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Japan Airlines and Jetstar Japan embrace LCC hybridity, codesharing – and reap rewards

2-Mar-2013

While some parts of the industry spend time seeking to define what makes a low-cost carrier or debating who is and is not a “true” LCC, most airlines are looking past labels and instead offering services that give them a yield premium and expand traffic flows.

This hybridisation of airlines that, by their own term, started as LCCs is exemplified by Jetstar. One feature that may be most contentious for a LCC to have is interline and codeshare relationships. Jetstar has three codeshare and 25 interline agreements following the main addition of Jetstar Japan codesharing with part owner Japan Airlines. This will further help Jetstar increase interline and codeshare revenue, which grew 80% in 2012.

The Jetstar Japan-JAL deal has its own nuances worthy of examination. Not only is this a partnership between one of the most adaptive LCCs and what was one of the most hardened legacy carriers, the relationship will enable JAL to expand its domestic network virtually and at a low cost, critical for high-cost JAL at a time of transformation in North Asia.

Despite being an LCC, interline and codeshare are a major part of Jetstar's DNA   

The time is past when LCCs' reflex would be to reject interline and codeshare relationships, but Jetstar is one airline that has actively embraced them. The development in Japan, which includes a codeshare between Jetstar Japan and JAL, and an interline between Qantas (full owner of the Australia-based Jetstar Airways) and Jetstar Japan, brings the Jetstar Group’s interline relationships to 25 (including Air France, Jet Airways and KLM) and codeshares to three (American Airlines, JAL and Qantas).

Revenue from interline and codeshare relationships grew 80% in 2012, Jetstar Group CCO David Koczkar said at the Airline Retail conference in Hong Kong in Feb-2013. Mr Koczkar declined to disclose a monetary amount.

Few carriers disclose revenue from partners. One exception, and a heavyweight at that, is Etihad Airways, which in 2012 reported 19%, or USD912 million, of revenue came from its partnerships. Virgin Australia wants to grow partnership revenue by up to AUD150 million (USD154 million) per annum by the end of FY2015. In FY2012 the interline and codeshare revenue going onto its domestic and short-haul international network increased 158% (no monetary figure disclosed).

In FY2011 Virgin only said the Etihad alliance more than doubled the number of passengers going onto Virgin's network, although the base was understandably low.

At the outset, Jetstar did not originally envision this focus on partnerships. As Mr Koczkar, one of the founders of the nine-year-old carrier, remarked at CAPA’s LCC & New Age Airline conference in Macau in Sep-2012: “One thing we didn’t think we would do was set up a codeshare business.”

He acknowledged interlines and codeshares are not what a LCC would set out to do, but Jetstar developed – largely with IT provider Navitaire – the capability. (Other Navitaire customers have interlines, including Tiger Airways with Scoot, Scoot with Tiger and SilkAir. AirAsia, Jetstar and Tiger all have connections within their portfolio of airlines. Outside of Navitaire, JetBlue is larger on interlines and partnerships.)

While the technology backbone was critical, Jetstar’s mass and market penetration made it an attractive partner. That appealed to Air France and KLM when they signed an interline agreement with Jetstar in Jun-2010. “We have a joint vision to connect two worlds – the world of Air France-KLM, the largest European airline group in the world, with the largest low cost operator in Asia-Pacific, Jetstar,” AF-KLM SVP Asia-Pacific Marnix Fruitema told Tnooz at the time. “Asia Pacific is too diverse, too large, to have just one partner. Our agreement with Jetstar is to drive business out of Singapore, South-East Asia and Australia and New Zealand, where we see tremendous growth potential.”

Air France at the time was a deep partner with Qantas: the two cooperated between Australia and France (AF did not fly to Australia and Qantas withdrew from Paris) and estimates are that the carriers transferred upwards of 100 passengers a day, mostly on Qantas' Frankfurt service. Qantas in Sep-2012 announced it was ending its relationship with Air France as part of its alliance with Emirates, as well as terminating its Frankfurt service. AF-KLM have since done a deal with Etihad covering Australia, but Mr Koczkar says the AF-KLM interline remains in place, for now at least.

See related articles:

A Feb-2012 interline agreement between Jetstar and India’s Jet Airways was especially important, and likely one of the key drivers of Jetstar’s 80% revenue growth (also notable in the period was AF-KLM expanding its agreement with Jetstar).

The Jet Airways agreement covered flights from India to Southeast Asia and Australia, although Southeast Asia would have been more important. The deal gave Jet Airways greater access in the competitive Southeast Asia market while Jetstar, long weary of entering India with its own metal, was able to tap into the Indian market (although interline tickets covering Jet Airways and Jetstar are only available for sale from Jet Airways and not Jetstar).

See related article: Jet Airways-Jetstar interline positions carriers for growth in India, Southeast Asia and Australasia

Jetstar offers different complimentary services to interline customers

Coordinating products on a LCC-FSC interline ticket has not proven to be insurmountable. Jet Airways interline passengers receive free checked luggage on Jetstar and, on long-haul flights, meals and amenity kits (other passengers pay). That is not to say there is a completely standard product between the carriers. Passengers can be fine with that – if there is proper communication at the time of booking. In general, communication, especially on what are often clunky websites, is not a forte of airlines.

Under the Jetstar Japan-JAL codeshare, which is only applicable when connecting from an international JAL flight, JAL passengers receive the same luggage allowance on Jetstar Japan as they had for their international service, according to JAL. Food and drinks are not complimentary. Jetstar Japan flights are typically under two hours, and even then JAL and All Nippon Airways offer a minimal service selection of basic drinks (typically water, tea and coffee).

At the time of booking, JAL passengers on a Jetstar Japan codeshare can only specify if they want an aisle or window seat. JAL passengers travelling on a Jetstar Japan codeshare are able to access the JAL lounge under the same conditions as JAL international and domestic connections (but for Jetstar Japan domestic services, this will lose relevance as low-cost terminals gain favour).

With typical Japanese attention to detail – along with unfamiliarity with the new LCCs – JAL notes Jetstar Japan services do not have JAL cabin crew on board, and that diapers are not provided.

Jetstar Japan codeshare available only with international connection

The Jetstar Japan-JAL codeshare was floated even before Jetstar Japan’s Jul-2012 launch, as CAPA has noted.

Jetstar Japan CEO Miyuki Suzuki, speaking to CAPA while discussions with JAL over the codeshare were ongoing, said the objectives of the codeshare were to let members of JAL’s frequent flyer programme earn miles/points on Jetstar Japan. JAL is part owner of Jetstar Japan along with Australia’s Jetstar Group (itself part of the Qantas Group), Mitsubishi Corporation and Century Tokyo Leasing Corporation. The importance of frequent flyer programmes in attracting and retaining customers cannot be over-estimated.

A second driver of the codeshare, Ms Suzuki said, was to give JAL access to Jetstar Japan’s network, especially in regional cities. JAL and ANA have historically focused on trunk routes out of demand but also as those markets have enough business traffic to sustain fares, high as a result of JAL and ANA’s bloated cost bases. Jetstar Japan and peers AirAsia Japan and Peach aim to have a cost base half to one-third of ANA and JAL.

The Jetstar Japan-JAL codeshare is only bookable via JAL (as is the case for Jetstar’s other codeshare relationships) and when making an international connection, keeping domestic itineraries independent of each airline. This is consistent with the larger Jetstar Group, Mr Koczkar told CAPA. He said Jetstar codeshares bearing Qantas' QF-flight numbers have been accessible in the domestic market but only when connecting to an international flight. Qantas in Jan-2013 said it would no longer sell QF-coded Jetstar-operated services between Sydney, Melbourne, Adelaide and Perth in order to “increase transparency in the booking process”.

Qantas had received criticism from passengers who had booked on Qantas but found themselves on a Jetstar service – an issue essentially about lack of communication. Qantas did not specify if it had been selling codeshares on Jetstar on domestic itineraries.

Jetstar Japan codeshare gives virtual expansion to JAL, looking to reduce its domestic emphasis

Virtual expansion for JAL is critical. The carrier is preparing for a future in a less than upbeat market. Japan has been a shrinking economy and air market, and JAL’s cost base, although significantly lower than prior to its bankruptcy, is still high and a blockade to stimulating growth.

JAL’s management plan calls for it to shrink in the domestic market. By FY2016 it expects to operate 3% fewer domestic ASKs than it did in FY2011. JAL’s own flying will likely decrease further as JAL includes codeshare services when counting its domestic ASKs.

Making up for domestic shrinkage, JAL expects to operate 25% more international ASKs in 2016 than it did in 2011. Domestic passenger flights are JAL’s single largest source of revenue but international flights will slowly catch up and, one day, likely overtake domestic.

JAL projected ASK growth based on 2011 baseline: 2012, 2013 and 2016

  FY2012 FY2013 FY2016
International 6% 13% 25%
Domestic 4% 4% -3%
Total 5% 9% 13%

See related article: Japan Airlines plans for future: more regional & long-haul flights as LCCs swallow short-haul market

Virtual domestic expansion via the Jetstar Japan codeshare will help feed JAL’s growing international presence. In the domestic market, JAL is about half the size of ANA with 718,000 weekly seats in Feb-2013 compared to ANA’s 1.3 million.

Internationally, however, JAL is larger than ANA with 241,000 weekly seats in Feb-2013 to ANA’s 196,000.

Jetstar Japan's Narita base is a better connecting match for JAL's international Narita flights

Even if JAL were to grow its domestic network to feed its international services, there would be logistical challenges.

JAL, like ANA, has the bulk of its domestic services at Tokyo’s downtown airport of Haneda while international services are at Narita. While there are some international flights from Haneda and some domestic services from Narita, a domestic-international transfer at Tokyo – where the majority of international seats are – requires a long airport transfer.

JAL top 10 international hubs/bases ranked on seat capacity: 25-Feb-2013 to 03-Mar-2013

ANA top 10 international hubs/bases ranked on seat capacity: 25-Feb-2013 to 03-Mar-2013

Jetstar Japan, however, has Tokyo Narita as its primary hub, which could make transfers far smoother – and shorter – as passengers would no longer have to change airports.

JAL’s domestic network at Narita is limited to five cities while from Haneda it serves 31 destinations.

JAL domestic capacity from Tokyo Narita ranked on seat capacity: 25-Feb-2013 to 3-Mar-2013

Rank

Airport

Total Seats

1

NGO

Nagoya Chubu Centrair International Airport

5,656

2

ITM

Osaka Itami Airport

4,578

3

CTS

Sapporo Chitose Airport

3,234

4

FUK

Fukuoka Airport

3,234

5

OKA

Okinawa Naha Airport

1,078

JAL domestic capacity from Tokyo Haneda ranked on seat capacity: 25-Feb-2013 to 03-Mar-2013

Rank

Airport

 

Total Seats

1

FUK

Fukuoka Airport

37,462

2

CTS

Sapporo Chitose Airport

35,903

3

OKA

Okinawa Naha Airport

33,359

4

ITM

Osaka Itami Airport

29,535

5

KMJ

Kumamoto Airport

12,108

6

KOJ

Kagoshima Airport

11,933

7

KMQ

Komatsu Airport

11,578

8

OIT

Oita Airport

10,148

9

HIJ

Hiroshima International Airport

8,596

10

TKS

Tokushima Airport

7,940

11

AOJ

Aomori Airport

7,756

12

TAK

Takamatsu Airport

7,756

13

MYJ

Matsuyama Airport

7,664

14

IZO

Izumo Airport

6,926

15

NGS

Nagasaki Airport

6,468

16

OKJ

Okayama Airport

5,390

17

KMI

Miyazaki Airport

5,376

18

KCZ

Kochi Airport (Japan)

5,374

19

OBO

Obihiro Airport

4,588

20

MMB

Memanbetsu Airport

4,522

21

HKD

Hakodate Airport

4,430

22

UBJ

Ube Airport

4,312

23

AXT

Akita Airport

4,312

24

AKJ

Asahikawa Airport

4,312

25

KKJ

Kita Kyushu Kokura Airport

4,298

26

MSJ

Misawa Airport

3,234

27

KUH

Kushiro Airport

3,234

28

KIX

Osaka Kansai International Airport

2,156

29

SHM

Shirahama Airport

1,596

30

ASJ

Amami O Shima Airport

1,050

31

GAJ

Yamagata Junmachi Airport

376

The situation at Tokyo – and the relationship between JAL and Jetstar Japan – could change in the long-term as Haneda gears up for a large expansion of domestic slots around the middle of the decade. While the new LCCs, including Jetstar Japan, have not indicated if they will be interested in these slots, in all probability they would be. A presence at Haneda would enhance possible connectivity options.

As in Tokyo, Osaka’s international airport – Kansai (which is JAL’s third-largest Japanese hub for international services) – sees JAL service to three domestic destinations while the domestic/downtown airport – Itami – sees JAL service to 16 domestic destinations.

JAL domestic capacity from Osaka Kansai ranked on seat capacity: 25-Feb-2013 to 03-Mar-2013

Rank

Airport

Total Seats

1

CTS

Sapporo Chitose Airport

4,956

2

HND

Tokyo Haneda Airport

2,156

3

OKA

Okinawa Naha Airport

246

JAL domestic capacity from Osaka Itami ranked on seat capacity: 25-Feb-2013 to 3-Mar-2013

Rank

Airport

Total Seats

1

HND

Tokyo Haneda Airport

29,535

2

NRT

Tokyo Narita Airport

4,578

3

OKA

Okinawa Naha Airport

3,500

4

SDJ

Sendai Airport

3,192

5

KMI

Miyazaki Airport

2,660

6

CTS

Sapporo Chitose Airport

2,072

7

HNA

Hanamaki Airport

1,596

8

NGS

Nagasaki Airport

1,596

9

AXT

Akita Airport

1,414

10

KIJ

Niigata Airport

1,414

11

AOJ

Aomori Airport

1,414

12

GAJ

Yamagata Junmachi Airport

1,284

13

ASJ

Amami O Shima Airport

1,078

14

KMJ

Kumamoto Airport

1,050

15

FUK

Fukuoka Airport

882

16

OIT

Oita Airport

882

Nagoya, the fourth and only other Japanese airport to rank in JAL’s 10 largest international hubs, benefits from having a single airport for the city, unlike at Osaka and Tokyo. But JAL’s domestic presence at Nagoya is limited to two destinations, Tokyo Narita and Sapporo. Once Jetstar Japan spools up its operations, it will have one-third the capacity of JAL at the airport, representing notable growth but also showing just how small JAL’s presence is (ANA is about three times larger).

JAL domestic capacity from Nagoya ranked on seat capacity: 25-Feb-2013 to 03-Mar-2013

Rank

Airport

Total Seats

1

NRT

Tokyo Narita Airport

5,656

2

CTS

Sapporo Chitose Airport

5,390

The Jetstar Japan-JAL codeshare takes effect on 06-Mar-2013 across Jetstar Japan’s network. From 31-May-2013, services from Kagoshima to Tokyo Narita and Nagoya will be added (at the same time Jetstar Japan launches those flights).

JAL’s website (codeshares are also available for sale on its mobile site, reservation centre and through travel agents) is notoriously complex, but so far JAL is generally giving preference to Jetstar Japan domestic connections, which in one instance cost JPY10000 (USD108) less than JAL domestic flight.

In some instances, the Jetstar Japan-JAL codeshare allows JAL to price itineraries with a shorter connection time or that do not require a change of airports. JAL’s only link from Narita to Kagoshima or Oita, for example, will be on Jetstar Japan; JAL’s services from the Tokyo area to those regional cities depart from Haneda. Jetstar Japan’s future growth will include more secondary Japanese cities, which JAL primarily will not serve from Narita.

Using lower-cost Jetstar Japan instead of JAL for a domestic segment can in some instances deliver a better result to JAL’s bottom line.

Jetstar Japan is still spooling up and growing load factors, which over its launch during the popular summer travelling season were 20ppt higher than JAL but have since dipped below JAL’s less-than-impressive load factors. Low domestic load factors are a characteristic of the Japanese market and certainly not confined to JAL.

Select Japanese carriers' domestic load factors: Jul-2012 to Nov-2012

See related article: Peach holds strong, AirAsia Japan drops CEO & Jetstar Japan reduces Kansai; Nagoya new battleground

While the Jetstar Japan-JAL codeshare offers an opportunity to boost Jetstar Japan’s performance and public awareness, this impact is relatively limited.

Depending on how JAL makes its JL-coded, Jetstar Japan-operated flights available to partners, JAL codeshares on Jetstar Japan could also be a part of itineraries with ATI partners American Airlines and British Airways, just as the AF-KLM/Jetstar arrangement has worked so well for both sides – potentially giving JAL an edge over All Nippon Airways' ATI alliances with the Lufthansa Group and United Airlines.

Other new LCCs AirAsia Japan and Peach chart path independent of part owner ANA

The fact that JAL, once the pre-eminent symbol of a bloated, inefficient flag carrier, would even partner to establish a LCC was enough of a shakeup for the complacent Japanese market.

Now a much leaner, smarter and more profitable JAL is taking an active role in LCC hybridisation, one of the most avant-garde topics in air transport, symbolising the topic’s importance but also how far JAL (with nudges from Jetstar) has come.

But the topic of hybridisation still remains contentious. In addition to Jetstar Japan, 2012 also saw the launch of LCCs Peach Aviation and AirAsia Japan.

Peach is partially owned by JAL rival ANA (along with Hong Kong interests) while AirAsia Japan has a majority shareholding from ANA. Neither is keen to have codeshares, although they have different approaches to the topic of hybridity: Peach is aiming for the least complex model, without even connections, while AirAsia supports connections within the AirAsia Group of airlines.

As CAPA previously wrote:

The relationship between AirAsia Japan and ANA is opaque, with ANA not giving formal approvals or rejections but needing coaxing and discussion. As for codeshares, the two are firm they will not code with each other. AirAsia is more tight-knit whereas Jetstar, owing to its Qantas heritage, is externally-focused and has relationships with 20 carriers, including with Air France-KLM. Without a formal route coordinating committee, or scope for ANA to hand markets over to AirAsia Japan, the need for a codeshare is reduced.

As for frequent flyer points, ANA members will need to fly their own metal and pay a premium for doing so, although pressure may mount for that to change depending how successful a JAL-Jetstar relationship is from the perspective of a loyalty programme, which if done correctly can have margins higher than airlines. AirAsia is also vested in its loyalty programme, Big, which awards points for ticket purchases but also has critically signed up with credit card companies, first in its home of Malaysia and recently in Indonesia too. No doubt AirAsia will want to see a big Japanese membership pool. Peach and ANA also do not plan to code with each other.

See related article: As new Japanese LCCs – AirAsia, Jetstar and Peach – settle in, strategy differences become apparent

What is right and wrong for an airline cannot be a matter of rigid principle. The company's ultimate role is to be profitable. If the yield margin and additional traffic feed justifies adding complexity, then adaptation of this kind should not be a matter for simple orthodoxy.

Provided the focus on cost control is maintained – not as easy as it sounds – adopting this strategy is an almost inevitable evolution in Asia's still-young aviation market. With 25 interline relationships, Jetstar's attitude is self-evident.

Hybridisation is still in its infancy, with myriad untapped opportunities. For Asia at least, this conversation has scarcely begun.

Airlines in Transition, Dublin, 11/12 April 2013

CAPA’s second annual Airlines in Transition conference takes place in Dublin on 11-Apr-2013 to 12-Apr-2013 and covers the topic of airline hybridisation. Airline CEO speakers so far include Willie Walsh (IAG), Dave Barger (JetBlue), Alex Cruz (Vueling), Christoph Mueller (Aer Lingus), Adel Ali (Air Arabia), Kevin George, Managing Director, Monarch Airlines, Antonio Menezes, CEO, SATA and Patrick Yeung (Dragonair) and many others. For more information, see the CAPA conference home page: Airlines in Transition 2013


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