03-Jul-2012 3:50 PM

Jetstar Japan launches domestic routes and to target international markets from 1H2013

Analysis

Jetstar Japan became on 03-Jul-2012 the second low-cost carrier to launch domestic services in Japan this year, ushering in a new era not only for Japan but wider North Asia, where progressive policies and support for LCCs have been few.

Coupled with a flurry of recent open skies agreements, Japan's influence on North Asia will grow as Jetstar Japan targets the launch of international flights from 1H2013 to countries including China, the Philippines, South Korea and Taiwan.

Jetstar Japan will be the last of the new LCCs to launch international services, with Peach having commenced international services in May-2012, two months after its domestic launch, and All Nippon Airways JV AirAsia Japan planning international flights from Oct-2012, two months after its Aug-2012 domestic launch. As the carriers, and Jetstar Japan in particular, grow internationally, the region will change at a greater rate than some incumbent airlines and countries have the bandwidth to support.

Summary

Jetstar Japan is the second low-cost carrier to launch domestic services in Japan in 2012, signaling a new era for the country and wider North Asia.
Jetstar Japan plans to launch international flights from 1H2013 to countries including China, the Philippines, South Korea, and Taiwan.
Jetstar Japan is a joint venture with airline partners including Jetstar Group, Japan Airlines, Mitsubishi, and Century Tokyo Leasing.
The rapid development of low-cost carriers in Japan is expected to increase the country's overall LCC proportion to 19% of seats, with potential to grow to 50% later this decade.
The domestic Japanese market is ripe for lower fares, as current fares are among the highest in the world.
The recent open skies agreements negotiated by Japan will not only benefit the new Japanese LCCs but also allow existing airlines to expand, leading to further growth and competition in routes and prices.

Jetstar Japan's strong launch to give it largest domestic share of the new LCCs

The rapid pace of development in Japan is evident not only by the fact it was not until 2007 that Japan had low-cost international services (via Jetstar Australia) but also by the short history of the new LCCs. While Peach took approximately 18 months to launch with two aircraft from one base at Osaka Kansai, Jetstar Japan took 12 months to launch with three aircraft at a base in Tokyo Narita - and shortly with a second base in Osaka Kansai as well. Initial destinations include Fukuoka, Okinawa and Sapporo.

Next, the second of All Nippon Airways' part-owned LCC subsidiaries, AirAsia Japan, will launch in Aug-2012, also 12 months after being announced, with two aircraft and from a single base at Tokyo Narita.

For the history of Jetstar Japan's inception and launch, see related articles:

Jetstar Japan's advantage is that it is a joint venture with airline partners including Australia's Jetstar Group and Japan Airlines as well as non-airline partners Mitsubishi and Century Tokyo Leasing. Peach and AirAsia Japan are each partnered with All Nippon Airways, and their separate bases, for now, helps limit competition between them (although both will compete with ANA).

JAL has gained the benefit, albeit learning the hard way through a difficult bankruptcy restructuring, of being more nimble and adaptive. The result is to allow Jetstar Japan a considerable degree of freedom.

Jetstar Japan's inaugural flight, from Narita to Sapporo on a single class A320 seating 180, will be followed with a build-up that will see Jetstar Japan in Oct-2012 achieve a 1.3% share of Japan's domestic market - already the fourth largest in the world - compared to 1.1% by Peach and the 1% of AirAsia Japan. This will help push the country's overall LCC proportion, by seats, to 19%, which could grow to 50% later this decade.

North Asia is ripe for international LCC services; the pricing impact can be extreme

The domestic Japanese market is ripe for lower fares, which are among the world's highest (Jetstar Japan intends to consistently offer fares half that of full-service carriers and has a 10%-off guarantee where any other airline offers a lower fare). Jetstar today announced that "well over 100,000 fares have been sold by Jetstar Japan since sales started in April 2012".

Fare differences between the new entrants and their parents' offerings are dramatic:

Jetstar Japan's lowest one way fare for Osaka's Kansai-Sapporo is under JPY6,000 (USD75), around one sixth the lowest price offered by ANA from Osaka's downtown airport, Itami. Jetstar's Fukuoka-Narita lowest one way fare is just under JPY9,000 (USD113); part parent JAL's lowest one way fare on the same route is JPY35,000 (USD440).

International short-haul markets from Japan will also see lower-priced options to facilitate growth. While LCCs in Oct-2012 will account for 19% of domestic seats in Japan, on current plans they will account for less than 6% of international seats to Japan.

LCC capacity share (% of seats) of Japan's domestic and international market: 2001 to Oct-2012F

Jetstar Japan believes it can operate 100 aircraft by the end of the decade. It expects to deploy approximately one-third of capacity to international markets. While Jetstar has said its Japanese subsidiary could use any aircraft in the Jetstar portfolio - which also includes A321s, A330s and soon 787s - the A320 will be the primary vehicle for the time being.

Jetstar Japan CEO Miyuki Suzuki says she intends that the carrier will launch international short-haul services from 1H2013, subject to regulatory approval. While she did not flag specific routes - but mentioned China, the Philippines, South Korea and Taiwan as possibilities - the entire region would benefit from LCC services, although access in some markets could prove initially complex for any Japanese LCC owing to regulatory and other matters.

Peach has international services from Osaka Kansai to Seoul (thrice daily), Hong Kong (daily), and daily to Taipei from Sep-2012 while AirAsia Japan intends to link Tokyo Narita to South Korea's Seoul and Busan in Oct-2012.

China looms large for Japanese LCCs, but tense bilateral relations may prove limiting

The largest medium to long term potential for Japanese LCCs is mainland China, but the short-term offers some roadblocks - but also some positive developments.

Near term limiting factors are numerous. In a global context China exercises protection with its bilateral agreements, to give its major carriers - comparatively young - a chance to compress decades of development elsewhere and become a formidable force while winning passenger recognition. (Their concentration on attaining a five star SkyTrax ranking may be the largest in any market.)

This results in China seeking to have a balance in national capacity and not permit more foreign capacity than its carriers could request from the reciprocating country. Despite mainland China having ten times the population of Japan, there are, according to Japan Tourism, 3.5 times more Japanese that visit China than Chinese visit Japan, a large distortion even considering GDP.

Japanese visitor arrivals to China and Chinese visitor arrivals to Japan: 2000 to 2011

The imbalance was even larger early last decade (Japanese visitors to China were six times greater), when as Japan Aviation Management Research analyst Geoff Tudor notes, Chinese nationals could only visit Japan under group and not individual visas.

Access at the key airports in both countries is also a source of contention.

This situation, however, reflects a certain Tokyo-centric ideology that has seen large secondary airports ignored in favour of short-haul flights to Tokyo. While volumes from Tokyo to Beijing and Shanghai may be large, there are numerous regional city-pairings that could easily support service.

Throughout North Asia there is a tide of secondary services developing. Cross-Strait flights between Taiwan and the mainland are increasingly focusing on second- and third-tier mainland cities, although this part of a tight government allocation of services designed to reduce overlapping services and promote the comparatively smaller mainland cities the government is now focusing on developing, having already achieved considerable scale in its largest cities.

Rank of airlines serving Japan-China based on capacity (seats): 02-Jul-2012 to 08-Jul-2012

Rank	Airline		Total seats
1	MU	China Eastern Airlines	30,711
2	NH	All Nippon Airways	30,380
3	CA	Air China	26,373
4	JL	Japan Airlines	18,283
5	CZ	China Southern Airlines	14,610
6	DL	Delta Air Lines	3682
7	FM	Shanghai Airlines	2876
8	ZH	Shenzhen Airlines	2740
9	EY	Etihad Airways	1310
10	PK	Pakistan International Airlines	380
11	SC	Shandong Airlines	334
12	HU	Hainan Airlines	328

LCCs from South Korea are opening routes to second-tier Chinese cities, the most recent addition of which is Jeju Air launching services between Seoul and Qingdao in Jun-2012. But this too is partially a response to government oversight wanting to protect route development, as well as a lack of slots at Beijing and Shanghai. Finally, Jetstar Hong Kong, projected to launch in early 2013, will target second-tier mainland cities as the largest mainland cities are already well served, and, again, slot limited.

The slot restrictions are most severe at Beijing, where new carriers can typically only gain slots in the midnight hours. While this may be accepted by carriers with medium- and long-haul services (such as Jetstar to Singapore and AirAsia X and Malaysia Airlines to Kuala Lumpur), where at least one of the departure or arrival times will occur during daylight hours, arrivals and departures from short-haul flights during those hours means there is a greater likelihood of both arrival and departure times being in the middle of the night. If the price is right these flights will work, but there is a yield penalty.

Shanghai has also opened domestic airport Hongqiao to limited regional international services, the way Tokyo Haneda had been for many years prior to the recent wave of long-haul flights. Like Haneda, Hongqiao served initially as both a domestic and international airport, prior to the opening of a more distant Pudong International Airport. Shanghai Hongqiao-Tokyo Haneda services thus offer the potential to link each country's financial centre with a convenient downturn airport.

Only China Eastern from the mainland side has secured permission for Honqiao-Haneda services and operates two flights, a morning and evening service. In exchange Japan was given two slots, which have been split, with ANA and JAL each holding one. They would like an increase to offer double daily service the way China Eastern does, but China Eastern is not focused on increasing its services, and other mainland carriers do not have access. Private bilateral negotiations have stalled since 2010, according to Mr Tudor.

While each side will see greater slot access later this decade with Beijing due to open a new airport in 2015 and Haneda increasing slots in 2014, this still leaves regional services as the great opportunity. So far it is Spring Airlines, a privately-owned mainland Chinese LCC, that may tap this opportunity, with services to Takamatsu (as well as Ibaraki and Saga which respectively serve as low-cost alternates to Tokyo and Fukuoka) and intentions to expand to 10 cities. At Takamatsu, Spring is the second foreign carrier after Asiana. The highly innovative Spring is also talking of establishing a local Japanese joint venture airline.

Filipino LCCs locked out of Japan, offering potential for the new Japanese LCCs

If mainland China holds long-term potential, it is the Philippines that offers short-term opportunity, but here too the opportunity must be qualified. Filipino LCCs currently cannot expand in Japan due to a JCAB restriction which essentially follows US determinations relating to a country's safety category. The Philippines for a number of years now has been denied US FAA Category 1 status, the normal level. As a result of not being Category 1, Filipino carriers serving the US cannot open any new routes or change frequency or aircraft. As Japan has chosen to follow this determination, the same restrictions apply on Filipino carriers serving Japan.

Philippine Airlines holds the largest amount of capacity in the Philippines-Japan market, in place prior to losing Category 1 status, with the second largest amount of capacity from Delta, which uses its ex-Japan traffic rights to serve the Philippines. Delta offers more capacity to the Philippines than ANA and JAL combined.

There is also limited frequency between the Philippines and Japan via service from from Jetstar Airways (originating in Australia) and Jetstar Asia (originating in Singapore). Jetstar Japan will enable the group to enhance links between the Philippines and Japan on an origin and destination basis without having a first leg from Australia or Singapore to the Philippines. The pairing of routes can be polar, with very price-sensitive VFR traffic visiting the Philippines' main cities while leisure travellers head to tourist hubs.

Rank of airlines serving Japan-Philippines based on capacity (seats): 02-Jul-2012 to 08-Jul-2012

Rank	Airline		Total seats
1	PR	Philippine Airlines	9108
2	DL	Delta Air Lines	5474
3	JL	Japan Airlines	3318
4	NH	All Nippon Airways	1540
5	JQ	Jetstar Airways	732
6	3K	Jetstar Asia	540
7	5J	Cebu Pacific Air	537

Cebu Pacific, the largest and only profitable LCC in the Philippines, has only about 500 weekly seats to Japan. The potential of the Japan-Philippines market to expand with low-priced LCC service (ANA and JAL have some of the highest costs and prices) is exemplified by the South Korea-Philippines market.

South Korea does not follow the US over Category 1 ratings and so Filipino carriers have been able to expand in line with bilateral agreements. In Apr-2012 Cebu Pacific requested approximately 4,000 additional weekly seats to South Korea.

Rank of airlines serving South Korea-Philippines based on capacity (seats): 02-Jul-2012 to 08-Jul-2012

Rank	Airline		Total seats
1	OZ	Asiana Airlines	8813
2	PR	Philippine Airlines	7756
3	KE	Korean Air	6250
4	5J	Cebu Pacific Air	5191
5	Z2	Zest Air	3360
6	7C	Jeju Air	1323
7	LJ	Jin Air	1098
8	BX	Air Busan	780

The lack of Category 1 status in the Philippines is a sore point and Japan's somewhat arbitrary adoption of it is already the subject of discussions between the two countries. This issue will likely come to head and be resolved if and when Japanese LCCs request capacity into the Philippines.

Category 1 reflects not on individual airlines (it relates to regulatory oversight capability) but consequences work against them. Philippines Airlines acquired Boeing 777-300ER aircraft under the assumption the Philippines would regain Category 1 status but has since had to use the aircraft on alternative routes, decreasing cost synergies and revenue improvements, as it cannot change equipment on US routes so long as the Philippines is not Category 1 rated. A likely scenario is that the Philippines could pressure Japan to relax its following of US Category 1 ratings (which globally is followed by very few countries) in exchange for giving Japanese LCCs access.

When the market is finally opened, the Japanese LCCs will feel pressure from Filipino carriers that not only have a lower cost base but greater brand recognition, as is especially the case with Cebu Pacific. Jetstar could want to secure its position early and before the Philippines-Japan market is opened to expansion by Filipino LCCs. None of the Japanese airlines will be anxious to see any change in the status quo relating to Category 1.

The AirAsia group is advantaged as it launched a local subsidiary, AirAsia Philippines, in Mar-2012 that could potentially serve more of the market than higher-cost AirAsia Japan. Jetstar has no Filipino subsidiary and the market is saturated enough that a joint venture there is unlikely.

Japan's open skies agreements can change the game entirely

The recent rush of open skies agreements negotiated by Japan has not only opened the door for the new Japanese LCCs, but will also permit existing airlines to expand, provoking further growth and route and price competition.

Japan and Taiwan in 2011 signed an open skies agreement, a landmark as it is one of the few such agreements within North Asia. A Japan-Korea open skies agreement will also enter into effect in summer 2013.

Singapore based Jetstar Asia serves the Taiwan-Japan market via a flight that originates in Singapore. And Scoot, the long-haul LCC of Singapore Airlines, intends to enter the Singapore-Taiwan-Tokyo market in Oct-2012.

Following the new bilateral liberalisation Taiwan's TransAsia Airways has applied to fly daily scheduled services to Osaka, Fukuoka and Okinawa, which it previously served with charters. TransAsia is also seeking to launch two weekly flights to Sapporo and Hakodate and one weekly flight to Asakihawa, Kushiro and Obihiro. Mandarin Airlines is seeking twice weekly service to Ishigaki, Okinawa and Kansai, while its parent China Airlines has requested three times weekly Shizuoka and Kagoshima and twice weekly to Toyama. EVA and its airline stable are yet to announce any plans for new routes to Japan.

Each of these, coming on top of an already booming tourism market (Taiwan inbound from Japan is already performing at around 20% growth), promotes a move away from the fixation on Tokyo Airports (often excluded from the open skies terms), but will also intensify the flurry of new international activity as the LCCs enter the scene.

Taiwanese carriers China Airlines and EVA Air currently account for the majority of capacity and are supplemented by traffic from Cathay Pacific and Delta. Thanks to the predominance of full-service carrier capacity, fares are high. The local status quo is unlikely to change in the near future owing to China Airlines and EVA Air largely being preoccupied with very successful and high-yielding cross-Strait routes - although the entry of TransAsia Airways could produce interesting outcomes. Besides cross-Strait traffic Taiwan may be slowly encircled by LCCs, but executing the forethought to respond can be challenging.

Also, Peach on 30-Sep-2012 will commence daily Osaka Kansai-Taipei Taoyuan service.

Rank of airlines serving Japan and Taiwan (seats): 02-Jul-2012 to 08-Jul-2012

Rank	Airline		Total seats
1	CI	China Airlines	33,232
2	BR	EVA Air	15,623
3	JL	Japan Airlines	11,760
4	CX	Cathay Pacific	8555
5	NH	All Nippon Airways	4620
6	GE	TransAsia Airways	3759
7	DL	Delta Air Lines	2737
8	3K	Jetstar Asia	2520
9	UA	United Airlines	1911
10	AE	Mandarin Airlines	208

Effective open skies with South Korea will make the market competitive, but South Korea stands to benefit academically

Pending formal entry into force, Japan and South Korea have allowed of many provision of their open skies agreement, and much-needed price competition was introduced with the start of services from South Korea's quasi-LCCs: Asiana's Air Busan and Korean Air's Jin Air as well as independent carriers Eastar Jet and Jeju Air. Jin Air currently the deploys the least amount of scheduled capacity, likely to reduce cannibalisation of Korean Air, which deploys the largest amount of capacity between the two countries.

Rank of airlines serving Japan-South Korea market based on capacity (seats): 02-Jul-2012 to 08-Jul-2012

Rank	Airline		Total seats
1	KE	Korean Air	59,588
2	OZ	Asiana Airlines	38,440
3	JL	Japan Airlines	12,915
4	NH	All Nippon Airways	9366
5	7C	Jeju Air	7560
6	MM	Peach	3780
7	BX	Air Busan	3647
8	TW	t'way	2646
9	ZE	Eastar Jet	2336
10	UA	United Airlines	1911
11	DL	Delta Air Lines	1253
12	LJ	Jin Air	732

Yields are already coming under pressure. JAL dropped prices on Osaka-Seoul routes to historic lows in response to Peach's thrice daily services between Kansai and Incheon. Further fare stimulation is being provided by small Japanese carrier Starflyer, which on 12-Jul-2012 is entering the Kitakyushu-Busan market, its first international route.

South Korea is a comfortable country for airlines (and passengers) to break in to and traffic is large enough that LCCs can easily attract passengers. Yields, however, will likely be some of the lowest. While carriers will likely retain services between main cities, services originating and or departing at secondary cities will see less competition and therefore less pressure on yields.

The biggest benefit will likely be that of influence and leadership, with no-frills LCCs like AirAsia Japan, Jetstar Japan and Peach showing Korean carriers that Korea is ready for wide scale no-frills LCC service, which they have previously shunned, preferring instead a self-described "Korean-style LCC" that operates on a hybrid cost base but without higher yield benefits.

Korea will come under pressure to liberalise with other countries its bilateral agreements and when it does it will want its carriers to be in a position to respond to the likely influx of capacity.

And the rest: Hong Kong, Guam and Saipan - and Mongolia?

Jetstar Japan CEO Ms Suzuki did not explicitly mention the markets of Hong Kong, Guam and Saipan but they hold potential, albeit with qualifications. Japan-Hong Kong options are even more limited than from Taipei, with fares high.

While Jetstar Japan could open Hong Kong-Japan service, the Jetstar Group in 1H2013 is due to launch Jetstar Hong Kong as a joint venture with China Eastern and presumably local Hong Kong investors which, with an expected lower cost base than Jetstar Japan, could more affordably serve the market. Jetstar Hong Kong will focus on mainland routes as well as to North and Southeast Asia.

Rank of airlines serving Japan-Hong Kong based on capacity (seats): 02-Jul-2012 to 08-Jul-2012

Rank	Airline		Total seats
1	CX	Cathay Pacific	26,381
2	NH	All Nippon Airways	7707
3	JL	Japan Airlines	3766
4	UO	Hong Kong Express	3045
5	DL	Delta Air Lines	1883
6	KA	Dragonair	1802
7	HX	Hong Kong Airlines	1260
8	MM	Peach	1260
9	UA	United Airlines	1064

Guam and Saipan are popular holiday destinations for the Japanese, and fares are high, especially to Saipan following JAL's withdrawal of capacity in Oct-2005. This absence of traffic led to the formation of proposed virtual airline Saipan Air that would operate charters via Swift Air. The carrier was due to launch on 01-Jul-2012 and eventually serve Tokyo and Osaka, but Swift Air was unable to fulfill its obligation and filed for bankruptcy. Plans to launch Saipan Air have been indefinitely postponed, although Delta for one realises the potential and will seasonally increase services from 14 weekly to 18 weekly.

Rank of airlines serving Japan-Northern Mariana Islands (Saipan) based on capacity (seats): 09-Jul-2012 to 15-Jul-2012

Rank	Airline		Total seats
1	DL	Delta Air Lines	2864
2	OZ	Asiana Airlines	540

As both Guam and Saipan are territories of the US, Jetstar Japan will have to go through the appropriate and lengthy bureaucratic US regulatory process, although the group already has experience via its Australian services to Honolulu. Peach has said it expects eventually serve some of the Pacific island holiday destinations.

Rank of airlines serving Japan-Guam based on capacity (seats): 02-Jul-2012 to 08-Jul-2012

Rank	Airline		Total seats
1	UA	United Airlines	11,050
2	DL	Delta Air Lines	6608
3	JL	Japan Airlines	1659
4	KE	Korean Air	1316

In the medium-term Jetstar Japan could even consider the Mongolia market, where GDP growth (albeit from a low base) is the second-highest in the world and the limited existing air services offer only high fares. Mongolia has strong seasonal patterns and would appeal to the sector of the Japanese population that likes adventure destinations. Currently only MIAT Mongolian Airlines serves Japan with about 1,100 weekly seats, but startup Mongolian Airlines Group (unaffiliated with MIAT) intends to enter Japan.

Jetstar Japan's large yet unquantifiable benefit is spearheading change

Jetstar Japan's largest contribution to North Asian air transport may not be mere seat numbers and ASKs, but rather pedagogic, as its growth shows the LCC potential to other regions, South Korea and Taiwan in particular, which have remained somewhat cloistered to the LCC revolution that has occurred throughout the world over the past decade. Implications for incumbents will be large, as already seen in Japan.

See related articles:

Jetstar Japan's early and concentrated launch is testament to the group's strength and will now focus on scale and demonstrating its position is conducive to profits. Other countries in North Asia will take note, and the Jetstar and AirAsia groups could find themselves in those countries with new subsidiaries, further building scale and delivering North Asia's long-awaited LCC revolution.

This is the latest in a series of analysis reports on the rapidly expanding LCC market in North Asia ahead of CAPA's Low-Cost Carriers in North Asia conference to be held in Macau in September. For more information see: LCCs in North Asia - CAPA Knowledge Event.