Delta Air Lines extends its wings

Courtesy Airbus Industrie

Courtesy Airbus Industrie

The saga of Japan’s bankrupt Skymark Airlines has shifted attention from the plight of the damsel in distress to the competition among prospective white knights in waiting. Delta Air Lines has emerged as the frontrunner to the rescue of the beleaguered carrier, strongly favoured by Skymark’s creditors, Airbus Industrie and aircraft leasing firm Intrepid Aviation Group which have become kingmaker in the game. Of course, much also depends on the Japanese government’s position on a foreign carrier’s investment in the nation’s third largest airline.

Other foreign carriers that are said to have expressed an interest, if not now but in the early days, include American Airlines although it already has an alliance with Japan Airlines (JAL), China’s Hainan Airlines, and Malaysia’s AirAsia which had previously entered into a failed joint venture with ANA, which subsequently bought out AirAsia’s stake in AirAsia Japan and renamed it Vanilla Air.

Early indications pointed to ANA as Skymark’s best bet, but that would mean returning to a duopoly between JAL and ANA, not quite the desired situation preferred by the authorities if competition across the industry is to be encouraged. Airbus and Intrepid are trying to block such an eventuality, fighting a rival plan that would see ANA take up a stake of 16.5 per cent in Skymark. As the major creditors holding more than half of Skymark’s debt of 320 billion yen (US$2.6 billion), they are in a position of influence. The troubled budget carrier may also be handed heavy penalties for its cancelled Airbus order. Airbus and Industrie are proposing that Delta be invited to buy as much as 20 per cent of Skymark.

Intrepid believes the proposal “offers the best opportunity to preserve Skymark as Japan’s third largest independent carrier and is in the best interests of the carrier’s employees, suppliers and creditors.”

But is the issue really about preserving Skymark’s independence? Or even about its survival as prospective buyers take centre stage and observers wait to see how that would change the state of play. That can best be understood in the context of what really is at stake in the game.

For one thing, ANA is more a Boeing operator with a current fleet mix of only 6 per cent Airbus and the rest Boeing. It has also said it is not interested in taking over Skymark’s Airbus A330 leases. Delta on the other hand has shown increasing support of Airbus, favouring the European planemaker over Boeing with an order of 50 jets worth US$14 billion last year. Its current fleet mix is a growing Airbus 20 per cent to Boeing 58 per cent that tells the success story of Airbus penetration into the American market.

Skymark’s initial inclination was to work with JAL but was apparently advised not to exclude ANA. The benefit to any airline succeeding in the bid is Skymark’s 504 weekly slots at Haneda Airport, which is advantaged by its shorter distance to the city compared with Narita Airport. Although these slots are meant for domestic operations, it will add to ANA’s strength and increase its dominance at Haneda over JAL. However, ANA has already established other domestic brands that include Peach Aviation and Vanilla Air, and the likely outcome of such an arrangement may see Skymark being drastically downsized through fleet, route and capacity reduction, opening up opportunities for ANA and its subsidiaries – Skymark’s erstwhile competitors – to grow at Skymark`s expense. The authorities too may not be enthusiastic to see a diminished role for Skymark in the name of competition or some semblance of it for local travellers.

Courtesy Delta Air Lines

Courtesy Delta Air Lines

Delta is more likely to keep the Skymark brand intact, at least in the short term, as the Japanese carrier proffers an opportunity to extend its wings farther into the Japanese market. It is also about competition with compatriot rivals American and United Airlines outside the US. All three of them are mega carriers formed from mergers with fellow home airlines in a period of US aviation history marked by Chapter 11 protection, and consequently lifted by reduced competition at home to expand overseas. Since then, Delta has acquired a 49-oer-cent stake in Virgin Atlantic to strengthen its trans-Atlantic connections. It has also formed an alliance with Virgin Australia. What it needs now is an Asian, if not Japanese, partner, noting that both American and United have already forged alliances with JAL and ANA respectively. Hence Skymark looks like a timely opportunity.

Through Skymark, Delta will be able to gain access to many destinations within Japan, providing the channel for feed from and into Los Angeles (and perhaps other US points in the future). Viewed positively, it means Delta will have a piece of the local domestic market as well, something that is often not open to foreign carriers. Yet one is tempted to ask if Delta’s quest is all about banking on domestic connections, which many foreign carriers are quite happy to work through alliances with local partners. Delta will then be competing with JAL and ANA. Singapore Airlines tried and failed in Australia with the setup of Tigerair, which Virgin Australia as the new owner is trying to sustain as a completely local entity.

US carriers may gripe about Middle East airlines making inroads in the US market, but that too is quite a different story. First, Japan is not like the US. In fact, no single country is quite like the US unless you consider the countries collectively, such as the European Union where flying between member countries is not strictly domestic. Second, carriers such as Emirates Airlines are more interested in opportunities for direct access, connecting US cities with the world outside, operating viable links that US carriers may find eating into the domestic market for transfers.

Delta’s own experience of operating from Seattle to Haneda has not been up to the mark because of the seasonal traffic, a service which it will relinquish before the end of the year, making way for rival American to take up the Haneda slot with a second service to Tokyo in addition to its Narita route but flying from Los Angeles. This increases the competition threefold, American competing with not only Delta but also ANA. While Delta has said that the Seattle-Haneda service was intended to grow Seattle Tacoma Airport a gateway, the corollary challenge is growing the customer’s preference for Haneda, which lacks the international connections of Narita. But with an impending saturation at Narita, staking rights at Haneda is an investment for the future.

In a letter to the Department of Transport, Delta cited two reasons for the failed Seattle-Haneda service: “demand…is highly variable, peaking in the summer and declining in the winter; and Delta lacks a Japan airline partner to provide connectivity beyond Haneda to points in Japan and other countries in Asia.”

Interesting that Delta should attribute the failed service to its lack of a local partner, which therefore supports the case for courting Skymark. So also it seems the carrot is bigger than it looks. In 2010 when Skymark became the first Japanese carrier to negotiate a deal with Airbus for four Airbus A380 plus options for two more, it intended to use the aircraft for international routes from Narita to destinations such as London, Frankfurt, Paris and New York. The story sounds strangely familiar of a growing and ambitious airline, and one of a low-cost carrier that may have become neither sufficiently low-cost when buffeted by new competitors such as Jetstar Japan and Vanilla Air, nor adequately rebranded to attract corporate business and the higher end market. And the question, where Delta is concerned, is it looking a little too far into the future?

This article was first published in Aspire Aviation.

Qantas’ dismal performance: The singer or the song?

Courtesy Getty Images

Courtesy Getty Images


QANTAS reported a loss of A$252 million (US$225) for the half year (July-December 2013) which was worse than the loss of A$91 million last year. At the same time the Australian flag carrier announced it would cut 5,000 jobs as part of a three-year plan to reduce costs by A$2 billion. Other measures include deferring delivery of eight Airbus A380 for the parent airline and three Boeing B787 Dreamliner aircraft for budget subsidiary Jetstar as well as relinquishing some of the routes.

Qantas CEO Alan Joyce said: “We must take actions that are unprecedented in scope and depth to strengthen the core of the Qantas Group business.” He added: “We have already made tough decisions and nobody should doubt that there are more ahead.” So what’s new? One may then wonder if the dismal performance of Qantas is more about the singer than the song.

Mr Joyce attributed the poorer results to competition, high fuel prices and unfavourable foreign exchange rates – all the stock answers you can expect from any airline in a similar situation, not that they were in any way invalid but that they were definitely not the unusual suspects. The unions, naturally disenchanted by the announced staff cuts, had suggested that this might have been in part due to creative accounting in recent years.

It does not bode well for Qantas when the global economy is on the road to recovery with some major airlines already reporting profitable performances in sync with the optimistic outlook forecast by the International Air Transport Association. The flying kangaroo has been struggling to regain profitability on the back of a major restructuring initiative filled with such promise that would have observers believe in its certain recovery although not everyone was convinced. Something seemed to have gone amiss along the way.

A major thrust of Mr Joyce’s “transformation” strategy was to capitalize on the growth in Asia, which saw Qantas mounting more direct services in the region. But the flying kangaroo suffered from an image problem that even Australians preferred to book with competitor airlines such as Singapore Airlines (SIA) and Cathay. According to Mr Joyce, “82 out of every 100 people flying out of Australia are choosing to fly with an airline other than Qantas, not including Jetstar.” That might still hold true considering the airline’s latest results. The Asia plan to avert what Mr Joyce then referred to as an Australian “tragedy” was to launch a premier regional carrier based in Asia code-named RedQ, which never took off, and to promote Jetstar aggressively across the region. Jetstar Japan was launched in 2012 jointly with Japan Airlines, and Jetstar Hong Kong was established with China Eastern Airlines much to the displeasure of Cathay. But even Jetstar, once the star performer, was reporting a loss. Did Mr Joyce misread Asia and underestimate the competition? Was there a mismatch between his enthusiasm and the reality? Or did the fault lie in the execution?

Today Mr Joyce is reiterating the call for renewal he made two years ago when, announcing a 52% dip in first half profits, he said: “The highly competitive markets and tough global economy in which we operate mean that we must change.” At that time, 500 jobs were axed consequently. Then Cathay also reported a plunge of more than 60% in full-year profits (2011) and the results for SIA were just as lacklustre. The airline industry was suffering. To avert further losses largely incurred by its international arm, Qantas split its international and domestic operations into separate autonomous units in May 2012. Mr Joyce could be right that international and domestic operations faced different demands and challenges, and an independent Qantas International would have a freer hand in pursuing the Asia dream and other channels of growth. He said then, “We have begun the process of restoring Qantas International to a sustainable position.” Then as higher losses were expected for the full year came the glimmer of hope when the mega alliance with Emirates Airlines was announced, an initiative that looked likely to hurt rival SIA with the shift of Qantas’ hub for the kangaroo route from Singapore to Dubai that expands its accessibility to Europe, the Middle-East and Africa through Emirates. While Mr Joyce admitted that the alliance had cushioned the losses, the impact was far below expectations.

Only last year did Qantas send out signals that it was back on course, reporting a reduced loss for the first half. Mr Joyce, pleased with the turnaround, said: “We are now beginning to realise the benefits of the tough decisions that we have made over the past 18 months.” The improved performance of international operations was encouraging. It turned out to be a lull before the perfect storm. To be fair to Mr Joyce, one has to take a long term view of the strategy and recognize that external and unexpected events can affect the initial plans adversely and avert the desired results, and that under the circumstances a change of course would be expected of any dynamic organization. So one should cut Mr Joyce some slack lest one becomes too hasty in one’s judgement of the supposed “Qantas transformation program” which he would now accelerate to achieve a cost reduction of A$2 billion by 2016-17.

But the future looms large with uncertainty. It is not quite clear how Qantas would move ahead as the added measures appear to be short term and expedient, which may decelerate the growth of the airline and open up more room for the competition. A press release issued by the pilots’ association stated: “Qantas management has today outlined a demolition of jobs, but failed to follow through with a strategy for how it will grow the business and serve the national interest.” As if in preparation to ameliorate the negative impact of the devastating results, Mr Joyce has been harping on the Australian government’s unfair treatment of Qantas compared to Virgin Australia. The rules limiting foreign ownership have apparently put it at a disadvantage; rival Virgin on the other hand enjoys the investment that comes from partial ownership by Air New Zealand, Etihad Airways and SIA. Mr Joyce asserted: “The Australian domestic market has been distorted by current aviation policy.”

That restriction might be a hurdle to Qantas’ expansion, but it did not explain satisfactorily the failure of the airline to perform in progression with Mr Joyce’s grand restructuring plan. Above the sound and fury, as Australian Prime Minister Tony Abbott had commented, Qantas would have to first put its house in order.

Move over, Ryanair, the new low-cost model is Jetstar

Courtesy AFP/Getty Images

Courtesy AFP/Getty Images


REPORTING a net profit of 602m euros (US$831m) for the six months to end-September and despite an increase of 1% year-on-year, Ryanair yet again warned that profits are likely to fall for the full year. The airline reiterated an earlier exhortation about the numbers dipping as low as 500m euros compared to last year’s 570m euros, thus negating the gain made in the first half.

It is bad news that profits will fall despite an expected drop in fares by 10% over the winter months. Ryanair attributed this to “increased price competition, softer economic conditions in Europe and the weaker euro-sterling exchange rate.” As a result, the airline may ground some aircraft.

The truth is that Europe’s biggest low-cost carrier is beginning to feel that its hitherto successful modus operandi, hailed as a true budget model, may be finally running up against the wall. Surprise, surprise, surprise it is that the airline is talking about change, and more specifically in the department of customer service when previously it may even be said to have been sitting pretty comfortable and breathing arrogance about being labelled brusque, unfriendly and uncompassionate. Ryanair chief Michael O’Leary acknowledged it is now time to “listen to customers” in a somewhat belated but hopefully never too late attempt to retain customers and attract new ones.

Among the measures to be introduced are: the return of allocated seating in February next year for a smoother boarding process and to enable families and other groups of passengers to sit together; the allowance of a small second carry-on bag, which will be a bonus compared to other low-cost operators; and a 24-hour grace period to allow passengers to correct minor booking errors, a far cry from the alleged erstwhile practice of faulting or penalizing passengers on the slightest technical inaccuracy. It is a lesson learnt that in an increasingly competitive environment, customers do have a choice.

But, of course, many upstarts in the same niche market as Ryanair have failed to make the same strides as the Irish carrier. Some of them tried in vain to tweak the low-cost model to do one better and then ran the risks of evolving an expensive but misplaced hybrid model. Ryanair made no secret about flying the dollar and that everything else was baloney. Can you blame it that in its robust years it had not anticipated that this day of reckoning would arrive?

Image courtesy ABC

Image courtesy ABC


Younger Jetstar Airways and its sister airlines operating in a different part of the world might have gleaned some valuable lessons from the doyen’s experience. A subsidiary of Australian flag carrier Qantas, Jetstar has made its mark not only domestically but also in New Zealand and across Asia with local partners in Singapore, Vietnam, Japan and soon Hong Kong. It is fast becoming the region’s favourite low-cost carrier, competing with AirAsia and Tigerair whose founding fathers included Ryanair. Ranked tops in Australia, Jetstar Airways was second to AirAsia for best low-cost carrier worldwide in the Skytrax 2013 survey. Singapore-based Jetstar Asia was ranked seventh in the same category, but there was no mention of either Ryanair or Tiger Airways (now Tigerair) in the top ten list. In the Asia category, Jetstar Asia was ranked ahead of Tiger Airways. For Europe, Ryanair was outside the radar.

Jetstar is spreading its wings across Asia as Ryanair has done in Europe. It is enjoying an Asian boom, posting double-digit passenger growth. Since 2009, it has flown 23 million passengers within Asia and 10 million passengers from Australia to Asia. However, as pointed out by Jetstar CEO Jayne Hrdlicka, “low fares are just part of the story.” For too long while the going was good, competing on the lowest fares was everything for Ryanair. Price leadership has to be complemented by good products and services. Jetstar has identified “customer advocacy” as one of its drivers for growth. Providing a consistently good experience each time that a passenger flies is the surest way of attracting returning as well as new customers. It is the best advertisement that you can get.

Jetstar has contributed positively to the bottom line of the Qantas Group even though its last full year (ending June 2013) profit dipped by 32%, attributable largely to start-up losses in Jetstar Japan and Hong Kong. Is Jetstar, compared to standalone Ryanair, advantaged by its being an offshoot of an established legacy brand? Jetstar may attribute its success largely to its focus on local and independent management, but you cannot rule out parental influence. The airline is not alone in that aspect, if you consider the many others so conceived. This could well be the reason why AirAsia failed to work with partner All Nippon Airways (ANA) in the Jetstar Japan venture which has since been fully assimilated by ANA and the airline renamed Vanilla Air. Yet Qantas and Japan Airlines so far seem to have done all right in the case of Jetstar Japan.

It is not a given. The parental association can benefit or be detrimental to the offshoot carrier. United Airlines and Delta Airlines were reluctant parents to Ted and Song respectively. Or, it can disappoint. The magic of Singapore Airlines has not seemed to rub off Tigerair, not even Scoot that it wholly owns.

Good bloodline may provide an advantageous lift-off; the rest depends on the offspring coming into its own. Jetstar has scored many firsts since its inception, among them the first LCC in Asia-Pacific to introduce customer self-service for changes and disruptions, SMS boarding passes, and the unbundling of check-in bags. It was also the first LCC to put on board iPADS with the latest content and the first LCC to offer interline and codeshare flights. Soon it will be the first LCC to launch avatar chat (“Ask Jess”).

In all fairness to Ryanair, it is an equally innovative airline and it should be commended for being a bold one too. Here is where the path diverges for both airlines. As a true blue low cost carrier, Ryanair is focused on measures aimed at reducing costs further. The first principle of economics is that ceteris paribus, consumers will go for the lowest cost. If, for example, you do not fancy eating up in the air, why should you subsidise the cost of meals that other passengers tuck in? You pay only when you want to eat. Budget carriers, including legacy airlines – notably North American carriers – operating domestic or the short haul routes are already subscribing to that principle. Ryanair goes further with other measures such as charging a fee for counter check-in and has no compunction about bumping off a passenger who arrives at the airport without a pre-printed boarding pass. Scrimping on staff numbers to provide customer service also helps to reduce its operating costs. Mr O’Leary raised some brows when he suggested charging for the use of the aircraft loo and providing standing room only fares. The vibes turn out to be negative.

Jetstar on the other hand offers more positive solutions to perceived constraints that may be considered by many travellers as necessary evils of the budget travel mode. It has adopted a consolatory approach that has earned it brownie points. What little additional costs it incurs on the swings, it more than makes up for it on the roundabouts. Ancillary services are a major earner for the airline.

Move over, Ryanair, the new low-cost model is Jetstar. Still, it is quite something to hear Mr O’Leary say: “Listen to customers.”

Qantas finds its route to profitability

Courtesy Getty Images

Courtesy Getty Images

The market is tough, admitted Qantas chief executive Alan Joyce when he announced the airline’s FY13 performance. Against that background, even as uncertainty lies ahead for the industry – with the looming fear of a Middle-East crisis as the political turmoil in Syria comes to a head, threatening yet another round of spiralling fuel prices – the Australian carrier deserved a well-earned moment to celebrate its steady recovery in international operations whose losses have shrunk by half to A$246 million (US$221 million).

Mr Joyce attributed the positive swing to Qantas’ alliance with Emirates although the full impact of that partnership would only be felt in 2015, by which time he expected the international arm would be back in the black.

He said: “The Qantas Emirates partnership gives the group a strengthened position on routes to Europe, the Middle East and North Africa, via the global hub of Dubai.” According to him, “Bookings have been very positive, running at about twice the level of Qantas’ previous code-share arrangements for flights to Europe.”

So it has emerged that Qantas has made the right decision – to ditch British Airways for Emirates and re-route the flights through Dubai instead of Singapore. That was a move that could be said to have changed the rules of the game, much to the credit of Mr Joyce. In his words, “It gives us a clear network advantage over our competitors to London and Europe.” That demonstrates how geography can shift with improved technology, enhanced by strategic alliances and positioning. However, Mr Joyce said “there is still a lot of work to do bedding down the partnership in FY14”, unwittingly suggesting that even that could change if taken for granted.

At the same time, Mr Joyce reiterated the importance of Asia in Qantas’ international operations as laid out in its 5-year restructuring plan now in its second year. The approach is one of providing “the best possible product and service on routes to major Asian hubs – and to extend our network through the right partners.” Using Singapore as a major Asian hub is not an entirely new strategy; Qantas has long been taking advantage of Singapore’s liberal aviation policies to connect passengers within Asia.

Besides Dubai and Singapore as part of restructuring the international network “around a series of global gateways”, there is no clear indication of what other hubs Qantas is considering at this moment or in the immediate future. Unless there are more strategically placed and at the same time more cost-effective alternatives, it is unlikely that Dubai and Singapore will lose their importance in this respect. Nor is there any pressing need for Qantas to dot more hubs across Asia, excepting perhaps a most likely third hub to be Hong Kong or an airport in mainland China to capture the Chinese market. Qantas will most likely look to working closely with partners such as China Eastern Airlines to extend its reach across the region.

Softened by the reduced losses of international operations, the Qantas group made a net profit of A$6 million, reversing last year’s loss of A$244 million. The earnings were also boosted by a settlement of A$125 million it received from Boeing following B787 order cancellations. Qantas Domestic, Jetstar and Qantas Loyalty continued to be profitable; however, earnings for both domestic operations and the budget carrier declined.

Increased competition was cited as a reason for the 21-per-cent dip in profitability of domestic operations to A$365 million. However, Virgin Australia, which has acquired a 60-per-cent stake in Tigerair Australia, is expected to report a full year loss of up to A$110 million, pointing also to a general slowdown in demand across the country. Mr Joyce remained optimistic about Qantas’ prospects vis-à-vis the competition, reporting a trend of corporate customers switching back to the airline, apparently “after trying the alternative”. Qantas’s share of the corporate travel market in Australia is 84 per cent.

Jetstar’s profits suffered a steeper drop of 32 per cent to A$138 million. However, the budget carrier remains a strong contender in the low-cost market in the region and a complementary arm of the parent airline if not a key extension of the Qantas network. Jetstar Japan, launched in July 2101 in partnership with Japan Airlines, has emerged as the leading budget carrier in Japan, outshining rival AirAsia Japan which has since been fully acquired by All Nippon Airways and renamed Vanilla Air.

Qantas will prove wrong critics who doubted the viability of a budget carrier in Hong Kong as approval for Jetstar Hong Kong – a partnership with China Eastern Airlines and Shun Tak Holdings – by the authorities looks set to be formalized. With the huge potential of the China market, there is little reason to doubt that the carrier will make some impact on a market dominated by Cathay Pacific and Dragonair.

Going forward, Mr Joyce said “the global outlook is mixed” with signs of recovery in America and Europe but the uncertainty of its sustainability. It being a volatile market, his commitment to focus on “the elements we can control” may be about the best that any airline can do under the circumstances, but within the framework of a disciplined programme such as one known as Qantas Transformation.

Everyone likes vanilla, but do they really?

Courtesy Bloomberg

Courtesy Bloomberg

Following the breakup of AirAsia Japan between partners All Nippon Airways (ANA) and AirAsia, with the latter acquiring the stake of the latter, ANA has renamed the budget carrier. It is now Vanilla Air.

Vanilla Air president Tomonori Ishii explained the choice of the name as follows: “We chose vanilla as our brand name because it is popular and loved by everyone in the world.”

Vanilla Air as a new airline will commence operations in late December, targeting travellers heading for resort destinations. There was speculation that it might merge with ANA’s other budget carrier – Peach Aviation – based in Kansai, but it looked like Vanilla will continue on its own operating out of Narita. Whereas in the past year its predecessor was focused on domestic destinations within Japan, Mr Ishii said Vanilla Air aims to fly beyond Japan to other resort destinations in Asia. He said: “”We will begin with short-distance services but want to expand the range to mid- and long-distances in line with ANA’s branding strategy.”

Vanilla Air will start with two airplanes and increase the number to 10 by 2015.

Will the renewed branding help Vanilla Air turn round the loss of its predecessor in its inaugural and only year of operations to the tune of 3.5 billion yen (US$40 million)? The erstwhile partners had blamed the split on differences in strategy management, with ANA suggesting that AirAsia did not understand the profile of the Japanese market. Time will tell if the shift from online marketing – which is the mainstay of the AirAsia strategy – to working more with travel agents will boost the new airline’s bottom-line. However, Air Vanilla is not ditching online selling altogether; it will introduce a new online system that will appeal to the Japanese market, underscoring the importance of local knowledge.

It is a clear indication from what Mr Ishii had said that Vanilla Air will align itself with the ANA ethos, suggesting a stronger involvement of the parent airline which was perhaps restricted by the shared responsibility of two partner airlines with different backgrounds. The conflict that led to the breakup, with AirAsia chief Tony Fernandes declaring that he would not want to ever again work in partnership with another airline, told the familiar tale of how there can only be one boss. That, however, does not explain how AirAsia Japan’s rival Jetstar Japan – a joint-venture between Qantas and Japan Airlines – could outperform the former.

Is it therefore any wonder why a name like AirAsia Japan did not work, since it was not wholly owned by the Malaysia-based airline?

Mr Ishii thought Vanilla Air was “a very cute name”. It does not matter if some people outside Japan also thought of vanilla as being bland and boring, and in need of dressing. Maybe that is an appropriate appellation for a budget carrier, one without frills. But what matters more is that the Japanese people like it, as they are ever so fond of “cute” things from Hello Kitty to “boyfriend pillows”. Kawaii, they say.

AirAsia blames ANA for budget break-up

Courtesy Wikipedia Commons/Flickr

Courtesy Wikipedia Commons/Flickr

AirAsia chief Tony Fernandes has put the blame on All Nippon Airways (ANA) for the breakup of AirAsia Japan budget joint-venture. (See Budget business matures, Jun 12, 2013) The beef is that majority shareholder ANA as a full-service airline does not understand budget operations, giving rise to differences between the two partners in financial and management issues.

A marriage across cultures is not always an easy one, even if both partners hail from the same level. The aviation industry has seen the break-up of even the most likely partners. Ultimately it all comes down to the numbers. AirAsia Japan is not doing as well as the other budget operators, namely ANA’s other budget arm Peach Aviation with a Hong Kong partner and Jetstar Japan, a joint-venture between Qantas’ Jetstar and Japan Airlines (JAL) as major partners.

How then do you explain Peach and Jetstar being more successful? Mr Fernandes may argue that it is because Peach’s other partner is non-aviation, so is it a case of too many experts spoiling the broth? And, interestingly, Mr Fernandes said he has learnt one critical lesson from the failed tie-up; he was quoted as having allegedly said: “The lesson is I will never ever work with another airline in my life. Let me qualify that – premium airline.” That again may have also explained why he has chosen to set up AirAsia India with non-aviation partners Tata Sons and Amit Bhatia instead of with another airline or buying into an existing airline such as Kingfisher Airlines which is clutching at straws for some help.

What about Jetstar Japan, assuming it has so far not faced the kind of problems that confronted AirAsia Japan, even though JAL, like ANA, is a full-service airline and Jetstar, like AirAsia, operates the no-frills model? Or, if Qantas, instead of Jetstar, is driving the business, does it not augur ill when two full-service airlines try to operate a budget joint-venture along legacy lines? Yet the Jetstar brand has enjoyed good growth across the region.

ANA will now buy up the AirAsia stake in the joint-venture, and AirAsia Japan may then merge with Peach. Since Japan is a prized market for leisure travel, AirAsia may again seek to re-enter the market on its own. Can it do better the next time round? The longer it waits, the more it has to catch up with lost ground as the market matures.

Budget business matures

anaLESS than a year into its operations, AirAsia Japan – a low-cost budget joint venture between All Nippon Airways (ANA) and AirAsia – is facing a possible dissolution. Majority shareholder ANA with a 67-per-cent stake is considering buying up the AirAsia stake.

The discount carrier has not done as well as its rivals in the business. During the peak Golden Week holiday in Japan, AirAsia Japan managed a load of 67.6 per cent compared to Peach Aviation’s 91.3 per cent and Jetstar Japan’s 78.8 per cent. Peach is a joint venture between ANA and a Hong Kong partner and is based in Osaka’s Kansai Airport; Jetstar Japan is a joint venture between rival Japan Airlines and Qantas.

It is likely that following the dissolution, AirAsia Japan will continue to operate out of Tokyo’s Narita Airport but under the Peach brand.

Courtesy Wikipedia Commons

Courtesy Wikipedia Commons

While Asia has been experiencing quantum leaps in the growth of budget traffic in recent years – resulting in many more upstarts joining the competition – AirAsia Japan’s performance may be a forewarning of this business sector maturing even as analysts pointed out much has to do with a failed marketing strategy. The budget model was an initiative in its early years to generate growth in air travel which would not have otherwise materialised if not for its affordable fares, but many legacy airlines have also in their frenzy to prevent an outflow from their traditional markets set up budget offshoots.

Meantime AirAsia X – the long haul budget arm of AirAsia – is looking at the possibility of reinstating flights from Kuala Lumpur to destinations such as London and Paris which were suspended since early last year. The airline hopes to raise US$370 million in a share sale to repay debt and fund expansion plans. But the jury is still out as to whether the long-haul budget is a viable proposition, with many people inclined to think not so, as some airlines had tried and failed.