Ministry of Transport officials are still smarting from criticism of the latest deregulation initiative in the Japanese domestic market. On the surface, the complaints seem justified as basic fares are set to increase across the board. But a main architect of the plan insists the benefits will come from the greater discounting freedoms.

The deputy director of the airline industry division, Katsuhiro Yamaguchi, shakes his head as he reflects on the reaction of the national press after the airlines published their new fare structures: 'The media accused the airlines of taking advantage of the situation and increasing their fares,' he says, frustrated that the wider discounting opportunities were ignored. 'If you take into account the discount fares, there will be a decrease overall, but I can't speculate on how much as the system hasn't been tested yet.' Another factor overlooked in the melée was that domestic fares have not risen since 1982. 'Instead we had some minor decreases,' says Yamaguchi.

The new fare regulations were due to go into effect from June and follow the MOT's decision to open up more domestic routes to competition from April.

The new pricing measures allow carriers to set basic fares within a 25 per cent range below a maximum fare for each route. The airlines can also offer discount fares of up to 50 per cent, without reference to the ministry. Prior to this, airlines had no freedom to alter basic fares and only limited flexibility on discounts, which required MOT approval.

The initial response to the change in domestic pricing policy was led by ANA, which still controls over 50 per cent of the domestic market. The basic tariff structure comprises three bands - peak, normal and low - which apply at different times throughout the year. The normal tariff is in force 80 per cent of the time. Yamaguchi admits that normal fares are set to rise by 2 to 3 per cent. But he points to a lower JAS fare on Tokyo-Sapporo, the busiest domestic route, where it has only eight daily frequencies against 13 each for ANA and JAL: 'OK, it's only Y200 less, but it is lower and that was the point of the changes - to introduce some dynamism.'

Greater flexibility in discounting should spark some competition. ANA is offering 12 special fares, including booklets of four and six one-way tickets with discounts of up to 33 per cent. 'It's a case of educating the travelling public,' argues Yamaguchi. 'The success of the system depends on the reaction of the consumer.'

But in keeping with the tight-knit relationship between the airlines and the MOT, competition is likely to be limited by a behind-the-scenes deal. One banking source says all parties have agreed that pricing levels should ensure there is a 7 per cent return on all assets deployed domestically.

The MOT settled on a fluctuating band for basic fares for two reasons. First, airport congestion (see box) means the market is dominated by ANA, and prevents the other carriers from competing freely on frequencies. Second, ANA is financially stronger than both JAL and JAS, says Yamaguchi, and it would have been able to sustain deeper discounts for longer given full pricing freedom. The 25 per cent limit was set because it is equivalent to an airline's indirect costs on any given route.

Pressure from JAL - worried that ANA would consolidate its dominant position if pricing alone was relaxed - led the MOT to firstly open up more domestic routes to competition. This was achieved by lowering the criteria for so-called double and triple tracking on designated routes. When competition was first introduced domestically in 1986, double tracking was allowed on routes that supported 700,000 passengers annually, rising to triple tracking once the figure reached 1 million. These entry criteria were cut to 400,000 and 700,000, respectively, in 1990, and were subsequently halved last April.

The MOT has not been able to apply the new entry requirements to all routes because of the capacity constraints at Tokyo/Haneda, which will not disappear until the new runway is completed around mid-1997. But the immediate effect is to open routes accounting for 75 per cent of all domestic traffic to competition. After the Haneda project is completed this figure will rise to 90 per cent, says Yamaguchi. Before April, there was double tracking on 26 routes and triple tracking on 20 routes out of a total of 212. The double tracking routes will ultimately increase to 49 and the triple tracking routes to 38.

Yamaguchi stresses that the policy aims to ensure that neither JAL nor JAS suffer from All Nippon Airways' dominant domestic presence. This is the flip-side of Japan's multi-designation policy on international routes and the loss of domestic market share for ANA should be balanced by further expansion of its global network, though here the constraints at Tokyo/Narita come into play.

The MOT is not speculating what will happen once all three players adapt to the more competitive environment, but there already appears to be some concern among officials about JAS. Japan's second domestic carrier suspended its international operations last year and is being allowed to introduce the new domestic pricing measures a month earlier than the other two carriers, because 'JAS just wanted to.'

Yamaguchi is cautious about the prospects for full domestic deregulation. 'We are still not sure if full deregulation is the right way.' He stresses that Tokyo's gradual approach is aimed at avoiding the type of concentration experienced in the US.

As the MOT continues to don the oriental 'tortoise' mantle and shun the western 'hare' attire, the measured approach may yet prove the shrewdest.

Source: Airline Business