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Special Report - Japan, a World Apart

Aviation in Japan is at a crossroads as airlines and airports undergo major changes. Its choice of direction will impact the global industry

Special Report: Japan

Despite its relatively modest geographical size, Japan is a major aviation player. Tokyo Haneda handles over 66 million passengers every year, making it Asia’s busiest, while Japan Airlines (JAL) and All Nippon Airways (ANA) are among the region’s largest, each serving some 50 million passengers annually. Little wonder Japan is the third largest domestic aviation market after the US and China.

These robust figures have been sorely tested by the global economic crisis and uncertainties over the Influenza A(H1N1) virus. According to the Economist Intelligence Unit, a forecasted 6.8% drop in GDP in 2009 will be followed by a modest 1% growth in 2010. However, Japan’s economy is based on export-driven manufacturing and could lose out to Asian rivals in any market restructuring. Unemployment already stands at about 5%.

Home airlines are suffering. ANA’s domestic traffic was down 13.6% in the first fiscal quarter of 2009 (April-June) compared to the same period last year, with international passenger numbers down 15.5%. The airline—a launch customer for the Boeing 787—has drawn up an Emergency Income Recovery Plan aimed at securing an additional $322 million (JPY30 billion) in revenue by April 2010. The plan will complement measures to cut $784 million (JPY73 billion) in costs.

JAL’s situation is arguably worse. It has been forced to ask for emergency funds from the government and there is talk of a foreign investor. It is also working hard internally. It has cut staff numbers by nearly 7,000 and in the second half of this fiscal year, frequencies will be further reduced on eight international routes, and services from Nagoya to Paris and Seoul will be stopped.

There will also be a major downsizing of aircraft on certain routes. “We have listed nine areas in which we will target cost cuts and aim to reduce cost by $568 million (JPY53 billion) for this fiscal year, but we will not be stopping at that,” says Director of Corporate Planning, Keisuke Suzuki.

“We are looking into the possibility of merging our cargo operations with Nippon Cargo Airlines, a subsidiary of Nippon Yusen Kaisha,” he adds. “Instead of searching for solutions to survive individually, we anticipate that the positive synergy that this merger can bring will improve customer convenience and satisfaction.”

Infrastructure issues

There are plenty more challenges ahead. Japan is in the midst of a major infrastructure shift that could change both domestic and international traffic. Tokyo’s two metropolitan airports are expanding. Significantly, Haneda will finally return full scale into the international arena. The new government will have a busy agenda that includes improving international access at secondary markets such as Hokkaido, Fukuoka and Okinawa, plus regional connections at smaller gateways. The aim is to encourage traffic and challenge other regional hubs such as Seoul Incheon and Shanghai.

The liberalization policy could also promote lower airport charges and reduced levies on aircraft fuel. Japan’s landing fees are among the highest in the region and fuel facility charges among the highest in the world, despite reduction agreements with the major airports. Change won’t come a moment too soon for the airlines. “We would prefer to see lower airport charges, of course, so that Japan’s airports are more competitive with those of our neighbors, and to reduce the overheads of all airlines operating into Japan,” says Hiroshi Shibata, Deputy Director, Network Planning, ANA.

An enlightened aviation policy should have a positive effect but it could also encourage low-cost competition—a minor concern for the majors. LCCs will be eligible for a share of the new slots available at Narita and Haneda and will benefit from a future liberalization of regional airports. Ibaraki, north of Tokyo, is perhaps the first airport to fit the bill of a secondary facility. A new bullet-train network, connecting Toyama, on the west coast, to Tokyo and the east coast, is set to become an increasing concern, eating into routes previously only practical by plane.

Japan must also deal with its airspace infrastructure. Complaints about aircraft noise originated in Japan and the issue has had a knock-on effect, creating a patchwork quilt of air-traffic routes as local authorities looked to diffuse the situation.

Japanese airlines would benefit from more efficient and cohesive airspace and will also need to be key players in any pan-Asian initiatives. While Europe and the US have SESAR and NextGen on the radar—albeit further off than liked—there is no such political mandate in Asia. These challenges are not insurmountable. Over the past few years, IATA has developed a good working relationship with airports and government officials on a variety of initiatives.

For example, charges were reduced by 11% at Narita in 2005 and consultations have been held over the last 12 months on additional changes to the charges framework. Japan has also become the 21st e-freight location worldwide. E-freight effectively eliminates the need for 13 paper documents, improving speed, reliability and the bottom line.

Japan may seem a world apart as its idiosyncrasies and market volume underline. However, the airlines’ challenges are typical: a downturn in demand due to the poor economic climate, increased competition amid high costs, and infrastructural issues leading to inefficiencies. Japan’s response will be of interest to aviation everywhere.

LCCs yet to make their mark

Despite having the third largest domestic air transport market in the world, Japan has been far from a natural habitat for low-cost carriers (LCCs). Five newcomers entered the market in 1998 but their business model cannot be accurately described as “low cost” in the same context as their foreign cousins.

Japan has about 95 million domestic air travellers a year, 63% of them are travelling to and from Tokyo. The capital’s two airports—Haneda and Narita—both charge landing fees that are among the region’s highest and both are stretched to capacity.

Even though new slots are being created, ANA and JAL will be the main beneficiaries. Large-scale LCC entrants could not be supported and alternative airports in the region are only now beginning to appear. Yokota, a US military base west of central Tokyo, has been suggested but no progress has been made in gaining civil access. Closer in is Chofu, a tiny landlocked aerodrome used mostly by general aviation and hampered by a 5pm curfew.

Mount Fuji Shizuoka Airport, which opened in June, could offer an opportunity and in March 2010 Ibaraki Airport, 80km northwest of Tokyo, will welcome traffic for the first time. However, there has been no domestic interest—all Japanese airlines have declined to use it—and only Asiana has signed up for an international service. Other foreign carriers, such as Air Asia X and V Australia, are reportedly considering the facility.

Airline comparison

According to Yoshihisa Akai, CEO and Chief Analyst of Japan Aviation Management Research, the newcomers cannot be called LCCs according to the accepted business model in other countries.
Akai has completed a study comparing Japanese airline Skymark with the Malaysian LCC AirAsia.

Skymark’s seat costs are triple those of AirAsia, its personnel cost over three times greater and airport charges and related handling fees nine times higher.
Japan’s punitive domestic fuel tax of $275 (JPY26,000) per kiloliter is another handicap.

Domestic fuel tax in Japan—20 times greater than that of the US—amounts to 10% of these airlines’ operating costs, which means Japan’s ‘low-cost carriers’ are unable to differentiate their basic business model from the established airlines.

Skymark has achieved high load factors, making profits on heavy-demand routes with small aircraft at low fares. But cockpit crew shortages forced flight cancellations in summer 2008 leading to a small net loss in the last full fiscal year. It hopes to return to the black this fiscal year.

The four other Japanese start-up airlines—Air Do, Skynet Asia, Star Flyer and commuter IBEX—have been unable to adopt a similar “stand-alone” strategy due to network constraints and have survived by aligning with ANA.

In 10 years, the newcomers have secured only 6% of the Japanese market. ANA has a 48% share, followed by JAL with 46%.

All change in infrastructure

Recent developments at Japanese airports will have a major impact on both domestic and international aviation.

At Narita—Tokyo’s prime international gateway—the second runway which opened in 2002 has finally been extended to 2,500 meters. From March 2010, this will allow an initial extra 20,000 international flights a year—a 10% improvement—and better accommodate the larger aircraft. The airport is hoping to eventually increase annual international slots to 300,000.

Haneda, the capital’s main domestic facility, opens its fourth runway next year and will soon complete a new international terminal. Although the airport has had a limited international service, the new set-up will see a significant move on to the global stage. Approximately half of the 120,000 slots created will be given to international service.

Originally, the plan was to limit international traffic to short-haul destinations: Korea, eastern China and the Russian Far East. However, further liberalization was announced in May 2008, which allowed flights to operate between 11pm and 6am to any destination—noise restrictions permitting. The UK, Netherlands, France and Canada are among those that have already signed up to take advantage.

Haneda is much closer to downtown Tokyo than Narita and so this opening up to international traffic could have a profound affect on airline networks. Hiroshi Shibata, Deputy Director, Network Planning, All Nippon Airways (ANA), points out that passengers will have a fully functioning 24-hour international hub in the capital city for the first time: “For ANA, expansion at Narita and Haneda will allow us to grow our international network and provide much more efficient connections for customers, from domestic to international.

“We intend to operate a dual hub structure and maximize the individual benefits of both airports.”
Despite such assurances and the forthcoming Narita Rapid Rail, which will cut journey times to the airport by approximately 20 minutes, an impact on Narita business is anticipated. This will be further deepened by the new Ibaraki Airport in Hyakuri—around two hours outside central Tokyo—which will give LCCs a crucial secondary airport for the first time.

Narita has been corporatized and is due for privatization, pending any change of plans by the new Japanese government. There is pressure on the airport to improve profitability prior to an IPO but it now has a difficult competitive position. Aside from the above, repaying the government loan is a big constraint on its ability to generate surpluses.

Osaka Bay

In Osaka—the heart of the Kansai region, which has some 21 million inhabitants and a GDP bigger than Canada’s—there are three major gateways. Itami is Osaka’s old international airport and primary domestic gateway, Kansai is Japan’s biggest hub airport connecting domestic and international traffic, and Kobe is a new domestic facility across Osaka bay frwom Kansai.

Noise complaints at Itami led to a lawsuit demanding its closure. Kansai was to become its replacement but, with the threat to jobs, there was a U-turn in lobbying efforts and the airport remained open. Itami is more convenient for those travelling to North Osaka and Kyoto and has been growing its traffic, while Kobe serves a thriving city. Kansai principally handles international flights plus domestic connection flights and traffic bound for southern Osaka.

This dispersion of traffic has restricted Kansai’s ability to function as a hub for the region. And although the Ministry of Land, Infrastructure and Transport (MLIT) has defined Kansai as the only international hub for western Japan and a domestic airport for the Kansai region, it is still struggling. An earthquake in 1995, the Asian economic crisis, 9/11, SARS and the recent financial meltdown have not helped. Traffic peaked in 2000 at over 20 million.

In 2008 there were 15.3 million passengers of which 10.1 million were international. ANA recently adapted its network to focus on Itami and cut Kansai flights.
Nevertheless, an $8 billion second runway opened two years ago despite usage of the first being well below capacity.

The extra operating costs have made Kansai the most expensive airport in Asia-Pacific. “There are additional charges rebates available for new operations and larger aircraft,” says Jeff Poole, IATA’s Director for Industry Charges, Fuel and Taxation. “But, together with the airlines, we are lobbying the airport and government to reduce the burden on all current operators.”

Japan - In Pursuit of Open Skies

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