June 21, 2024

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Japan has become a hot tourist destination this year. Overseas visitors to the country reached a historic high in March as they flocked to the country attracted by a cheap currency. The Japanese yen fell to its weakest level against the dollar in 34 years last month. Yet local airline stocks are not enjoying the boom.

The rebound in travel, with a record 3.1mn visitors in March, has boosted tourism spending to a quarterly record this year and is helping the Japanese government get closer to its goal of ¥15tn ($96bn) in annual tourism spending by 2030. For airlines, demand for international cargo and flights is starting to recover, with the weak yen further boosting profits for sales made in foreign currencies.

Japan Airlines expects sales to grow 17 per cent and its group net profit to rise 5 per cent to ¥100bn for the year to next March. This would be JAL’s first time since fiscal 2018 at that level. It is working to expand group-wide international capacity, with North America one of its focus areas. But the country’s airline shares do not reflect this brighter outlook.

Shares in Japan’s two biggest, JAL and All Nippon Airways, have barely budged in the past year, during a time when the broader benchmark Nikkei 225 index has risen by more than a third.

Line chart of Share prices and index rebased in ¥ terms showing Japan’s airlines have failed to take off

Part of that is due to the weak yen being a double-edged sword. The cost of imported fuel, which is paid for in dollars, has been rising. But the bigger issue is depressed outbound travel. Unlike the rest of the world, post-pandemic travel recovery has been slow among Japanese travellers. In the first quarter of this year, even as the number of international visitors to Japan soared, Japanese travellers leaving the country was down nearly 40 per cent compared with pre-pandemic levels.

Trips to Hawaii — a favourite spot, with Japanese travellers making up the largest number of overseas tourists in Hawaii before the pandemic — have long been a good indicator of long-haul flight demand. The fact that Japanese visitors to Hawaii this year are about half the 2019 level is worrying given that long-haul flights are a big factor in airline profitability.

All this means that a full recovery in airline earnings and share prices will depend on many more factors than a tourist rebound: wage growth that outpaces inflation, a recovery in household spending and a stable yen.

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