Asia Times: Japan's aviation industry: Flying high


	August 2, 2001	atimes.com

Special Reports

Japan's aviation industry: Flying high

Overview
Revisions to the aviation law in February 2000 ushered in deregulation and greater competition in the airline industry. The winners so far have generally been Japan's three largest airlines, which have strengthened their positions with increased domestic business. New carriers, however, have had a difficult time becoming profitable.

All Nippon Airways (ANA) began offering "super discounts" in April of last year. The discounts allow passengers to fly anywhere in Japan for a flat 10,000 yen (US$81). The cheaper tickets attracted 1.15 million passengers in the year ended March 31, 2001, helping ANA push up revenue by 8 billion yen in the year. The service, albeit limited to specific dates, offers a maximum 81 percent discount, far above the 50 percent cap allowed under the pre-revision aviation law.

In July, ANA said it would offer discount fares on international flights, hoping to repeat the success of its domestic discount fares in boosting revenues. ANA will offer round-trip tickets from Japanese airports to New York, Chicago and Washington for 60,000 yen and those to Los Angeles, San Francisco and Honolulu for 50,000 yen. The fares will be offered for departures during a limited period - November 30 to December 9, January 25 to February 3 and February 15 to 24 - and for travellers returning to Japan within 14 days of departure.

In addition to the international flights, ANA said it would offer the 10,000 yen discount fares again for domestic flights during certain dates between October and early next March.

Taking a leaf out of ANA's book, Japan Airlines (JAL) and Japan Air System (JAS) have introduced similar discounts on domestic flights. JAL sold tickets for destinations within Japan for 5,000 yen, a discount of up to 90 percent, for five days beginning May 10. JAS in May introduced a so-called birthday discount service, which allows customers to travel to any destination for a flat 10,000 yen for 15 days following their birthday.

In June, Boeing announced that JAL had placed an order for three Boeing 777-200ERs. The value of the new airplanes at list prices is estimated at $525 million. Deliveries are scheduled between 2003 and 2006. This order marks the initial replacements for the fleet of 15 DC-10s that JAL currently operates. Additional replacement orders, including commitments for 767-300ERs, are expected. In November last year, the airline ordered eight 777-200ERs and three 767-300ERs to replace its MD-11 fleet, for delivery from 2002 through 2004.

JAL is one of the biggest Boeing fleet operators, with a fleet that includes 10 777s, 25 767s, 84 747s and 23 737s. In addition, the carrier is a launch customer for the new longer-range 777-300ER. JAL currently operates its DC-10 airplanes on short to medium-range routes between Japan and Southeast Asia, as well as to Hawaii.

The 777-200ER is an extended-range model that can fly non-stop from Tokyo to the East Coast of the US, as well as throughout intra-Asia. It is the world's longest-range airplane and seats up to 301 passengers in a three-class configuration. The 777s are used on a variety of routes, including trans-Pacific routes in accordance with Extended-range Twin-engine Operations (ETOPS), as authorized by the US Federal Aviation Administration, the Japan Civil Aviation Bureau and/or other local agencies.

The price cuts employed by Japan's airlines have not eroded revenue at the three airlines, however, with airfares overall up by an average of 15 percent since last April.

ANA recorded a 161 percent surge in group operating profit to 82.2 billion yen for the year ended March 2001 on rising passenger volume thanks to discounts and other offers. The carrier saw per-passenger revenue climb 2.7 percent and increases in both domestic passenger volume and the number of business-class passengers on international flights, up 28 percent.

JAL posted a group operating profit of 78.6 billion yen in fiscal 2000, a jump of 75 percent, while JAS recorded an 85 percent rise in group operating profit to 17.7 billion yen.

Domestic passenger volume in fiscal 2000 climbed 1.4 percent on the year to 92.84 million, due partly to price-cuts offered by the three major carries. The three maintained their dominance in the market, with ANA holding a 42.5 percent share, JAS 21.9 percent and JAL 21.8 percent. Skymark Airlines and Hokkaido International Airlines (Air Do), new carriers that made their debut in 1998, each held a meager share of about 1 percent.

Skymark and Air Do set off a price war in their attempts to undercut the major airlines when they entered the market three years ago. The ensuing competition has, however, hurt the newcomers more than the big three, with last year's market liberalization compounding their woes.

Air Do, which serves the Tokyo-Sapporo route, reported a net loss of 3.2 billion yen for the year ended March 2001. With cumulative losses at 6.6 billion yen, the carrier is on the verge of falling into negative net worth. Operating costs have weighed heavily on the airline. Outsourcing ground operations to JAL costs Air Do about 3 billion yen annually, and leasing fees it pays for its fleet of two aircraft total 2.3 billion yen, which together account for nearly 50 percent of the company's revenue. The airline has nearly abandoned its target of moving into the black in fiscal 2002.

Skymark, flying between Tokyo and Fukuoka, sees a somewhat brighter picture. A pre-tax loss of 673 million yen for the six months ended April 2001 represented nearly 60 percent less red ink than seen in the same period a year earlier. Cost-cutting efforts by the carrier, including handling its own ground operations, have contributed to the stronger results. The airline hopes to move into the black in the current term ending October and projects pre-tax profit of 200 million yen for the full year.

Outlook
The global economic slowdown is expected to pull down earnings at airlines, with revenue from passenger operations at the major carriers expected to level off. To accelerate the pace of improvement in their financial standing, ANA, JAL and JAS intend to reduce interest-bearing liabilities, which stood at an aggregate 3.10 trillion yen at the end of March 2001, to 2.75 trillion yen by the end of March 2002.

(Asia Times Online/Asia Pulse)

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