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Japan aviation policy outlook: JAL bailout, Narita privatisation, open skies. Where next?

1st September, 2009

On Sunday, Japan elected a new Democratic Party (DPJ) government in a landslide, overturning the longstanding Liberal Democratic Party (LDP). This raises a number of issues about key aviation policies that the outgoing administration had set in motion and about the approach a new government, keen to shake off years of LDP leadership, might take.

Most immediate among these are the future of flag carrier, Japan Airlines, the direction of aviation policy and market access generally, the proposed privatisation of Narita Airport and, for the short term, the level of taxes and charges on aviation, currently among the highest in the world. Typically a new government in this position – especially after a landslide, voting out an unpopular administration – will look to make some keynote changes early on, to show that there are new directions ahead.

That will not necessarily extend to aviation policy immediately, but there will be changes, of that much we can be sure.

Will the new government continue with the JAL restructuring?

The newly elected DPJ Government has many larger problems to deal with than the financial health of its leading flag carrier, but this is nonetheless a highly conspicuous and still important Japanese icon. And it needs to be addressed urgently, whichever way the decision goes.

Last month, the LDP government announced a bailout package for Japan Airlines. In the form of a loan, organised under government supervision with private financial institutions involved, this was to range up to USD1 billion.

JAL lost over USD1 billion in the 3 months to 30-Jun-2009 and, despite massive attempts to turn the airline around, it is still weighed down with decades of legacy baggage which it is finding difficult to unravel. It needs funds just to give it cash flow and, presumably, to help it avoid infringing debt covenants. And, despite being a private airline, the LDP government had established a committee to oversee a process of restructuring, with financiers also involved.

Here the DPJ in pre-election statements said it would as a broad policy take a radically tough line on giving subsidies to companies in difficulties; it announced that Government-backed bailouts would be placed under strong scrutiny. In that sense, JAL - as a company in trouble - could face difficulties in its future restructuring.

However, at a post election press conference on 31-Aug-2009, DPJ president and likely next prime minister, Yukio Hatoyama, said that despite its huge election victory, the new government would respect LDP policies already being implemented and would authorise their continuance.

As JAL's restructuring is still a work in progress and was formally supported by the LDP, it seems unlikely that a new administration would want to rock the boat on such an iconic entity in the first days of entering into power. So the process looks likely to continue - with the caveat that the airline must make every effort to put its own house in order. This is however likely to mean that a DPJ administration will be inclined to take a harder line with JAL, at least in the medium term. 

For the time being, the DPJ will most probably adopt a wait and see stance. But another angle is that the early days of an administration do offer the opportunity to take decisions that get progressively more difficult if left unresolved. If economic conditions do not improve and JAL continues to decline, the posture will surely become more uncompromising. A flash point is likely over JAL's strategy of reducing pension payments to retirees – sure to be part of the financiers’ demands too. If this fails and the company needs further funding to keep aloft, that could trigger a major reaction.

All Nippon Airways, JAL’s main competitor, is performing much better despite the weak Japanese market, so the government does have some levers to pull in extracting further concessions where necessary. In pre-election statements, the DPJ was prepared to take radical – for Japan – positions on such issues as the refuelling mission in the Indian Ocean supporting US and allied warships in the Afghan campaign, as well as on other central areas of US-Japan relations. Compromises become more necessary once in power, but this has set the tone for a generally tougher approach than the facilitative roles played over the years by the LDP.

So, even though the national airline is a small item measured against such weighty matters, it will be unsurprising to see a very different approach over time. JAL will almost certainly have a tougher job on its hands now.

Open skies and aviation policy

In the area of aviation policy, the first positive note that foreign and Japanese airlines alike can look forward to was covered in the DPJ’s election statements in Jul-2009. "INDEX2009" contained an outline of various policies, including aviation related measures.

Taxes and charges

Among these were commitments to lowering the country’s cripplingly high landing charges, as well as the highly unpopular aviation fuel tax. These of course have revenue implications, but it would certainly help to make airlines a lot happier.

Open skies

Part of this commitment was also to move towards creation of an Open Sky Policy by abolishing barriers to entry. Narita and Haneda, which will remain capacity constrained even after the 2010 expansion, are however still to be excluded from open skies. (This policy will however come under pressure if JAL is forced to cut back significantly as part of its restructuring. The underpinning of Japan’s resistance to allowing more foreign entry has been the shortage of slots at the heart of its aviation activity, Tokyo. Removing that constraint also seriously dilutes the justification for resistance to change.)

But while Tokyo airports are excluded for the time being at least, there is a willingness to expand access and convenience of other regional hubs. The major (potential) hub airports of Kansai, Chubu, Hokkaido, Fukuoka, Okinawa and others, are to be expanded. They, along with a range of smaller regional airports, are to be promoted in the context of the nascent regional (international) policy that the JCAB has been supporting quietly but persistently for some years now.

This would encourage more small hub-small hub travel between Japanese regional centres and other Asian cities, especially in Korea and China. The Centre estimates that trilateral liberalisation – even if it does not involve the capital cities – could generate hundreds of millions of new air travellers, with massive flow-on benefits for regional economic development.

Low cost airline entry: could be a new era

Home-bred low cost airlines have until now struggled in Japan. The dominance of JAL and ANA has made competing difficult in the air. But on the ground a combination of those carriers’ control of ground handling and associated services, along with high government charges, has guaranteed a position where any new entrant has a high cost base – and minimal cost advantages against the larger airlines.

But foreign LCCs are about to start invading Japan on international routes, and, as long as the DPJ is prepared to follow through with its liberal international policies, this could usher in a new era of low cost growth in a region which is the world’s last bastion of non-LCC activity. One key area for foreign airlines will be the attitude to be adopted towards the ancient bilateral concept of national ownership of international airlines; Japan has previously adopted a very conservative approach to the concept of “substantial ownership and effective control” of airlines which are designate to fly into Japanese territory.

A more relaxed interpretation of this provision can mean the difference between a new generation of airline and staying in the past.

At this stage, the new administration’s posture has to remain speculative, but, depending on the attitude which it takes to supporting JAL, the signs appear to be aligned. Paradoxically, relaxation of access provisions could be the best thing that could happen to the flag carrier.

Narita privatisation: still on, probably

The DPJ has made no formal pronouncement on the proposed privatisation of Narita. Legislation to permit the IPO had been prepared for debate by the Diet, but the last parliamentary session ran out of time. It is possible it will be debated in the next parliamentary session, with a new government in power. If so, it could become law by the end of the current financial year, 31-Mar-2010. 

Senior source at the JCAB said last week that this would position Narita for an IPO later in the next financial year. However, the current downturn is having its effect and a combination of a smaller JAL – almost inevitable – and reduced landing charges is likely to see Narita trading in negative territory, a feature that might prompt a delay.

Nonetheless, Narita is likely to remain a goldmine for the foreseeable future and, once investors sniff an upturn – most likely during the next financial year – the fact that the airport made a recent loss will become much less important.

Ibaraki Airport: Tokyo’s LCC airport goes ahead

Meanwhile, another airport has been given a breath of life, as a result of the concurrent gubernatorial elections

Supporters of Ibaraki Airport, due to open in Mar-2009, breathed sighs of relief when Ibaraki prefecture Governor Masaru Hashimoto was reelected to a fifth term in the separate, but parallel, gubernatorial election.

Governor Hashimoto has been the driving force behind the airport plan and his re-election all but ensures that the airport will go ahead. Now in the final stages of construction at a SDF airbase northeast of Tokyo, Ibaraki is being promoted as Tokyo's low cost option airport, even though only Asiana has confirmed it will fly there.

But that is likely to change, as the concept becomes reality. A relaxation of entry rules, along with actual encouragement to new entry (an important part of a policy change in Japan) could see Ibaraki become a thriving centre in a couple of years.

The broad outlook: probably a healthy improvement for the aviation sector

It is early days yet, but simply the fact of a change of government after five decades of almost unbroken rule by the LDP is enough to suggest that there will be significant change. It may not be quick, but it may be deep. This is a critical and perhaps definitive time for Japan’s aviation, with JAL poised on a knife-edge and the potential for a more liberal and lower cost framework to stimulate new demand.

The general signals that the DPJ sent out before the election do indicate that a more liberal attitude is likely to prevail. If this is the case, it will lead to a very different looking Japanese airline system over the next few years.

Redirecting the entrenched positions and power of the bureaucracy will not be easy, but it too is a target of the new government. That may be the biggest hurdle to overcome. It will not happen quickly.

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