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Saturday, March 15, 2003

ONE MORE PROBLEM TO CONFRONT

Japan Inc. plotting its own war survival strategy


By TOMOKO OTAKE, TETSUSHI KAJIMOTO and AKEMI NAKAMURA
Staff writers

Japan Inc. is on high alert.

With a war in Iraq looking more likely, many companies are bracing for oil price spikes, beefing up inventories or looking to bypass the Middle East with their shipments.

The prewar jitters come as businesses are already floundering due to years of deflation.

Air carriers and travel agents are nervously following developments, as the growing threat of war on Iraq is already hampering the recovery in overseas travel demand.

Japan Airlines System Corp. on Thursday announced changes to its flight schedules for fiscal 2003 and had filed for authorization with the transport ministry. The nation's largest carrier will reduce Tokyo-Paris flights from 10 a week to seven between April 1 and May 31, and from 11 flights to 10 between June 1 and Oct. 31.

"We made the decision due to worsening business sentiment and the Iraq situation," said a JAL spokesman. "Demand is weak for flights that mainly carry tourists, such as the Tokyo-Paris route."

More and more people appear to be wary of traveling abroad, with some travel agents saying they've been receiving cancellations on group tours to Europe since last month.

"The Iraq situation seems to be having an effect already," said one airline official. "We are carefully watching the situation."

If war actually breaks out and fighting drags on, the industry would face the more serious problem of a jump in jet fuel prices due to disrupted oil output from the Middle East, the official said.

Airlines are always hedging against that risk by negotiating large purchases of fuel in advance -- ranging from half-year to two-year periods -- with various oil wholesale dealers and trading companies.

"The situation depends on how long a war would last," the official said, recalling when crude oil prices soared during the 1991 Gulf War, but returned to normal a couple months after.

"We're concerned about the overall situation though, which has been tense since long before the war threat," the official added.

Equally worried are the nation's oil refining companies, who get nearly 90 percent of their crude oil imports from the Middle East. As the futures trading prices of a benchmark U.S. crude oil soared to nearly $40 a barrel in late February -- twice as high as normal -- and have remained above $30 since, the industry is inevitably feeling the pinch.

And with domestic competition driving prices down, many companies cannot pass on the cost increases to gasoline retailers, industry officials said.

"We have been facing excessive competition ever since the market was liberalized in 1996," said Hozumi Tokita, spokesman for Cosmo Oil Co. "It has been difficult to pass on rising crude oil costs to consumers."

Gasoline prices stand at an average 102 yen per liter, up 2 yen from December 2001. However, if crude oil price increases were reflected, the price would be up by 9 yen, according to an official of Nippon Oil Corp., the nation's largest oil refiner and distributor. Gas retailers and oil refining companies are thus shouldering the extra 7 yen.

Petroleum companies are not worried about an immediate crude oil shortage; each firm has at least 70 days worth of surplus oil, as mandated by law. But they are now looking to diversify their sources in case a U.S.-led attack on Iraq disrupts shipments.

Cosmo Oil is considering having crude oil shipped from Mexico and Nigeria, while Nippon Oil is mulling using non-Japanese tankers, such as those from Liberia and Panama.

Japanese sailors' unions have warned they will not go near the battlefield, according to the firms.

Though less direct, the impact of the looming war is being felt in other sectors.

Yukio Kitahora, senior vice president of Nissan Motor Co.'s domestic sales division, said companies should brace for poor domestic performance, as war would almost certainly hurt consumer demand.

He pointed out that during the three-month Gulf War, Japan's auto sales decreased between 5 percent and 6 percent year-on-year.

"If, unfortunately, a war starts (this month), I would be concerned about deteriorating sales in April and onward, as well as further falling stock prices," Kitahora said. "A yellow light is now on, as we need to come up with measures to cope with such situations."

Major auto and electronics manufacturers are also trying to secure alternative routes so they can keep exporting products to Europe.

Normally, Japanese exporters' ships bound for Europe go through the Suez Canal between Egypt and Saudi Arabia. But the canal may be closed if war erupts in the Middle East.

Honda Motor Co., for example, plans a detour around the Cape of Good Hope, at the southern tip of Africa, to transport goods to its British plant, said Honda spokesman Masaya Nagai.

The plant also keeps two-weeks worth of emergency auto parts inventory, he added.

NEC Corp., which usually uses maritime transportation, is planning to secure alternative routes using land and air means to deliver personal computers to its customers in Europe, company officials said.



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