Moody's cuts Japan Airlines, All Nippon

Moody's Investors Service downgraded the senior unsecured debt of Japan Airlines Co., Ltd. and

All Nippon Airways Co., Ltd. to Ba3 from Ba1. The outlook for both is negative.

Moody's said the downgrades reflect its expectation of weaker cash flow generation at Japan Airlines and All Nippon Airways over the short to medium-term, due to the negative events prompted by the Iraq war and the SARS virus, and which the entire airline industry currently faces.

The downgrades are also based on the economic downturn in Japan and greater competition in the domestic market.

In Moody's opinion, a strong rebound in yield and/or traffic volumes - which would be necessary to generate a meaningful rise in revenues - is unlikely to occur in the near term. Consequently, Moody's does not anticipate significant recovery in operating profitability and cash flow generation.

For many years, Japanese airline companies have operated as public utilities within a regulatory framework. Moody's said Japan's aviation sector is still governed and protected by the government through slot allocations - in response to the shortage of airport slots at Haneda and Narita - controls on landing charges, access to loans from government-related financial institutions, negotiations with other governments for desired flying and landing rights for Japanese airlines, and its policy of insulating the domestic market from foreign competition. The continued support from the government is important for the stability of the ratings.

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