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The JAL Group conducts risk assessments biannually and updates its list of risks and risk map. We are taking steps to identify and prioritize our risks and act on them (by how we have prioritized them).

The JAL Group has identified a number of risks that could have a material impact on investment decisions. The list is not exhaustive and the JAL Group may be affected by unforeseen risks not described below. This report also contains forward-looking statements based on information available to the Company as of March 31, 2020. The JAL Group is exposed to the following principal risks due to the nature of its business activities, centered on the scheduled air transportation business and non-scheduled air transportation business.

(1) Pandemic Risk, Natural Disaster Risk and Climate Change Risk

①Pandemic Risk

The JAL Group operates the air transportation business in Japan and around the world. A global outbreak of an unknown disease, such as the new coronavirus (COVID-19) that has been spreading around the world since the beginning of 2020, could lead to a sharp decline in air passenger demand caused by government-imposed restrictions on the movement of people such as entry and travel restrictions and voluntary restraint from going out, and voluntary restraint from using aircraft by companies and users to prevent infection. As the Group’s air transportation business has a high proportion of fixed costs such as aircraft costs and personnel costs, a short-term sharp decline in demand could seriously affect the operating performance of airlines including the JAL Group.

②Natural Disaster Risk and Climate Change Risk

The majority of JAL Group passengers use aircraft departing from or arriving at Haneda and Narita airports. Consequently, these airports play a vital role in the Group’s air transportation business. In addition, the Group’s Information System Center, which plays an important role in managing JAL Group airline flights, reservations and other services, and the Integrated Operations Control Center (IOC), which is tasked with controlling the operation and scheduling of the Group’s fleet worldwide, are both located in the Tokyo area. Consequently, a major earthquake or volcanic eruption in the Tokyo area could lead to the protracted closure of Haneda and Narita airports, while a fire, terrorist attack or other incident at these key facilities could lead to a prolonged outage of the Group’s information systems and operational capabilities, which would have a severe impact on the Group’s operations.
To mitigate the risk of a shutdown of the IOC in Tokyo, the Group transferred some of its functions to the Operations Control Center at Osaka International Airport and started 24-hour operations, but it is not a substitution for all the functions of the IOC in Tokyo.
In addition, if climate change caused by global warning, etc. brings more frequent large-scale natural disasters to Japan, it could affect the Group’s operating performance.

(2) External Environment Risk such as International Affairs and Economic Trends

①External Environment Risk

The JAL Group’s air transportation business operates in Japan and markets worldwide. Demand for air travel may be affected by global economic trends, natural disasters, terrorist attacks, regional conflicts, war and other events. In addition, the JAL Group’s services are partly dependent on maintenance companies, airport personnel, sky marshals, fuel suppliers, baggage handling companies, security companies, and other third parties, which could affect the Group’s business operations.

②Competitive Risk

The JAL Group faces severe competition in Japan and overseas in areas such as routes, services, and pricing. On domestic routes, the Group competes with other major Japanese airlines, low cost carriers, and bullet train services. On international routes, competition is intensifying with both major domestic and international airlines. In addition, alliances, codeshare agreements, and reciprocal air frequent flyer programs between overseas and Japanese airlines are contributing to the challenging environment on international routes. Significant deterioration in this competitive climate and operating environment could affect the Group’s operations.
The JAL Group has partnerships with global partner airlines in various forms such as joint business, alliance, codeshare, frequent flyer program, and so forth. The JAL Group’s alliance strategy may be affected by changes in operating conditions at other partner airlines including oneworld members or joint business partners, and by changes in the oneworld alliance membership or major developments in the Group’s alliance relationships.

(3) Aircraft Delivery Risk

In the air transportation business, the JAL Group places orders for aircraft with the Boeing Company, Airbus SAS, Embraer SA, ATR, and Mitsubishi Aircraft Corporation to increase efficiency by switching to more fuel-efficient aircraft and reducing aircraft types in the fleet. However, the delivery of new aircraft may be delayed due to technical, financial, and other reasons at aircraft manufacturers, which could force adjustments to fleet plans that affect the Group’s operations over the medium and long term.

(4) Market Fluctuation Risk

①Fuel Price Fluctuation Risk

Fluctuations in fuel prices have a significant impact on JAL Group’s operating performance. The Group charges a fuel surcharge to partly cover the impact of higher fuel prices. However, changes in fuel prices are not immediately reflected in the fuel surcharge and it is inappropriate to ask customers to cover the entire increase in fuel prices. The Group also uses crude oil hedging transactions to mitigate the risk of fuel price fluctuations. However, a sudden and steep drop in oil prices may not contribute to an improvement in the Group’s operating performance, as the benefits of the decline would not be reflected in business results immediately due to hedge contract positions and other factors.

②Exchange Rate Fluctuation Risk

The JAL Group operates in countries other than Japan. As a result, some of its revenues and expenses are denominated in foreign currencies. In particular, aviation fuel prices, one of the Group’s main expenses, is largely linked to the US dollar. Fluctuations in US dollar exchange rates therefore have a greater impact on the Group’s expenses than on its revenues. To mitigate the impact of exchange rate fluctuations on profits, the JAL Group uses foreign currency revenues to offset foreign currency expenses and foreign currency hedging transactions. The price of new aircraft is also closely linked to the US dollar, which means the Group is also exposed to the risk of exchange rate fluctuations when recording the value of assets and depreciation costs related to aircraft. To mitigate this risk, the Group uses hedging transactions to diversify opportunities for foreign currency exchange.

③Capital Market Risk and Financial Market Risk

The JAL Group needs to make significant capital investments, such as procuring new aircraft. To meet funding needs for these investments, the Group may procure funds from financial institutions or capital markets. The Group’s ability to secure funds and its funding costs are affected by trends in capital and financial markets, and by changes in its credit rating, which may limit the Group’s access to funds and lead to higher funding costs.

(5) Aviation Safety Risk

The JAL Group implements a wide range of measures on a daily basis to ensure the safe operation of its flights. However, a single fatal accident has the potential to undermine customer trust in the Group’s flight safety and lead to a loss of public support. The Group must also provide compensation for any passenger fatalities or injuries in the event of an accident, which could have a severe impact on the Group’s operating performance. In addition, safety issues related to the JAL Group, the same aircraft type operated by the Group or codeshare flights could undermine customer trust in the Group’s flight safety and lead to a loss of public support, which could affect the Group’s operating performance. To limit the impact of legal damages related to air accidents and to ensure those affected by any accident receive sufficient compensation, the Group has purchased liability insurance that provides an internationally recognized level of compensation and coverage.

(6) Regulatory Risk, Environmental Compliance Risk and Litigation Risk

The Group’s operations are subject to various international legal restrictions and national and local government laws and regulations. Revisions to these laws and regulations may result in even tighter restrictions on the Group’s operations, which could lead to a significant increase in costs.

①Regulatory Risk

The JAL Group conducts its operations in accordance with various rules and regulations, such as Japan’s Civil Aeronautics Act and other regulations governing airline businesses, bilateral aviation agreements and other international arrangements, Japan’s Antimonopoly Act and other similar antitrust laws overseas, and rules on taxes and public dues such as landing fees. Revisions to these rules and regulations or notifications of legally enforceable airworthiness directives could have an impact on the Group’s operating performance. Moreover, the allocation of flight slots at Haneda and Narita airports and the timing of the launch of new routes could also affect the Group’s operating performance.

②Environmental Compliance Risk

With growing pressure on companies in recent years to fulfill their corporate social responsibility to the environment such as preventing global warming, the JAL Group is facing tighter restrictions on CO2 emissions, noise pollution, harmful substances, and other environment issues. A further tightening of environmental regulations that leads to a higher cost burden through emission charging mechanisms or other schemes, such as a new greenhouse gas trading system to be implemented from fiscal 2020 at earliest, could have an impact on the Group’s operating performance.

③Litigation Risk

The JAL Group’s business activities are exposed to the risk of various types of litigation, which could affect the Group’s operations and operating performance. In the event that a litigation is filed against the Group, developments in the subsequent legal case may require additional costs and the booking of provisions, which could also affect the Group’s operating performance.

(7) IT Risk and Customer Data Protection Risk

The JAL Group’s operations are dependent on a large number of IT systems. Failures in these IT systems caused by flaws in computer programs, computer viruses, and other cyber-attacks may lead to the loss of critical data, as well as issues in flight operations, which could affect the Group’s operations. Largescale failures in power systems, communication networks, and other infrastructure that support IT systems and in cloud services used by the Group such as email communication could also result in significant disruption to the Group’s operations. In addition, inadequate handling of customers’ personal information by the Group or unauthorized access that results in the disclosure of such information could damage public trust in the Group’s business, systems and corporate brand and undermine customer and market trust in the JAL Group, which could affect the Group’s financial position and operating performance.

(8) HR Risk and Industrial Relations Risk

The JAL Group’s business is dependent on securing personnel who have national certificates and other legally required qualifications related to the operation of aircraft. However, due to the considerable amount of time required by employees to acquire these qualifications and skills during the course of their duties, the JAL Group may not be able to secure sufficient personnel when required, which could affect the Group’s business operations.
In addition, many of the Group’s employees are members of labor unions. A collective strike by Group employees or other labor disputes could affect the Group’s aircraft operations.

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