For the year, ANA carried nearly 42 million passengers: 3.49 million on international routes, an increase of 11%, and 38.35 million on domestic routes, up 2%. However, intense competition in the Japan domestic market, including the increasing availability of discount fares, depressed yields, resulting in a drop of 1% in operating revenues to ¥903 billion, and an operating loss of ¥13.1 billion.

Recurring profit was ¥500 million, but ANA is reporting a net loss of ¥6.5 billion ($54.1 million @ U.S. $1 = ¥120) for the year. As previously announced, ANA will not pay a dividend to shareholders in 1999.

ANA President and CEO Kichisaburo Nomura said, "It has been a challenging year, not only for airlines but for many industries in Japan. ANA is moving to respond to these challenges by making radical changes to support profitability in the adverse conditions we face. These changes will mark a new beginning for the company."

The Japanese economy is in a lingering recession. Unemployment has reached record levels and the slump in consumer spending continues as instability in the financial system and doubts about where the economy is headed depress corporate confidence.

Against this backdrop, fierce competition has taken over in the domestic aviation market. Passenger traffic has increased slightly, stimulated in part by the reductions in fares brought about by the entry of the first new scheduled passenger airlines in 35 years. But lower fares have meant lower yields.

In this environment, ANA is striving to boost profitability by adjusting the frequency of service to more closely match domestic and international passenger demand. ANA launched service on three domestic and nine international routes, including six cities in China and two in the U.S.

ANA added 10 new aircraft to its fleet during the past year: twotwotwo Boeing 747-400s, four Boeing 777-300s, two Boeing 777-200s and two Airbus A321s.

ANA is also expanding its route network and improving passenger convenience through agreements with Star Alliance airlines. ANA will become a full member of Star Alliance in October of this year.

These initiatives helped ANA post healthy increases in the number of passengers carried on international and domestic routes. Still, despite these positive developments, lower fares, particularly on domestic routes, resulted in a decline in revenues greater than cost savings.

ANA inaugurated scheduled service to six new destinations in China, including Tianjin in May, and Shenyang and Xiamen in July. It also began Tokyo-Honolulu service in October followed by Tokyo-San Francisco and Osaka-Denpasar flights in December.

ANA began code-sharing with United Airlines in October, thereby significantly expanding its reach in the important North America market. In addition, ANA began code-share agreements with other Star Alliance partners Lufthansa, Varig and Ansett.

Service was suspended on six international routes, including Narita-Sydney, Osaka-Rome, and Narita-Qingdao, as ANA moved to better adapt the network to passenger demand and travel patterns.

International passenger numbers rose 11% to 3.49 million, but operating revenue slipped 4% to ¥172.9 billion as demand for premium travel declined.

International cargo operations, centering on automotive and electrical components, continued to do well on routes to Europe and North America. Flights to Japan, on the other hand, showed little growth due to the economic slowdown. ANA stepped up its international cargo activities by using chartered cargo planes to serve destinations in China, and targeting the expansion of its network overseas through alliances.

Total international cargo volume rose 14% to 157 thousand tons, and revenue increased 8% to ¥35.3 billion. Mail shipments rose 17% to 6 thousand tons, and operating revenues were up 31% to ¥2 billion.

ANA began service on three new domestic routes, including Tokyo-Saga and Tokyo-Yonago. The company increased services between Tokyo and Sapporo, Fukuoka and Okinawa, as well as between Osaka (Kansai) and Sapporo and other routes with heavy demand.

ANA started flying an Airbus A321 on domestic scheduled services in April 1998 and a Boeing 777-300 in July, becoming the first airline to use these aircraft on scheduled routes in Japan.

In another first, ANA added three specially painted aircraft, including a Boeing 747-400, bearing "Pokémon " character designs on its domestic routes. After the highly successful reception of its Pokémon aircraft in Japan, ANA introduced a similarly decorated 747-400 to its New York route in January. ANA will expand "Pokémon " service to other overseas destinations this year.

Passenger traffic on domestic routes rose 2% to 38.35 million but increased competition and reduced fares resulted in a 2% drop in operating revenues to ¥584. 1 billion.

Air parcels transportation turned in a strong performance, but general cargo and fresh produce levels were below those of last year. Overall cargo demand generally remained stagnant due to the lingering recession in Japan. Total volume was up 0.3% to 395 thousand tons, and operating revenues rose 3% to ¥26.7 billion. Mail operations posted a 4% drop in volume to 65 thousand tons, and operating revenues declined 5% to ¥9.3 billion.

Revenue from incidental business services for other airlines such as aircraft maintenance and subcontracted ground support services, including check-in and baggage handling rose 14% to ¥72.4 billion.

ANA has long been committed to a policy of consistent dividend payments. However, given the current environment ANA deeply regrets that it is forced to suspend dividend payments for another year, and asks its investors for their continued support while it works to restore dividend payments as soon as possible.

The outlook for the domestic economy remains uncertain. As a result, Japan's aviation industry is likely to encounter still tougher operating conditions over the next year.

International routes likely will experience little growth, while competition in the domestic market likely will increase as a result of upcoming changes such as the abolition of restrictions on new entrants and the full liberalization of fares in the domestic market.

As part of its strategy to improve performance on international routes, ANA will become a full member of Star Alliance in October. ANA will continue to pursue bilateral alliances with Star Alliance members to enhance passenger convenience, and will seek reduced costs through sharing of resources among partner airlines.

To increase revenues on its domestic network, ANA will focus on the profitability of individual routes and restructure its entire route network to gain more flexibility to adapt to changes in market demand and supply.

ANA will overhaul its corporate structure and introduce radical changes to further reduce costs and improve competitiveness. The entire ANA group will work together to restore dividend payments and ANA's strong position in the market.

ANA expects a passenger volume of 3.64 million on international routes (up 4%) and 38.22 million on domestic routes (0% change). Operating revenues will total approximately ¥903 billion, (0% change).

By June 1999, ANA expects to complete Y2K inspection and remedial work, including simulation tests, in the core areas most vulnerable to computer problems, such as passenger and cargo reservations, ticketing, boarding, loading, transit, arrival and pickup. Checks on other routine internal operations are also proceeding smoothly and are expected to be completed by the end of September.

Based on regular reports being submitted by aircraft manufacturers Airbus and Boeing, ANA believes that there are no flight safety concerns related to its aircraft. Airbus has already completed inspections of its aircraft types, and Boeing is scheduled to do so by the end of June.

ANA estimates that the Y2K system overhaul will cost about ¥4 billion. However, it is difficult to isolate expenses specifically connected with the problem, as much of the verification work has been undertaken as part of routine redevelopment, upgrading and parts replacement procedures. These expenses are not expected to have a material impact on future operations or results.

Having made hypothetical assessments of the ways in which ANA and its infrastructure could be affected by the Year 2000 issue, the company is compiling a contingency plan which outlines procedures for both continuing operations in a smooth and safe manner using substitute resources, and for preventive measures and rapid damage repair. Drafting of the contingency plan is scheduled for completion by the end of June.

ANA cannot guarantee that there will be no disruption to service in connection with the Y2K issue, but pledges to do everything in its power to ensure that any disruptions, in the unlikely event they occur, will be minimal.