Can budget airlines fly high in Japan?

HK Express flights, between Tokyo’s Haneda International Airport and Hong Kong, are a bargain, at least on paper. For less that ¥40,000, one can get from Tokyo to the island city. But there’s a catch: the flights arrive and leave at awkward times.

Landing from the evening flight out of Tokyo gets you to Hong Kong before public transport starts; the return journey gets you to Haneda after trains have stopped running. You get what you pay for.

Japan is in the midst of a tourist boom. By August, the number was up 49.1 percent from the 8.81 million logged for the same eight months a year earlier. By September, the nation had attracted 15 million visitors for 2015. The record for most visitors in a year to Japan was broken September 10.

DESTINATION JAPAN

A large portion of the tourist surge comes from Asia. China visitors are up 117 percent, visitors from South Korea 43 percent, Hong Kong 68 percent, and Singapore 33 percent. Other countries in the region, such as the Philippines, India, Vietnam, and Indonesia, are also logging double-digit growth in visitor numbers.

Budget airlines are one reason more tourists are coming from across Asia to Japan. If people can get to the country for less, more will visit. AirAsia founder Tony Fernandes is among the people pushing for the government to make the nation more accessible to budget airlines.

“Haneda is too full,” he told a recent conference in Bangkok, according to Kyodo News.

Fernandes, whose Malaysia-based budget airline is the largest in Asia, is optimistic regarding prospects in Japan. He said that Osaka Kansai International Airport and Chubu Centrair International Airport in Nagoya both show the nation’s understanding of the growth potential at the CAPA Low Cost Carrier Airports Congress, which took place in the Thai capital. The Nagoya airport plans to open a new terminal targeting budget airlines by 2018.

Back in the Kanto region around Tokyo, Narita Airport recently opened Terminal 3, which is devoted to budget airlines. The terminal, without its own train station, is not in the most convenient part of the airport. But Narita charges airlines using it about 40 percent less per passenger, a saving that can be passed on.

There are, however, issues for the capital. “There’s just not going to be enough capacity at Haneda and Narita,” says Christopher Hood, reader in Japanese studies at Cardiff University.

“We have seen a huge increase in foreigners, primarily Chinese, coming into Japan. If that trend continues to any degree, and you put [the Tokyo 2020 Olympic and Paralympic Games] traffic on top of that, Haneda and Narita just cannot cope.”

COMPETITIVE BUDGET

Finding runway space is not the only issue for budget airlines. In January, the difficulties of succeeding on a shoestring in Japan became clear when Skymark Airlines, Japan’s first budget carrier founded in 1998, declared bankruptcy with an estimated ¥71 billion in debt.

As cost competition intensified in recent years, Skymark found itself lumbered with unprofitable routes at a time when foreign-denominated debt was increasing, reflecting the sharp drop in the yen’s value.

“Given the size of the market, it took a long time to see any competition going on,” says Hood. “Skymark was never really that competitive in terms of air fares and so on.” The airline, however, was able to find suitors.

A group led by All Nippon Airways Co., Ltd. (ANA) injected ¥18 billion into Skymark, beating competition from US carrier Delta Air Lines. Of this investment, ¥15 billion will be used to pay off a fraction of the debt. The rest will be spent on improving the airline’s services.

On some routes, ANA and Skymark will have code-share flights, and the beleaguered airline will purchase fuel, carry out maintenance, and conduct other key operations together with the larger carrier. Integral Corp., a private equity fund, will take a 50.1 percent share in the airline.

But seeking out fast growth does not appear to be the reason for the deal. “I do not expect rapid growth for budget airlines,” said Hideo Inagaki, an analyst at Japan Aviation Management Research.

“The three major budget airlines in Japan are subsidiaries of [Japan Airlines and ANA]. The two majors get good enough financial results from domestic services for now, so they do not have policies for the rapid expansion of budget airlines. Also, the Japanese government has pushed budget airlines to Narita Airport, which is a handicap, as many passengers use Haneda Airport in Tokyo [for connecting domestic flights].”

Keeping a grip on the Japanese market appears to be the main reason for ANA’s deal with Skymark. Delta, whose rival bid was rejected, continues to search for routes at Japan’s chock-full urban airports.

Hood sees ANA winning the Skymark bid as a cause for concern. “Rather than looking to loosen ANA and JAL’s grip, the question is whether you can loosen ANA’s now,” he says. “The airline is unbelievably powerful and influential. It now has 60 percent of the domestic market, then they help to run and train AIRDO [Co., Ltd.], Starflyer[, Inc.]... they are tied in with Vanilla Air, and one or two others. And they are the ones that will help out with Skymark now, too.

“I can understand if the company complains the government does too much to help JAL with bankruptcy issues and so on, but part of me also thinks somebody needs to keep and eye on JAL because ANA is moving toward almost a monopoly situation within the domestic market.”

LOCAL BENEFIT

Getting budget airlines going can have benefits. JLL, a real estate company, found in an analysis of Europe — where budget airlines account for 40 percent of revenue per passenger kilometer — that cheaper aviation has three effects on cities.

It brings in more tourists from overseas; pushes out domestic visitors, who do not wish to deal with the growing crowds of foreigners; and helps boost the growth of communities near the budget airline airports, which are often far from city centers.

Such effects could help rural areas in a country served by close to 100 airports. The government is pushing for a revitalization of those towns and villages that, far from the metropolises, have long seen the gap widen between their incomes and those in urban areas. However, for there to be any degree of revitalization, cities will need to make themselves desirable for budget airlines.

“I think it would be unlikely that you will get a small airport, out in the middle of nowhere, and a low-cost carrier will say, ‘let’s try a route there to try and revitalize that area.’ I don’t think that’s going to be their way of doing things,” says Hood. For now, it seems likely that the airports to benefit from low-cost flights will be limited to those that serve major metropolises.

“In Japanese domestic air traffic services, budget airline services provide only 10 percent of the country’s total revenue passenger kilometers,” says Inagaki. That compares with 60 percent for Southeast Asia.

There are many hurdles to overcome, but Japan’s budget airlines have plenty of room to grow over the long term.

Custom Media publishes The Journal for the American Chamber of Commerce in Japan.

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