Next year will mark a watershed in Japanese civil-aviation history: for the first time in 43 years, the country will see the emergence of new domestically owned airlines. In all, there will be six new carriers - four start-ups and two subsidiaries belonging to two of the three major incumbent airlines. At least two further start-ups planned for 2001 have also been announced.
The new airlines will have to overcome some formidable obstacles, not least the overwhelming dominance of the domestic market by Japan's three major incumbents, All Nippon Airways (ANA) Japan Airlines (JAL), and Japan Air Systems (JAS). The start-ups hope that a strategy based on low-cost flights aimed at niche markets will ensure their survival. "But whether this alone will work is still in doubt - I wouldn't be at all surprised if some of them were to crash and burn not long after take-off," warns Paul Smith, airlines analyst at James Capel in Tokyo.
The four initial start-ups include:
Skymark Air, an affiliate of major air-ticket discount agency HIS;
Hokkaido International Airlines, brainchild of a successful poultry farmer on the northern island of Hokkaido;
Pan Asia Airlines, set up by a Tokyo-based human-resources training company, Academia International, and which will be based in the southern city of Fukuoka;
Hokkaido Air Systems, a venture between JAS and Hokkaido's prefectural government.
Skymark, which has ´600 million ($5million) of capital 73.5% controlled by travel agent HIS and finance group Orix, plans to start operations in August 1998 with routes between Tokyo Haneda and Fukuoka and, later in the year, Fukuoka-Osaka-Sapporo, using two Boeing 767s. It adds that further aircraft will be added in future "depending on the market situation". The company had initially targeted the Tokyo-Sapporo route, but admits that it was forced to revise this after the announcement that Hokkaido International Airlines is to fly the same route. The Tokyo-Sapporo route is the country's busiest, handling some 7.8 million passengers annually.
Hokkaido International Airlines (which will adopt Air Do as its brand name) will initially have three flights a day between Haneda and Sapporo, beginning in April 1998. The airline recently signed a letter of intent with Ansett Australia Airlines to lease a 767-300ER, to be delivered in February 1998.
The airline says that it is looking to acquire a second aircraft towards the middle of the year, which will enable it to expand its services to include two daily flights between Osaka's Itami Airport and Sapporo, beginning in November.
The company adds that it is likely to lease a third aircraft in early 2000 to take advantage of the allocation of a further slot at Haneda from March 2000, which will allow it to increase its number of daily flights to Sapporo. "It is vital that we boost the number of flights between Haneda and Sapporo, as three flights a day is not economically viable," admits a senior company source. He adds that the company will also increase its daily flights to Osaka to six.
Like Skymark, Pan Asia Airlines is looking to corner the lucrative Fukuoka-based market with an initial seven domestic routes from the city, including Fukuoka-Haneda and Fukuoka-Okinawa, beginning in October 1998. It also plans to fly four routes to China, as well as to set up a subsidiary, Pan Asia World, which would fly initially to Taipei in Taiwan.
The size of the market can perhaps be gauged by the fact that, after Sapporo, the Tokyo-Fukuoka route is the country's second busiest, with an estimated 6 million-plus passengers a year. The company, which is capitalised at ´1.4 billion, will initially acquire five aircraft seating fewer than 300 passengers.
"We believe that Fukuoka will become the main gateway to the fast-growing east-Asian market, which is why we are making it the cornerstone of our operations," explains Pan Asia.
A consortium of 20 Okinawa-based private companies, meanwhile, is almost certain to give the go-ahead by the end of this year for a regional airline. Yasuma Unten, a director at Southern Cross - one of the driving forces behind the project - says that flights between Haneda and the Okinawan city of Naha would begin in 2000, once more slots become available at Haneda. He adds that the airline will acquire two aircraft in 1998, "probably Boeing 737s or 767s".
Analysts point out that not only is Okinawa a popular domestic tourist destination, but Naha Airport also serves routes to Hong Kong, Taipei and Seoul in South Korea. It also has the advantage of a 3,000m (10,000ft) runway capable of taking larger aircraft. These two factors would allow a new airline based on the island to develop a fairly comprehensive network of routes. Operations may also begin early in the next century at recently established Yokohama International Airlines. Set up by building-leasing company Saito, this carrier plans to start operations in 2001 with flights from Tokyo to Osaka and Macau. A senior company source says that it is looking initially to lease two aircraft, "-possibly 737s or Airbus A320s".
In response to the entry into the market of these start-ups, JAL and JAS are launching their own low-cost subsidiaries. JAL Express will operate on secondary domestic routes, and says that it will keep costs at least 20% below those of its parent. Its 737-400s will also perform wet-lease operations for JAL and, by 2005 to 2010, JAL Express is looking to have up to 20 aircraft, including 767s.
JAS offshoot Harlequin Airlines aims to start international charter operations to Brisbane and Honolulu in December, using a single McDonnell Douglas (MDC) DC-10. This will be followed by scheduled domestic flights from Fukuoka early in 1998 using three Boeing MD-80s, says the company. As with JAL Express, it will wet-lease aircraft back to JAS, and will hire foreign crew in an attempt to keep running costs down.
JAS will also take a 51% stake in a second Hokkaido-based start-up, Hokkaido Air Systems (HAC), with the Hokkaido prefectural government controlling the remaining 49%. Operations at HAC are due to begin in March 1998, following the delivery of two Saab 340BPlus turboprops, to be flown two or three times daily on a regional network throughout the northern Japanese island. More routes within the island will be added when a third Saab 340BPlus comes into service, probably in early 1999.
A senior source at HAC says that the company would like to fly additional routes in future, "-including to regional cities on the main island of Honshu, such as Aomori, Sendai and Niigata, as well as short-distance overseas routes, especially the Russian Far East-although this won't be for a few years".
The start-ups are seen as a desperate attempt by the transport ministry to restore its battered public image after the failure of attempts in 1996 to introduce fare competition by relaxing the country's stringent pricing rules. "Basically, the incumbents were simply not prepared to embark on a price war. Although a wider variety of discounts did hit the market, the airlines balanced this by increasing peak-time fares on other routes. Indeed, on average, prices actually rose last year," points out Naoko Matsumoto, airlines analyst at Merrill Lynch.
Moreover, it remains questionable just how far the emergence of these new airlines will help bring down prices. The three majors are considered unlikely to embark on a price war. "You only have to look at JAL's current battle for market share - it is hammering ANA in particular, not so much through heavy discounting, but rather through very clever marketing," explains James Capel's Paul Smith.
Nevertheless, most analysts agree that the entry of new players into the market should at least keep prices from increasing. The start-ups will face difficulties, one of the major ones being the inability to operate sufficient flights on the main trunk routes because of major congestion at Tokyo Haneda Airport. Although 40 new slots will become available in 1998 at Haneda, a total of six has been set aside for the start-up carriers. The ministry has not yet decided which carriers will receive the slots, but has already set a maximum of three for any one company.
"The fixed costs for airlines in Japan are so huge that airlines need to operate as many flights as they can to earn profits. Three slots simply do not give you sufficient critical mass to achieve profitable operations," argues Paul Smith.
The newcomers' problems are further compounded by their commitment to discount ticketing. Already, their initial promises are being modified, however. Skymark, for example, has changed its proposed rates, cutting their initial discount objective of 50% to 20-30%. The other new airlines are planning to offer similarly sized discounts. "Given their start-up and running costs and their limited number of slots on the most lucrative routes, discounts beyond this figure will be difficult to implement," believes Matsumoto.
"Nevertheless, the only way we will be able to survive against the majors is by a combination of cornering niche markets and using discounting to attract the bottom end of the market," says Southern Cross' Yasuma Unten. "While we maintain a policy of using smaller-bodied aircraft, I believe the majors will leave us alone. If start-ups begin to buy larger aircraft such as 747s or [Boeing] 777s, however, then [the majors] might start to get worried about the level of competition and retaliate," he adds.
All the new airlines are adopting the same strategy to keep their running costs to a minimum. This includes leasing aircraft, hiring foreign pilots and cabin crew, contracting out maintenance and crew training and using electronic ticket-distribution. In spite of the problems the new airlines will inevitably face, it would appear that there is room in the domestic market for them. According to Government statistics, air travel in Japan continues to grow at a healthy pace: in 1996 the number of domestic passengers on trunk routes totalled close to 28.5 million, while the number of passengers travelling on regional routes amounted to 53.6 million. These figures mark a 5% and 5.2% increase on 1995, respectively, and are both records. "These figures will be encouraging for the start-ups, especially when one considers the poor state of the economy," says Matsumoto.
Nevertheless, they must pray that the majors do not embark on a price war "-as that could knock them out of the skies", points out Smith. Certainly, given the tie-ups between the majors and the start-ups in areas such as ground handling and aircraft maintenance, it looks as if the incumbents have resigned themselves to the fact that increased levels of competition are unavoidable.
"The small nature of these companies and their target markets mean that it will be a long time - if ever - before they will pose a threat to the major incumbents. Providing logistical support to the start-ups not only is a good exercise in public relations, but also provides us with a useful source of additional revenue," adds ANA.
In the meantime, the new airlines will have to struggle on with what routes they have until further slots become available at Haneda and Narita early in the next century. If they can survive until then, their future will begin to look a bit more secure - although analysts warn that even this is still far from clear.
Source: Flight International