Japan’s airline sector steady but requires lift

JAL and ANA rule the long-haul market and they and local budget carriers have the potential to grow but only if a significant change is made across the industry.

The welcome ceremony for new employees of ANA at its hangar in Tokyo. It is a custom for large Japanese corporations to hold mass welcoming ceremonies for their new employees. Chris McGrath / Getty ImagesShow less

TOKYO // The Japan airline sector features a very stable duopoly with All Nippon Airways (ANA) and Japan Airlines (JAL) plus the steady development of a budding low-cost carrier (LCC) industry centred on the cities of Osaka, Sapporo, Fukuoka, Nagoya and Naha, says the Miami-based Airways News senior business analyst Vinay Bhaskara.

However, the overall growth of the industry is hampered by slot restrictions as well as the fact that it is heavily concentrated in Tokyo, Mr Bhaskara says.

“At some point Japan will need another long-haul hub. Perhaps 10 to 20 years down the line that can be Osaka, especially if [the authorities] come to their senses and just shut down Itami [airport] and force the high-yield domestic traffic to Kansai,” the region that includes Osaka City, he says. Osaka is a large port city and commercial centre on the Japanese island of Honshu.

With the 2020 Tokyo Olympic and Paralympic Games in mind, some Japanese budget carriers are considering expansion.

Jonathan Galaviz, the head of airline industry research at the US-based consultancy Global Market Advisors, considers LCC passenger growth both into and out of Japan as a necessity. “There is no doubt that Japan needs to further enhance its tourism sector to assist languishing economic growth figures,” he says.

And Mr Bhaskara notes that Japanese LCCs have just 5 per cent of available seat kilometres (ASK – a measure of an airline flight’s passenger carrying capacity, equal to the number of seats available multiplied by the number of kilometres flown) and 10 per cent of available passengers carried. That makes Japan among the world’s largest airline markets without a major LCC presence.

“In most developed-country markets around the world, the LCC share in a deregulated market quickly trends towards about 33 per cent of ASKs and 30 to 50 per cent of passengers carried,” Mr Bhaskara says.

JAL’s public relations assistant manager Jian Yang says moving towards the Games, the expansion of Japanese metropolitan area airport capacity will give domestic and foreign airlines access to more customers.

“With the increased presence of foreign airlines and the expansion of the LCC supply, we think competition will intensify,” Mr Yang says.

But one thing that will limit the potential of LCCs is the lack of a third Tokyo airport. Since both Haneda and Narita are slot restricted, it will be hard for an LCC to grow at those airports despite pent up demand, Mr Bhaskara says.

“Perhaps this is where an innovative start-up will be able to make Ibaraki Airport [85km north of Tokyo] function as a base, perhaps with a high-speed train from the city centre to make it ultra accessible,” he says.

With its fleet of 26 Boeing 737-800s, the local budget carrier Skymark only runs domestic flights. But the market for international flights is expected to grow, and the airline is considering such services, says the spokeswoman Moeko Kamakura.

“However, because the competition is also fierce, we want to give the matter careful thought,” she adds.

Its rival Starflyer, for its part, is actively considering short-distance international charter flights and domestic charter flights connecting 24-hour airports, says its corporate strategy department assistant manager Ami Moriyasu.

The company is not currently planning specific scheduled international flights, but it does aim to add new regular domestic routes during the fiscal years 2017-2020. “Because of those new routes, we are considering expanding to international flights,” Ms Moriyasu says.

Conversely, the LCC Vanilla Air is planning to expand its current fleet of A320 planes from eight to 25 by 2020. While that year’s Olympics is not its sole target, the company wants to incorporate the Games into the development of its ongoing business, say the public relations manager Hideaki Chubachi.

Mr Chubachi says if possible, Vanilla Air will increase its Taipei-Narita and Hong Kong-Narita flights, and is considering expanding beyond Taipei into routes such as Taipei-Bangkok, Taipei-Ho Chi Minh City and Taipei-Singapore. “If business smoothly progresses to plan, the next step would be to introduce A321 planes suitable to long-distance flights,” he says.

Another LCC, Peach, is also aggressively planning international expansion. All locations within a four-hour distance from its hubs of Kansai International Airport and Naha Airport are possible targets, says its corporate communications deputy manager Kensuke Asami.

“Four-hour flights from Kansai Airport can go to Vietnam and Thailand,” Mr Asami says.

Vietnam and Thailand are indeed top targets, particularly flights from the cities of Fukuoka, Sapporo, Osaka, and even Nagoya to Bangkok and Ho Chi Minh City/Hanoi, Mr Bhaskara says. “You would also expect to see services from Tokyo/Osaka to Thai beach destinations like Phuket,” he says.

Kuala Lumpur, Singapore, and especially Bali and Jakarta are all ripe for direct Japanese LCC services to boost tourism, but they cannot be served with current generation narrow-body aircraft such as the Airbus A320 or Boeing 737 because those aircraft do not have enough range, Mr Bhaskara says.

Wide-body planes, for their part, are uneconomical for LCCs. Indeed, that was one of the factors that bankrupted Skymark last year, for example, Mr Bhaskara says.

“In the interim, this is where using Taipei as a stopover point would make sense, and then once the next re-engined generation 737 MAX 8 and A321neo come out, the LCCs will be able to fly non-stop, and that will make demand boom,” he says.

Fundamentally though, the future of Japan’’s airline sector is very much dependent on the growth, or lack thereof, of Japan’s economy, Mr Galaviz says.

“As long as Japan’s macroeconomic situation does not improve, the fortunes of airlines with significant exposure to Japan will languish,” he says.

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