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Japan - In Pursuit of Open Skies

Ryuhei Maeda, Director General of the Japan Civil Aviation Bureau, talks to Geoffrey Tudor about capacity, safety and why Japan initially rejected Open Skies

Special Report: Japan

The extended runway at Narita and the opening of the fourth runway at Haneda are major events. How will they affect Japanese aviation?

These two developments will make a tremendous contribution to international air service expansion in the Tokyo metropolitan area. Altogether, the total number of new international slots at the two airports is 80,000. This is an increase of almost 45% on the current 180,000 slots.

The yield per slot at Haneda and Narita is very high compared to other airports in Japan, so these changes will expand the business opportunities, not only for Japanese carriers but also foreign airlines. 

Are you concerned about overcapacity, especially as demand has slumped following the financial crisis and H1N1 influenza threat?

I don’t think so. We are now promoting air negotiations with other countries and I think all those slots will be “sold out”. Airlines may not use the slots in the summer schedule, as we are exempting them from the “Use it or Lose it” rule, but in six months or even a year these slots will be taken up.

Could the new airport at Ibaraki become Tokyo’s low-cost option?

Ibaraki airport is being developed at a Self-Defense Force (SDF) airbase with a new civil-use runway parallel to the military runway, so construction costs are far less than building an airport from scratch. The terminal is very simple—no boarding bridges—and so very suitable for LCC operations. The landing fees will be set at a very low level, so Ibaraki airport can certainly become Tokyo’s low-cost option.

Will airlines benefit from the privatization of Narita?

We drafted the legislation for the Narita IPO but the Diet (National Assembly) session ran out of time so the debate has carried over. Still, I think the law will be passed by the end of March 2010.

In October 2005, through cost cutting and rationalization efforts, Narita Airport Company (NAC) succeeded in cutting landing fees. That kind of rationalization will continue after the privatization.

What is the Ministry of Land, Infrastructure and Transport (MLIT) doing to help Japan’s airlines?

In April this year we prepared a four-point package to help Japanese carriers, aimed at improving revenue, cutting costs, maintaining local networks and supporting loan requests. For example, high-yield Haneda has a number of slots reserved for public use. We offered four of these to JAL and ANA (two each). As mentioned, we suspended the “Use it or Lose it” rule and cut landing fees at all airports in Japan owned and operated by the central government. In June, our ministry also supported JAL’s request for a special loan.

Do you see more movement towards open skies for Japan?

Unfortunately, Japan has been giving the impression that we are not very positive towards liberalization. But, actually, we are moving in that direction. When the US first proposed its open-skies policy, we rejected it. The main reason was that US carriers had tremendous vested rights, especially at Narita, where they had a third of all slots—the same as Japanese carriers.

We are in favor of liberalization and, in recent years, have reached agreements with some Asian countries, such as Korea. We have opened our airports on the condition the other country opens its airports. Narita and Haneda are exceptions because the capacity there has reached the limit. We are now discussing open skies with the US and Japan is moving towards liberalization.

Japan has an admirable safety record. Can it get any safer?

The most important thing for safety is sharing information and in April this year we introduced ASIMS (Aeronautical Safety Information Managing and Sharing System). This originated in October 2006 when we asked carriers to report not only accidents and incidents but also the minor troubles that occur in daily operations. The idea was to gather this information and analyze it for use in future safety audits.Now this data is shared with carriers and aviation industry-related organizations.

What are your short-term challenges?

Short-term, our biggest challenge is the successful 2010 capacity expansion in the Tokyo metropolitan area.

Another big challenge is the issue of global warming. In October there’s a high-level ICAO meeting where we want to cooperate with other countries so that ICAO’s action programme can be authorized. Of course, global warning is a long-term challenge too, but this conference is a key short-term stepping stone.

...and your long-term challenges?

One of the biggest obstacles to Japan’s introduction of open skies is the capacity constraint of airports in the Tokyo metropolitan area, so we have to tackle that. In Kansai and Chubu, there’s no problem with capacity.

NAC has announced that their future goal is to increase slot capacity to 300,000. Haneda’s grand total of 407,000 slots will all be used in 10 years time, so to avoid future capacity restraints we are studying expansion there—either by extending present runways or constructing a fifth.
Basically, our long-term goal is to realize liberalization, so our challenge is to remove any restrictions that prevent that.

Ahead of the curve

From passenger ticketing to self-boarding gates, Japan is leading the way in aviation technology.  It is often said that Japan is isolated in terms of technology. Its huge domestic market has driven unique standards in everything from cell phones to electricity. Aviation critics point to distribution systems in particular, such as passenger reservation and ticketing.

According to Haruo Ushiba, Japan Director of PhoCusWright, a US-based travel industry market research company, there is a tendency for Japanese carriers to want to develop everything by themselves, particularly for domestic distribution systems. Part of the reason for this isolation is to do with language, the thought process and the large scale of the business. There is a strong tendency to look inward, rather than outward, he says.

Ushiba also points to the double systems for international CRS (computer reservation system) and domestic CRS operated by Japan Airlines. “There are very few major airlines in the world today that have double CRS systems for international and domestic passengers,” he says.

Paul Behan, IATA’s Head of Passenger Experience, offers another opinion. “I think the distribution system discussion is more historical than a defined strategy,” he suggests. “The international versions grew out of not being satisfied by the original host, hence the two. Although there is a cost element, providing the data exchange is consistent, it isn’t a major issue.”

Behan points out that many airlines still pursue an idiosyncratic path but stresses it is not necessarily a bad thing. IATA gets involved with technology standards when the lack of harmonization is detrimental to the industry’s efficiency. But as long as airlines can exchange data cost-effectively, separate developments are irrelevant.

“From the Japanese carriers’ perspective, their self-service applications are actually designed and implemented to the IATA common-use self service standard, even though visually they look very different to other carriers because of the heavy use of pictograms and graphics,” explains Behan. “From a European perspective, one can also look to Scandinavia in a similar light.”

True Innovators

Matrix two-dimentional bar codes have been used in Japan for several years but the concept has only been rolled out in Europe and North America in the last 12 months. The benefits of Matrix 2D include greater storage capacity and its size, which lends itself to use on a mobile device.

Japan has also led the way with automated ticketing and boarding passes, a local initiative that won worldwide acceptance. “Looking to boarding gates at Japanese airports, once again, the Japanese have led the industry, along with the Scandinavians,” says Behan. “From a process perspective, they are true innovators. Normally self-boarding gates open and close for every transaction, while the Japanese model includes gates that remain open and only close on exceptions. Very simple, but very efficient.” 

Behan suggests the reason that the Japanese aviation market may appear isolated is that it is ahead of the curve in terms of technology and process innovation. The rest of the world isn’t working on a parallel track but rather following the Japanese lead.

“JAL first introduced self-check-in machines (SCM) for domestic passengers way back in 1991, starting at Haneda Airport, at a time when electronic ticketing was still something of the future,” says  Hideyuki Isomura, Manager, Airport Operations and Customer Service. “Domestic passengers holding ATB tickets were able to use these SCMs and we took this a step further in 2005 by introducing the integrated circuit check-in method, called QuiC. Judging from the 70% usage rate of the SCM and QuiC as of July 2009, we are certain that passengers find value and convenience in such systems.”

After completing check-in online, domestic passengers are able to go directly to the gate and—using an integrated circuit (IC) card, IC chip in a mobile phone or 2D barcode on a mobile phone or piece of paper—they can board the flight.“There are currently 300 domestic SCMs in Japan, and we plan to expand the distribution of the QuiC systems further for the convenience and satisfaction of our customers,” says Isomura.

In 2002, JAL also implemented self-check-in machines, equipped with passport scanners, for international passengers. To date, it has some 80 JAL SCMs in Japanese international airports and 20 common-use self-service kiosks in operation at overseas airports.

Lessons in M&A

When plans for Japan Air Systems (JAS) to merge with Japan Airlines (JAL) were revealed in November 2001, the move was hailed as a brilliant and logical strategy. So it was decided that JAS and JAL would unite in a two phase integration. First, in October 2002 a holding company called Japan Airlines System Corporation Ltd. was created to oversee the integration and then, in April 2004, two new companies JAL International and JAL Domestic, would start business.

The integration had actually been a topic of discussion between the two carriers for some time. JAL had been concerned that it would be unable to expand domestically because of airport constraints and struggle in the volatile and highly competitive international market.

JAL’s revenue was 70% international, 30% domestic, putting it at the mercy of the international marketplace and the fluctuations of foreign currencies. By merging with JAS, whose operations were almost entirely domestic, JAL could get a better revenue balance. Last year, for example, passenger revenue was 51% international and 49% domestic.
This was the crucial point behind the merger.

However, massive cost cutting also became possible, as forces and facilities at city offices and airports were joined. JAL estimated that, revenue stability aside, the total integration cost benefit would be $630 million (JPY63 billion) by March 2006 and later increase to $680 million (JPY68 billion).

Strategically, the integration added competitiveness to the new airline, according to Ryu Tanji, Professor of Airline Business at Obirin University and a principal analyst of Japan Aviation Management Research, an industry think tank. “From a competitive stance, the new airline was finally able to face All Nippon Airways in the domestic market,” he says. “Prior to the integration, JAL and JAS had about 25% each of the domestic market but were unable to grow due to a lack of slots, notably at Tokyo’s Haneda, which handles 63% of all domestic traffic.”

All Nippon Airways (ANA) was the dominant player in the domestic market with its 50% market share. With the merger, the market became more competitive.

“But not all went well,” Tanji notes. “Mistakes were made in implementation that could apply in similar mergers.” JAL created a complex and ineffective structure. For example, passenger business was divided into separate operating companies, international and domestic. Traditionally, both passenger segments are closely related. The separation was unusual and counterproductive.

Another problem, according to Kenichiro Naito, Manager, Corporate Planning, JAL, was the harmonization of two distinct corporate cultures. “It has taken time to improve communication flow,” says Naito. “Employees of JAL International (JALI) created the CLM (Communications Leaders Meeting), where leaders from sections of JAL such as maintenance, cabin attendants, flight crew and reservations, came together to formulate measures to improve communication within the company.”

JAL’s restructuring has helped it weather recent shocks. “Without it, the impact of SARS and the war with Iraq would have been far more severe,” Tanji concludes. The global recession is testing its resilience once again.

Oddly, a main benefactor of the JAL/JAS integration has been ANA. The announcement of the integration was a shock. In response, in 2002 ANA launched a comprehensive restructuring programme covering all aspects of its business but focusing primarily on network revision and fleet renewal. This has provided stronger foundations for ANA as it deals with difficulties caused by the current crisis. 

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