travel restrictions and quarantine rules in each country, including the 14 day isolation period.

In domestic passenger operations, although a recovery trend was observed in July, passenger traffic decreased by 76.0% from the previous year due to sluggish demand growth in August and September. This was partly because the number of confirmed cases of COVID-19 increased again in summer, especially before the peak season during Obon, an annual Buddhist event. With regard to unit revenue, supply adjustments could not keep pace with the sharp decline in demand prior to the peak season. Also, under International Financial Reporting Standards (IFRS), the increase in JAL Mileage Bank award ticket users caused a negative impact on unit revenue compared to the previous year. As a result, passenger revenue declined 75.6% from the previous year to 69.6 billion yen. On the other hand, the atmosphere to exercise restraint in travel has eased since late-September, and driven by the expansion of the government's Go To Travel campaign to include Tokyo from October, domestic demand centered on tourism demand is recovering steadily. We strongly hope for further recovery.

In cargo and mail operations, amid the tight supply-demand balance caused by passenger flight reductions worldwide, we actively operated cargo-only flights using passenger aircraft, totalling 7,228 flights in the first half of the fiscal year. As a result, despite a substantial decrease in air cargo volume compared to the previous year, a large increase in cargo rates contributed to a 18.4% increase in cargo and mail revenue to 53.4 billion yen. We will continue to operate cargo flights mainly on international routes to support logistics networks and to use our aircraft effectively.

Next, I will explain our progress with cost reduction and investment control initiatives and the outlook for this fiscal year.

As for the reduction of fixed costs, we aimed to reduce fixed costs by 90 billion yen a year from our initial estimate, but will increase the target by 10 billion yen to 100 billion yen. Fixed costs for this fiscal year is expected to be 600 billion yen, instead of 700 billion as initially estiimated. Recent results show that we are achieving fixed cost reductions beyond our target through workplace-led efforts and we believe further reductions are possible.

With regard to revenue and capacity-linked costs, we have succeeded in reducing costs comparable to 40% of the revenue decline, and will continue to strive to reduce costs according to the revenue source.

With regard to investments, we aimed to reduce investments by 80 billion yen a year from our initial estimate. However, through further reduction in aircraft and other investments amounting to 10 billion yen, we will reduce total 90 billion yen from our initial plan of 200 billion yen, resulting in 110 billion yen of investments.

We will maintain Group-wide efforts to improve our business performance by swiftly implementing drastic cost reduction measures and controlling investments.

Next, I will explain our financial position and financing situation.

Cash on hand at the end of September was 346.6 billion yen. We plan to increase our commited credit line by 100 billion yen in November, bringing our unused commited credit line to 300 billion yen and ensuring sufficient liquidity on hand. Interest-bearing debt payable within one year is contained at 50.9 billion yen including lease fees, and most of it is secured with long-term funds.

Interest-bearing debt, which includes off-balance lease obligations under Japanese standards, was 501.1 billion yen as a result of procurement of capital in the first quarter. The equity ratio is 43.6% under IFRS including mileage obligation, which is a very high level among airlines around the world. Under Japanese standards, which does not recognize mileage obligation, the ratio will be up an additional 8 ~ 9 percentage points. The debt-to-equity ratio including lease obligations was 0.6, indicating that the Company continues to maintain a sound financial position.

Cash burn, which was approximately 45 to 50 billion yen a month in the first quarter, decreased significantly to approximately 15 to 20 billion yen a month from July to September, mainly because refunds for booking cancellations settled down. As a result, cash flows from operating activities also improved significantly from negative 130.2 billion yen in the first quarter to negative 19.7 billion yen in the second quarter alone.

As the situation is expected to remain stable at similar levels, we are preparing to fully withstand the effects of COVID-19.

We will continue to make every effort to secure liquidity on hand through flexible procurement of capital according to the situation.

Next, I will explain our full-year earnings forecast. As it is difficult at this time to present clear projections of recovery in international and domestic passenger demand given the continued spread of COVID-19, the Company has decided to make wide range estimates of demand recovery with several scenarios in mind, then estimate revenue based on these demand recovery scenarios, incorporate deeper cost reduction strategies, and present a wide range earnings forecast for this fiscal year.

Revenue for the current fiscal year is expected to be 530 to 600 billion yen, EBIT is expected to post a loss of 330 to 380 billion yen, and net loss is expected to be 240 to 270 billion yen. We must be prepared for very difficult results.

EBIT includes impairment expense, etc. due to aircraft retirement. As part of restructuring of our international passenger business, the Company is planning to retire 777 aircraft as soon as possible. As a result of aircraft retirement, restructuring costs are expected to be 4.7 billion yen in the first half and 10 billion yen for the full year.

Although the future is uncertain, we will make flexible supply adjustments according to demand and strive to narrow losses through rigorous cost reduction efforts.

Finally, I would like to talk about the future vision of the Company in the New Normal and measures to achieve it.

With an awareness of "Improving Safety and a Sense of Security" and "Accelerating Efforts toward Social Issues" as important management issues and the basis for our business operations, we will swiftly and flexibly "Review the Business Structure" to realize "Financial Restructuring" as soon as possible.

In reviewing our business structure, we will temporarily downsize our international full-service carrier business, where demand recovery is uncertain, and strengthen our LCC business to capture demand for tourism and VFR, or Visit Friends and Relatives, with expectations of a relative swift recovery and future growth.

In addition, the Company will strengthen businesses other than cargo and air transportation to improve risk tolerance, and flexibly adjust the balance of international, domestic, cargo and other businesses.

In the future, we plan to decease the proportion of revenues from our international and domestic full-service carrier businesses from around 70% to around 60% in the medium-to long-term, and increase the proportion of revenues from our LCC business, air transport-related business, and other businesses.

Next, I will explain specific actions for reviewing our business structure.

In the full-service carrier business, by the end of fiscal 2022, we plan to retire 24 aging 777 aircraft and five 737 -800s, a total of 29 aircraft, as soon as possible to improve fuel efficiency and reduce maintenance costs. In addition, some aircraft used for international flights will be flexibly relocated to domestic flights and ZIP AIR. Temporary expenses such as impairment expense due to aircraft retirement are expected to be approximately 10 billion yen in fiscal 2020 as I mentioned earlier, and approximately 3 billion yen from fiscal 2021 with limited impact.

New A350 aircraft for domestic flights will be introduced as planned, contributing to improving profitability and reducing CO2 emissions to achieve the SDGs.

On the other hand, in order to strengthen our LCC business, we will build an LCC network based in Narita by strengthening coordination between ZIPAIR and LCC partners Jetstar Japan and Spring Airlines Japan. ZIPAIR aims to achieve steady growth in line with demand recovery and is making steady progress with preparations such as introducting additional aircraft and commencing service to Honolulu.

While implementing these measures, we will promptly rebuild our financial structure to maintain and strengthen risk tolerance and achieve sustainable growth and development.

We are currently formulating a new Medium Term Management Plan incorporating these measures and plan to announce the plan by the end of the fiscal year.

In closing, though not mentioned in the Press Release, I would like to inform you of the details of director remuneration, which was decided at today's Board meeting based on current business conditions.

We have already decided to reduce monthly basic remuneration by 10% until December this year, and this will continue for the time being.

In addition, the Company has decided not to pay performance-linked remuneration, which accounts for 50% of director remuneration, next fiscal year.

As a result, director remuneration for next fiscal year will decrease by approximately 55% compared to when performance-linked remuneration is fully paid.