When Seiji Fukatsu, president of Japan's All Nippon Airways, called a press conference in mid-April, local scribes could have been forgiven for speculating that a major announcement of international import was in the offing.
It was common knowledge that ANA was on the verge of releasing details of its medium term business plan, a critical strategy document aimed at steering the carrier back to real profitability after several years of recessionary struggle. However, Fukatsu had other things on his mind: he was announcing that ANA had signed a contract with the proposed startup carrier Skymark Airlines.
Under the deal, ANA will provide technical assistance and help the newcomer procure aircraft and prepare the necessary documents so it can apply to the Ministry of Transport (MoT) for a licence to operate; it hopes to be flying by Spring 1998.
Even though Skymark is a potential competitor, Fukatsu says ANA is providing support because of growing public sentiment that there should be a fourth airline to enhance competition. 'As one of the existing carriers, we feel that we have an obligation to provide support for the newcomers.'
That may sound magnanimous, but in reality ANA is bowing to the inevitable. Domestic liberalisation in Japan is a fait accompli - signed, sealed and almost delivered after a year of Byzantine behind the scenes manoeuvring by the MoT.
Japan's skies are threatening to become even more crowded as hopefuls strive to enter a market that hasn't seen fresh blood for 43 years. Apart from Skymark, an affiliate of major air ticket discount agency HIS Ltd, three others have announced launch plans: Hokkaido International Airlines, brainchild of a successful poultry farming business on the northern island of Hokkaido; Pan Asia Airlines, formed by a Tokyo-based human resources training company, Academia International, and aiming to set up camp in the southern city of Fukuoka; and an as yet unnamed operator to be established by business interests on the island of Okinawa.
Two new low-cost airlines have also been announced by incumbents Japan Airlines and Japan Air System. Harlequin Airlines, JAS' offshoot, will fly scheduled domestic flights and international charters, and JAL Express will operate on secondary domestic routes.
Amidst all this activity the real question is whether liberalisation and genuine fare competition can really succeed, given the enormous difficulties prospective Japanese startups face. For a start, they are virtually barred from operating sufficient flights on major trunk routes because of chronic congestion at Tokyo's Haneda domestic terminal. And if Japan's domestic travellers are dreaming of deeply discounted air fares, they will almost certainly be sorely disappointed; the bottom lines of the three majors, JAL, ANA and JAS, are teetering on the brink and an air fares bloodbath would amount to financial suicide, say analysts.
The flurry of startup activity is seen as a desperate attempt by the ministry to restore its battered public image after last year's moves to introduce fares competition by freeing up the country's stringent ticket pricing rules failed miserably.
In December 1995 the MoT cleared a new zone fare system, which brought unprecedented freedom for airlines to set ticket prices from 1996. But Japan's carriers weren't ready to indulge in the fare wars which followed deregulation in North America and Europe. While a wider variety of discounts hit the market, airlines balanced this by raising peak-time prices on certain routes. On average, prices rose. An embarrassed ministry reacted by sending out signals that it was now ready to welcome startup applications with open arms.
'We are counting on the entry of new airlines to promote competition,' the head of the Ministry's Aviation Business Section, Sugiyama Atsushi, told the Asahi Shimbun newspaper. He did not have to wait long for the rush, and for the newcomers to pledge half-price fares.
Privately, officials at the incumbent airlines complain that the MoT is going beyond mere encouragement for the newcomers, and is actively assisting them. They claim the ministry has became so enthusiastic that it has christened Skymark its 'Golden Hope' and is acting as a behind-the-scenes consultant and adviser.
Ironically, the ministry has been unable to give the startups the one thing that they desperately need: Tokyo slots. In a recent allocation of 40 new daily round-trip slots, which became available after the completion of a new Haneda runway, Skymark and Hokkaido International were granted just three each.
'With three slots per carrier you don't have the critical mass to achieve profitable operations as far as I can see,' says James Capel Pacific airline analyst Paul Smith. 'With the exception of Skymark, I don't believe the companies are up to speed. I think there is a good possibility that Skymark will receive temporary use of the three slots allocated to Hokkaido for the period 1998 through to 2000. With six slots they may just be able to do business without losing money, but I'm not clear about that. I think it's pretty marginal.'
Soejima Tomokazu, an analyst at Morgan Stanley in Tokyo, points out that six daily round-trips from Haneda amount to only 2 per cent of the airport's slot capacity - ANA still operates 45 per cent of Haneda flights, JAL 23 per cent and JAS 30 per cent. 'As the fixed cost of the Japanese airline industry is huge, airlines need to operate as many flights as they can to earn profits.'
With so few slots the startups will be unable to offer a satisfactory shuttle service, and more new slots will not come on line until after 2000, with the completion of another runway at Haneda. Yet it is critical for newcomers to gain adequate access to Tokyo, with its lucrative trunk routes, including 7.8 million passengers a year to Sapporo, more than 6 million to Fukuoka, 3.5 million to Osaka, 2.5 million to Okinawa, and 1.8 million to Hiroshima.
All the newcomers are taking the same tactical approach, aiming to keep costs down by leasing aircraft, hiring foreign pilots, contracting out maintenance and crew training, and using electronic ticket distribution.
Ultimately, the cross they have to bear is their commitment to discount ticketing. A round-trip Tokyo-Okinawa ticket currently costs $500, about the same as an off-season package tour to Hawaii. A return Haneda-Sapporo fare is nearly $390.
Teruo Hamada, Hokkaido International's president, says he is launching the carrier because 'in Organisation for Economic Cooperation and Development (OECD) countries, air fares for the corresponding distance would be about half the going rates they are in Japan'.
Skymark's founder, entrepreneur Sawada Hideo, initially targeted the lucrative Tokyo-Sapporo route for launch flights but after Hokkaido emerged he switched focus to Tokyo-Osaka. He plans to use three widebody jets, probably B767s, but has already been forced to modify his proposed rates, cutting his initial discount objective of 50 per cent to just 20-30 per cent.
Sawada's HIS company has invested $700,000 in the new airline, giving it 58.7 per cent of the initial capital, while leasing firm Orix Corporation has taken a 6.7 per cent stake. Starting with just 10 staff, he plans to increase employee numbers to 200 and capital to nearly $50 million within five years through a public flotation.
Hokkaido International plans Sapporo-Haneda flights from April 1998, charging half current fares. There will be extra fees for meals and hold luggage. More than 100 locals have invested in the airline, which hopes to raise $25 million by startup. The business plan is based on a thesis by Tadahisa Wada, an assistant professor at Seishu Women's University in Sapporo, who foresees Sapporo's New Chitose airport being transformed into a new international air hub for northern Japan. Wada claims foreign airlines, including KLM and United, have already made enquiries about new routes involving Chitose.
Pan Asia Airways hopes to launch seven domestic routes in October 1998 and later fly to China. A subsidiary, Pan Asia World, would fly to Taipei. The president of controlling interest company Academia International is Yoshimi Hirotani, a former Pan Am employee who wants to 'revive Pan Am in Asia'. Investors are being sought in Taiwan and Hong Kong but Academia would hold 51 per cent of the equity.
Pan Asia will be based at Fukuoka in southern Japan, with domestic routes including Fukuoka-Haneda and Fukuoka-Okinawa. International services would avoid the Tokyo squeeze by operating from Fukuoka and Okinawa.
Pan Asia would lease five jets in the under 300 seat category. 'Fukuoka will be a main gateway to east Asia, where travel demand is expected to grow. That is the reason for setting up the main office there,' says an official.
Faced with this flood of low-cost startups, JAL and JAS have wasted no time organising their defences. JAL's new entrant, JAL Express, will operate on low-demand domestic routes keeping costs at least 20 per cent below those of its parent. Boeing 737-400s will also perform wet-lease operations for JAL, and by 2005 to 2010 JAL Express could be equipped with 15 to 20 aircraft, including B767s.
JAS' Harlequin is to launch in December this year with international charters, followed in October 1998 with scheduled domestic services. It will hire crew offshore at lower salaries and wet lease planes back to JAS.
About 100 charter flights a year to Asia-Pacific destinations are planned from secondary Japanese cities, helping JAS tap into rising demand - the number of international charter flights rose 10 per cent to 2,786 in 1995. Foreign airlines dominate with an 80 per cent share of this business.
'Since JAS itself is suffering in the red, we need to make cost-cutting efforts, and the new company will play a great role in reducing costs,' says JAS president Hiromi Funabiki.
Analysts agree that Japan's big three won't indulge in a price war to knock the private startups out of the sky. 'If they wanted to pick them off and just use bracket pricing around these routes or sustain losses on the individual routes it wouldn't be too difficult to blow these people out of the air,' says James Capel's Smith.
'But I wonder whether there's not some moral persuasion by the MoT that says - let's say Skymark is the chosen carrier - Skymark's our baby and if you mess around with Skymark then we're only going to come back to you, and with the new allocation of slots in 2000 we'll really open these up to other carriers,' he adds.
Morgan Stanley's Soejima Tomokazu says ministry determination to push deregulation means that 'from now on, the administrative circumstances will be positive for the newly established airlines, and this will not make it feasible for existing airlines to take counter measures to crush newcomers.
'The liberalisation of the Japanese airline industry has just begun and I don't think we will see drastic change like in Europe or the US in the short term. I think they will coexist for a while, with a small share for newcomers. Fierce competition will be sometime after.'
Even without the danger of being swamped by the big incumbents, survival may be difficult. A low capital base coupled with discounting commitments will place all the startups under pressure. 'I think they are going to find it quite a strain,' says Smith.
Fare cuts of 25-30 per cent may be achievable, especially if travel agent commissions can be avoided. 'After all, that's the standard fare that ANA gets from Hokkaido to Tokyo. Their actual receipts are about 25 per cent below the full fare for the route, so that type of discount seems reasonable. But I think 50 per cent discounts are untenable with the slots that we are talking about . . . I suspect it will even be pretty hard to offer 40 per cent discounts'.
One way for new airlines to build up their networks will be to avoid the bottleneck at Haneda and operate on trunk routes between other major cities, or operate from cities outside Tokyo to international destinations, as Pan Asia proposes. 'That is definitely something they can do. You've got more capacity to Osaka and you've got huge excess capacity to almost all the other airports in the country. If you can operate from Fukuoka and do a series of trunk routes avoiding Haneda then there is some potential,' says Smith.
Smith does believe barely profitable new companies with a very small market share could have a disproportionately large impact on the market. The mere threat of market entry could at the very least discourage incumbent operators from putting up ticket prices and persuade them to introduce more discounts, even on routes the startups are not flying. Soejima believes that despite their small size, the arrival of newcomers will lead to an overall reduction in airfares.
Given that the incumbents are accepting the inevitability of their presence, and even working with them, the key for Japan's new breed of carriers will be survival until the turn of the century, when more new slots will be available at both Haneda and Narita. By then, according to insiders, shifts in government policy may bring an easing of the slot situation. They expect Haneda to be a 24-hour airport and foresee both of Tokyo's airports handling both international and domestic flights.
That may just offer at least one of the newcomers an opportunity to cement a permanent position on Japan's aviation stage, particularly if it has a big partner like ANA.
The six at the starting gate
- Harlequin Airlines
Capitalisation: $3.9 million
schedules, international charters
Hokkaido International Airlines
poultry farming business; and a group of Hokkaido businessmen
Capitalisation: $800,000
- JAL Express
Capitalisation: $3.2 million
possible
scheduled domestic routes
- Okinawa Air (?)*
business people
Capitalisation: Unknown
and other Japanese cities
- Pan Asia Airlines
Capitalisation: $1.2 million
- Skymark Airlines
discount air ticket agency
Capitalisation: $1.2 million
*This airline has not yet been named
*This airline has not yet been named
Source: Airline Business
