Japan Airlines eyes a bigger slice of budget market

Courtesy Reuters

It is taking Japan Airlines (JAL) a long time to launch a budget subsidiary, but it’s never too late if the budget market continues to grow. One may say that the Japanese carrier is treading with extreme caution, and even if the economic arguments are no stronger now than before, there can be no better reason than the Tokyo Olympics in 2020 for the belated introduction.

At home, rival All Nippon Airways (ANA) has been operating two budget carriers, namely Peach and Vanilla (which was the rebirth of a failed joint venture with AirAsia), and has plans to merge the two carriers in preparation for medium-haul international flights.

Foreign low-cost competitors include AirAsia, Singapore Airlines’ Scoot and Hong Kong Express. And, of course, there is Jetstar, the budget arm of Qantas, in which JAL has a minority share. It is therefore not exactly correct to say that the Japanese national carrier has not tapped into the budget market earlier, though not in as big a way as the others.

The yet-to-be-named budget carrier, to be based at Narita International Airport, will commence operations with two jets in mid-2020, offering medium and long-haul flights to Asia, Europe and the Americas. It will operate to some of the destinations already served by JAL.

The timing cannot be coincidental, as this is when ANA is expanding the operations of Peach into the international market. Until then, JAL seems quite content that the competition is limited to the domestic market, but with Peach offering another option for loyal Japanese travellers besides others to fly beyond and into Japan at lower fares, it cannot be taken lightly.

The budget market in Asia is a growing business. JAL director Masaru Onishi said the airline will cater to a broad group of Japanese and foreign passengers, and will take a more experimental approach to its product than the full-service parent carrier. There will be a mix of budget and premium options for meals and seats. The airline aims to be profitable within three years.

JAL may be Johnny-come-lately, but it has ambitious plans for its budget offspring. The competition is set to intensify, not just with compatriot ANA but also with other foreign carriers.

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.

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.

Mixed signals: All Nippon Airways upgrades forecast, Air France-KLM reports a difficult year

ONLY in March did the International Air Transport Association (Iata) cut its 2012 profit projection for the airline industry from US$3.5 billion to US$3 billion. Iata director-general Tony Tyler cited high oil prices as the main bugbear as the European crisis showed signs of averting, warning that the industry would plunge into the red if the situation did not improve.

Many airlines have been reporting reeling from the high fuel costs or suffering losses if not reduced profits as a consequence. Among the latest reports is that posted by Air France-KLM, which incurred first-quarter net loss of 368 million euros (US$483 million) even as revenue increased by 6 per cent to 5.6 billion euros. This was attributed to higher fuel and staff costs.

But there is good news in the East as All Nippon Airways (ANA) upgrades its forecast, and higher workforce, expecting consolidated net income of 28 billion yen (US$349 million) in fiscal 2011, compared to earlier forecast of 20 billion yen (US$249 million). The revised figure is also an improvement of 20.6 per cent compared to 23.3 billion yen the year before, thus turning an expected reduced quarter profitability into an improved one.

According to ANA, the optimism was boosted by strong demand in tourism, gradual recovery of the Japanese economy following the earthquake and tsunami in March last year, and cost improvement measures – this, in spite of the global concern about rising fuel costs. Looking ahead, the airline expects further improvement, banking on its strength as a network carrier and the launch of low-cost airline operations (Peach Aviation and AirAsia Japan) to improve overall group performance.

So it is not bad news all round. The winner will be one who is able to spot opportunities in adversity, maintains a discipline of dealing with the hard times and not losing sight of its vision, and takes timely action to be ready to pick the fruits when they are ready for the plucking. ANA appears to have mapped its future with some measure of success, bucking the general global trend.

It’s a long road to recovery for wounded Tiger Airways

THERE was some good news for budget carrier Tiger Airways this week; the Australian authorities have agreed to allow it to operate up to 32 sectors daily, up from the earlier 22. That should put excess capacity to some good use.

But it remains a long road to recovery for the wounded Tiger which, in June this year, was suspended for breaching safety. The carrier resumed limited flights six weeks after.

The suspension has cost the carrier dearly as it reported a second quarter loss of S$50 million (US$39 million). Even the Singapore operations are in the red. The full-year result is not expected to improve substantially, even with the added approval for joint-venture SEAir to fly domestic routes in the Philippines.

While Tiger addresses the damage to its reputation, rivals Qantas and Virgin Australia have gained new ground in Australia. In Asia, Tiger already faces stiff competition from Jetstar and AirAsia. New carriers such as Hong Kong-based Peach and AirAsia’s joint-venture with Thai Airways International will add to the competition.

Perhaps there is a ray of hope yet if parent Singapore Airlines (SIA) can manage to oversee sibling co-operation instead of rivalry when Scoot commences operations. But by all indications thus far, SIA’s new subsidiary which is expected to commence operations next year to destinations in China and Australasia, is only too keen to blaze its own trail. For a start, both carriers will be operating from different terminals out of Singapore Changi Airport.

Scramble for the budget pie

“GO budget” seems to be the gold-rush message for Asia-Pacific carriers. There has been a slew of news supporting the euphoria to dig into a growing lucrative market. While existing budget carriers are competing to extend their wings further and wider, new ones continue to enter the arena (even as some came and went). Full-service airlines that used to turn their nose up at the budget market have also decided they can no longer stay out of the action.

Jetstar and AirAsia are two examples of budget incumbents that have ambitious plans.

Jetstar, a subsidiary of Qantas, is increasing flights to China and Vietnam and investing US$500 million (S$604 million) in fleet expansion, hoping to operate more than 3,000 weekly flights to over 60 destinations in 17 countries by the end of the year.

Malaysia’s AirAsia announced recently a joint venture with All Nippon Airways (ANA) to set up Air Asia Japan, which will be based in Tokyo’s Narita Airport to serve both domestic and international routes connecting China, Taiwan and South Korea. ANA had already earlier formed another budget carrier named Peach Aviation with Hong Kong-based First Eastern Investment Group. AirAsia too already has similar joint ventures in Thailand, Vietnam and the Philippines, and operates budget long-haul under the AirAsia X banner flying from Kuala Lumpur to as far as Paris and London.

Not to be outdone, Qantas has decided to form a budget joint-venture with Japan Airlines and Mitsubishi Corporation – to be named Jetstar Japan.

Top of the news is Singapore Airlines (SIA)’s decision to start a fully-owned budget subsidiary although it already has a 32.9 per cent stake in Tiger Airways.

According to International Air Transport Association (Iata), Asia-Pacific is the only region where demand is expected to outstrip capacity, and budget carriers will be the main driver of that growth.

In line with the forecast, Singapore Changi Airport for one reported passenger movements of budget carriers growing 25.2 per cent for the first six months of the year, compared to 6.6 per cent by full service airlines. One in four passengers arrived or departed on a budget carrier. The authorities are expecting budget carriers to perform even better in the second half of the year.

AirAsia chief Tony Fernandes said in a BBC report: “Aviation is far from reaching a saturation point in Asia. There is definitely space for new players and for the expansion of existing ones.”

However, the optimism is only the obvious half of the story.

Asia-Pacific budget airlines are comparatively young. The large market potential offered by China has yet to be fully tapped, and as skies become more open across the region, opportunities abound. In 2007, Japan embarked on an “Asian Gateway Initiative” that relaxed restrictions on capacity and ports of call, signing agreements with Korea, Thailand, Macau, Hong Kong, Vietnam, Malaysia and Singapore. Other countries in the widely disparate region have also become more open to competition to meet the rising demand, which is expected to escalate when Asean Open Skies kicks in by 2015.

Yet Cathay Pacific Airways, the region’s most profitable airline, is resisting the temptation to follow in the footstep of archrival SIA, and would be introducing premium economy instead. Also, Virgin Blue rebranded as Virgin Australia is shedding its budget identity for a more upmarket image, eyeing not just the leisure but also the corporate market as it ventures into the long haul.

This is where the other half of the story reflects a less sanguine picture – that of an industry still struggling to stabilize after 2009 as Iata ever so often keeps revising its forecast. The original western budget model is changing its form as the incumbents become ambitious and more aggressive, as new upstarts enter the competition and as full-service airlines feel the threat of the market shifting downwards. Budget carriers are no longer content with serving only remote destinations, operating the short haul of no more than four hours, catering to cost-conscious leisure travellers and competing with land transport (as in Europe and the United States but less a cogent factor in this part of the world except in large densely populated land masses like China and perhaps Japan.)

The budget market used to be distinct from that of full-service airlines, but today the competition has crossed over. In Europe, Easyjet reported its revenue increasing by 23 per cent for the three months to June partly attributed to a new strategy of attracting business customers. In Asia-Pacific, Jetstar has introduced business class.

SIA’s budget decision signals an inevitable transformation of the aviation landscape as full-service airlines act to protect their turf and perhaps hopefully beat budget carriers at their own game. Reporting a tumble of Group’s profit by 82 per cent and the airline itself incurring a loss for the first quarter of FY 2011/12, SIA recognizes it needs new initiatives – although strictly this late decision is not exactly new considering how the writing has long been on the wall – to recapture its leadership position. (See “What could be ailing Singapore Airlines?” Aug 9, 2010). The move nonetheless demonstrates some diversion of policy that is already evident in SIA’s greater involvement in the management of Tiger Airways (See “Tiger Airways’ future hangs in the balance”, Aug 12, 2010). The competition is not what it seems. Full-service airlines are not only concerned about the encroachment of budget carriers on their turf but also how their full-service rivals are working with budget offshoots to retain or increase market share of the overall aviation pie. The competition is not as clearly defined as it used to be, as the line between budget and full-service begins to blur. A new hybrid model may evolve, but that is not going to influence significantly the choice of the travelling public, who will decide not between budget and full-service (or yet another classification in the nomenclature), but between airline A and airline B – whichever one offers the best value for their money.

Come to think of it, in reality the game has not changed. It has come a full circle back to the basics.