12-Jan-2016 12:55 PM

Osaka Kansai International Airport: a powerful regional airport but still an investment experiment

Analysis

Osaka Kansai International Airport (OKAI), which opened in 1994, is built on two man-made islands located 40km from the city centre, and is the main regional centre in Japan for scheduled international passenger flights, as well as being a hub for both JAL and ANA. It is also one of the two main airports serving Osaka, the city at the centre of Japan's second largest metropolitan region population (the other airport is Osaka International Airport, or Itami Airport as it is more commonly known).

Both of these airports have recently been privatised in what was the first public-to-private airport transaction in Japan, expected to foreshadow many others in the following months and years if it is deemed to be a success.

This report looks at: present and future growth trends at Kansai International; local airport statistics; how the airport matches up to competition across a range of metrics; construction activities, and its changing ownership.

Osaka Kansai no match for the Tokyo airports but holds a powerful regional position

The table below compares OKIA with peer and neighbouring international and domestic airports, using a variety of metrics that include aviation and population statistics. (N.B. population figures are for city-region metropolitan areas, which may vary in their assessment.)

N.B: In the third to sixth columns a lower number means the airport is higher in the rankings. In the final column a higher score suggests a higher proportion of local passengers are using the airport.

Rankings by assorted metrics:

Airport/metric	Distance (city) from Osaka (km)	ASKs	Seats	Frequencies	Cargo payload	Pax 2014 (million)	City-region population (million)	Ratio: pax to local population 2014
Osaka Kansai International	-	64	72	101	35	19.4	19.3*¹	1
Tokyo Haneda	396	25	4	8	7	72.8	38	1.9
Tokyo Narita	396	13	44	60	8	35.6	38	0.9
Chubu Centrair (Nagoya)	139	137	148	155	121	9.9	9.1	1.1
Kobe	30	517	401	501	357	2.5	1.5 *²	1.7

A number of conclusions can be drawn from these statistics, and from rule of thumb basic calculations that are given for illustrative purposes.

In spite of the huge catchment area covering three very large cities, it is difficult to compare OKIA directly with the two Tokyo airports, which together form the biggest passenger catchment of one of the world's largest airport systems, servicing almost 110 million passengers in 2014. However, in terms of ASKs, seats, frequencies and cargo payload (which is noticeably disproportionate) OKIA ranks considerably higher than Chubu Centrair, which serves the Nagoya city-region.

The other statistic that leaps out is that all the four main airports host fewer passengers than might be expected from such enormous catchment areas.

Osaka's city-region population is very similar to that of London and the Southeast of England, whose airports collectively handled over 146 million passengers in 2014, compared with just 19 million at OKIA. Even allowing for the hub nature of London's Heathrow Airport, this is a very large difference.

There are numerous contributory factors to this apparent discrepancy, including the very high use of alternative transport modes - such as the shinkansen bullet train - for domestic travel, the failure of Japanese travellers to embrace the concept of low cost for many years (though that resistance has weakened lately), and until recently: very low international visitor numbers. There is some preference amongst Japanese travellers to take the bullet train to Tokyo for their international flights, even if that means bypassing local airports with international services.

The map below shows Osaka's position in relation to other major cities; Tokyo, Nagoya, Kobe, Kyoto and Yokohama. These are six of the seven largest cities by population in Japan. The fifth largest, Sapporo, is on Hokkaido Island, to the north.

Kobe Airport is, like KIA, built on an artificial offshore island and was first mooted as an alternative to KIA, relieving the overcapacity Osaka International Airport (Itami). Today, Kobe handles primarily domestic flights. There is no airport at Kyoto. Nagoya is served by Chūbu Centrair International Airport, also built on an artificial island, this time in Ise Bay, 35 km south of Nagoya. Like the Kobe airport, it opened in 2005/6.

There are five such offshore airports in Japan in total: OKIA and Kobe in the Kansai region, Centrair, Nagasaki and Kitakyushu, the latter two in the west, on Kyushu island. There is no commercial airport at Yokohama, despite its being the second largest city after Tokyo. The capital's two main airports, Haneda and Narita, serve Yokohama instead, while Tokyo is additionally served by the small and mainly low cost Ibaraki Airport to the northeast, though its contribution is negligible.

Location map of Osaka in relation to Kobe, Kyoto, Nagoya, Yokohama and Tokyo

59 international airlines - a high total

OKIA currently hosts 61 airlines, of which 59 are international. There are 76 non-stop passenger and 14 non-stop air freight destinations. Most of the non-stop destinations are in Asia. Latin America is not served at all, while North America and the Middle East are barely served.

Osaka Kansai International Airport Network Summary (at 04-Jan-2016)

Total Airlines	61
Domestic only	2
International	59
Total non-stop passenger destinations	76
Domestic	12
Africa	0
Asia Pacific	54
Europe	5
Latin America	0
Middle East	2
North America	3
Total non-stop freight destinations	14
Domestic	2
Africa	0
Asia Pacific	9
Europe	1
Latin America	0
Middle East	0
North America	2

Alongside the main peer Japanese airports, OKIA compares well with both Tokyo Haneda and the Nagoya airport, in terms of total number of airlines and number of international airlines. It ranks second behind those airports in terms of freight destinations.

Airport	Total airlines	International airlines	Non-stop passenger destinations	Non-stop freight destinations
Osaka Kansai International	61	59	76	14
Tokyo Haneda	41	36	77	3
Tokyo Narita	76	71	115	27
Chubu Centrair, Nagoya	33	27	51	4
Kobe	4	0	6	0

The route map below shows all destinations that can be reached by direct or connecting flights from Osaka Kansai.

Direct and indirect (connecting) routes from Osaka Kansai International Airport, Jan-2016

The 'heat' map below identifies the regions with the greatest density of seats. The concentration on North Asia is clear.

Osaka Kansai International Airport international capacity, seats by region heat map: 04-Jan-2016 to 10-Jan-2016

Non-stop connectivity - OKIA matches Tokyo Haneda

Turning to non-stop connectivity, the chart below compares OKIA in terms of non-stop connectivity with four peer group airports in North Asia - the two Tokyo airports, Seoul Incheon and Taiwan Taoyuan airports. These international airports are competing for recognition as primary hubs for the region.

Non-stop connectivity values (passenger destinations). Comparison of Osaka Kansai International Airport with a selection of its North Asian peers - Tokyo Narita and Haneda airports, Seoul Incheon Airport and Taiwan Taoyuan airports, Jan-2016

There are no direct flights from any of these airports to Africa, and only one to Latin America (Tokyo Narita). The Middle East and North America are poorly served, apart from Tokyo Narita in the latter case. In its favour, OKIA matches Tokyo Haneda on flights within Asia Pacific and to/from Europe, though it is the weakest of the bunch on North American flights.

Overall, considering it is not a capital city airport, it holds its own in comparison with most of these airports, apart from Seoul Incheon.

Alliance penetration - OKIA at the bottom of its peer group

Another way of assessing hub strength is by way of alliance penetration.

43% of seat capacity at OKIA is on unaligned carriers, with Star Alliance the dominant presence (26.1%), though not by much. Star Alliance is represented in Japan by ANA. Oneworld, which is represented in Japan by JAL, comes in at 11.7%. The second largest alliance, though, is SkyTeam, which does not feature a Japanese airline member, although it does have various Chinese and Korean airlines on its register.

Osaka Kansai International Airport capacity, seat share by alliance/unaligned: 04-Jan-2016 to 10-Jan-2016

When the situation in Osaka is compared with the same peer group of airports, however, it is clear that OKIA falls well behind those airports in terms of seat capacity on aligned carriers, by at least 15.5 percentage points.

Comparison of selected airports by alliance penetration - seat availability: 04-Jan-2016 to 10-Jan-2016

Airport	% of seats on unaligned carriers	% of seats on aligned carriers
Osaka Kansai Intn'l	43	57
Tokyo Haneda	16.4	83.6
Tokyo Narita	26.5	73.5
Seoul Incheon	22.7	77.3
Taipei Taoyuan	24.2	75.8

Kansai's charging regime - high landing charges apply; only Haneda's are higher

An important determinant of airport selection by airlines is its charges. The chart below gives an indication of landing charges at OKIA in 2014 by five different aircraft types, versus three of its peers: Tokyo Haneda; Seoul Incheon and Taipei Taoyuan airports.

Tokyo Narita is omitted from the comparison on account of its complex charging regime. In the case of OKIA, charging levels are given for both standard and LCC (off-peak) rates.

Landing Charges for Osaka Kansai International Airport, Tokyo Haneda Airport, Seoul Incheon International Airport, Taipei Taoyuan International Airport (USD) for 2014

Narita is the most expensive airport by some margin, but OKIA's standard rate is the second highest and even its off-peak LCC rate exceeds those at Seoul and Taipei.

Full service airlines account for two thirds of seats

33.6% of seats at OKIA are on low cost carriers and all the others are full service carriers.

Osaka Kansai International Airport capacity, seat share by carrier type: 04-Jan-2016 to 10-Jan-2016

It is useful to compare this traffic split with OKIA's peer international airports, again with the two Tokyo airports, Seoul Incheon and Taipei Taoyuan.

It is clear that the impact of LCCs is greater at OKIA than at the other airports.

Comparison of selected airports by airline type - seat availability: 04-Jan-2016 to 10-Jan-2016

Airport	% of seats on FSCs	% of seats on LCCs	% of seats on other modes (e.g. regional, charter airlines)	Clarification of previous column
Osaka Kansai Intn'l	66.4	33.6	n/a	n/a
Tokyo Narita	78.3	21.3	0.4	Regional/commuter and charter airlines
Tokyo Haneda	87.9	12.1	n/a	n/a
Seoul Incheon	83	16.9	0.1	Charter
Taipei Taoyuan	87.8	12.2	n/a	n/a

That LCC impact at OKIA is driven mainly by Peach, which has the same seat capacity as its part shareholder ANA.

While their share of seat capacity is equal, in the nature of things Peach's share of aircraft frequency should be higher - and it is, at 18.1% versus 11.3%. Another significant player is Jetstar Japan.

But the most evident statistic from the chart below is that there is no carrier that is dominant overall. Capacity is well spread, as is emphasised by the category 'other' (i.e. less than 3.2% of capacity) which aggregates over 50% overall.

Osaka Kansai International Airport capacity (seats per week), by all carriers: 04-Jan-2016 to 10-Jan-2016

LCC impact might also explain why the percentage of First Class seats is considerably less at OKIA than the worldwide airport average (0.5% versus 1.6%).

Osaka Kansai International Airport schedule by class of seat - one way weekly departing seats (total system)

Except that it doesn't. The ratio of economy seats at OKIA is in fact exactly the same as the worldwide average (92.6%). What OKIA loses in First Class (and Premium Economy) seats it makes up for in business class seats.

The international/domestic seat share at OKIA is in the chart below. The international nature of the airport is made clear.

Osaka Kansai International Airport international vs domestic capacity seat share, 4-Jan-2016 to 10-Jan-2015

Within that 74.4% of international capacity the share of seats between local and foreign airlines is apportioned 15.4% local to 84.6% foreign. So despite the presence of ANA, JAL, Peach and Jetstar Japan, foreign carriers are predominant.

And they are likely to stay that way.

Neither ANA nor JAL will be the growth engine; both want to focus long haul from Tokyo. On the other hand, the Gulf carriers will not have the same impact in Japan as in Korea/China. Qatar Airways, for example, is exiting NKIA.

Looking at international seat capacity by country, China and South Korea are the two main markets, followed by Taiwan and Hong Kong.

Osaka Kansai International Airport international capacity, seats by country: 4-Jan-2016 to 10-Jan-2016

Source: CAPA - Centre for Aviation and OAG

The influence of North Asia markets becomes clearer when a chart of international seat capacity by region is viewed, as 73.6% of it is within North Asia. The only other region to top 10% is Southeast Asia (13.6%).

The top individual international routes are represented in a bar chart below.

Those top ten international routes by seat capacity are represented in the chart below, led by Taipei and Seoul. Only one of them - Honolulu - is not in Asia and only two are not in North Asia.

Osaka Kansai International Airport top 10 international routes by seats: 4-Jan-2016 to 10-Jan-2016

Traffic growth strong and getting stronger

Traffic growth has been strong during the last four years, varying between a low of +8.7% (2013-14) and a high of +19.1% (2011-2012). In 2015 to November, average growth was +17.8% (see the Monthly Passenger Figures chart, below).

Osaka Kansai International Airport annual passenger numbers: 2011-2014

Osaka Kansai International Airport monthly passenger numbers: 2008-2015

N.B. In both charts, in the live online version pointing at the dot on the line gives an actual growth figure (annual chart) and a growth figure plus a passenger numbers figure (monthly chart).

When a comparison is made, again, with the same peer airports, OKIA's 2015 growth outstrips them considerably - both the Japanese airports and the foreign ones.

Airport	Average % pax traffic growth in 2015	Period
Osaka Kansai Intn'l	17.8	Jan-Nov
Tokyo Narita	0.5	Jan-Nov
Tokyo Haneda	4.86	Jan-Oct
Seoul Incheon	8.42	Jan-Nov
Taipei Taoyuan	10.84	Jan-Nov
Average of the averages	8.48	-

It should be noted, though, that while NKIA has 24/7 operational capability (even if it doesn't use it - see the 'seats by hour' chart later) and has slots, Narita Airport has a curfew, and long haul flight operators are vacillating. Haneda Airport has 24/7 capability, but has slot shortages at most hours.

Kansai stage lengths - almost 80% of capacity on flights of less than four hours

The fact that so much capacity is focused on North Asia is clear in the chart below, which details seat capacity by length of flight. 78.2% of capacity is on flights in the range 0-4 hours, with just 1% on flights in excess of 12 hours.

Osaka Kansai International Airport, seats by length of flight (total system): 04-Jan-2016 to 10-Jan-2016

That ratio hardly changes at all if only international capacity is selected, but as might be expected - it does change if only domestic capacity is selected. In that scenario all flight seats are in the 0-4 hours category and 80% of them in the 0-2 hours category.

The chart below demonstrates that the vast majority of frequencies are actually concentrated in the 0-5 hour categories, with only a very small number in the 7-13 hour categories, with nothing beyond it.

Osaka Kansai International Airport frequencies, total system: 4-Jan-2016 to 10-Jan-2016

The chart for international frequencies is broadly similar, but that of domestic frequencies is strongly clustered, with the majority of frequencies on flights in the 1.25-2.25 hour range.

Another perspective is represented below in the form of a bar chart of available seats (arriving and departing) by time of day. A typical day of Thursday 08-Jan-2016 was selected.

The distribution is well balanced on this 'typical day' with two discernible activity peaks, i.e. 1100-1200 and 1900-2000. There is a notable imbalance in favour of arriving seats between 1500 and 1600, and there is scarcely any activity between 0100 and 0600.

Charts for 'domestic only' and 'international only' display similar characteristics.

Osaka Kansai International Airport, seats per hour, typical day, Thursday 07-Jan-2016 (all airlines, total system, all terminals, all origins and destinations)

Cargo at Kansai Airport - an important hub for freighter aircraft

Just over a third of OKIA's airfreight is carried on dedicated cargo aircraft.

Osaka Kansai International Airport freighter/belly hold split (cargo payload): 4-Jan-2016 to 10-Jan-2016

A comparison is made here with the same peer group of Japanese airports as was used earlier, plus Sapporo.

Airport	% of cargo carried in passenger aircraft belly-hold	% of cargo carried on designated freighters
Osaka Kansai Intn'l	61.6	38.4
Tokyo Haneda	99.1	0.9
Tokyo Narita	56.5	43.5
Chubu Centrair (Nagoya)	75.9	24.1
Kobe	100	0
Sapporo	100	0

The table validates OKIA as an important freighter airport, ranking alongside Tokyo Narita for the amount of cargo carried on dedicated aircraft. There are in excess of 20 cargo airlines operating there, including Cathay Pacific Cargo, China Cargo Airlines, Korean Air Cargo and Lufthansa Cargo.

The chart below is of international cargo payload by region. As with passenger seats, the vast majority of capacity is in Northeast Asia, followed by Southeast Asia. North America has 9.1% of volume capacity, and Western Europe lags well behind at just 4%.

Osaka Kansai International Airport total international capacity (cargo payload) by region: 4-Jan-2016 to 10-Jan-2016

The 'heat' map below displays this data in another way. The similarity with the passenger heat map above is evident.

Osaka Kansai International Airport, total cargo capacity by region, heat map: 4-Jan-2016 to 10-Jan-2016

OKIA's cargo capacity by carrier chart shows that there is no dominant airline, which is also the case with passenger capacity. Apart from the leading airline, ANA, JAL, and Nippon Cargo Airlines, all the other carriers in this chart are foreign, and they occupy four of the first five positions.

Osaka Kansai International Airport total cargo capacity per week by carrier, 04-Jan-2016 to 10-Jan-2016 (cargo payload, total system)

OKIA opts for low cost terminals

Earlier, it was demonstrated that a third of seats at OKIA are on low cost carriers. The airport management has catered for the growth of LCCs by providing a separate terminal for LCCs (T2), occupied solely by Peach, and by planning for a second budget terminal that could be used by budget carriers that occupy T1 now, such as Jetstar, Jetstar Japan and Cebu Pacific.

According to the CAPA Airport Construction Database, this third terminal is scheduled to be completed in Mar-2017, with Peach and China's Spring Airlines having already expressed interest in using the facility. Spring Airlines has a Japanese start-up unit for some B737s that were delivered new, while the parent airline increased its international capacity share from 14% in 2014 to 30% at the end of 2015.

Once completed, the 33,000sqm facility and the airport's existing low cost terminal for domestic services will have a combined capacity of eight million passengers per annum, double the current capacity. Whereas T2 is for domestic services T3 will be specifically for international ones.

The airport operator also has the construction of a fourth terminal, dedicated to LCCs, under review. Commencement of that project will be determined after the conclusion of the concession on the airport (see below).

Several other airports in Japan either have dedicated LCC terminals (e.g. Tokyo Narita), or cater solely or principally to low cost carriers (e.g. Ibaraki).

Separately, the airport carried out a large scale reconstruction of its terminal one building from Mar-2014 and costing JPY8000 million (USD81.6 million).

All information above from the CAPA Airport Construction Database.

The operation of the existing terminals is detailed below.

Osaka Kansai International Airport - Passenger Airlines by Terminal

Terminal	Main airlines
1	ANA, JAL, Jetstar Japan, Korean Air, Cathay Pacific, China Airlines, China Eastern
2	Peach

The chart below represents the seat capacity in each terminal at this time. (Ignore 'main/other' which is an anomalous statistic).

Osaka Kansai International Airport terminal share (seats) by system: 4-Jan-2016 to 10-Jan-2016

Kansai Airport ownership - a private sector gamble

There have been examples of privatisation of airport activities previously in Japan - such as Nagoya's Chubu Centrair Airport, constructed under a private finance initiative, and Tokyo Haneda, where landside activities are managed by Japan Airport Terminal Company. However, the long-term lease concession for the rights to manage runways, airport terminal buildings and car parking at the merged Osaka Kansai and Itami airports is a first for Japan, and a procedure that is expected to clear the way for the privatisation of up to 94 airports nationally in a similar manner.

The intention of Japan's Ministry of Land, Infrastructure, Transport and Tourism (MLITT) since 2011 is that all Japanese airports should be privatised by 2020, and the New Kansai International Airport Company (NKIAC) is very much a test case, with one of Japan's biggest airports in the mix.

The procedure began in Oct-2013 when the already corporatised NKIAC acquired a 67.7% stake in Osaka International Airport Terminal Co Ltd, which operated the terminal building at Osaka Itami Airport with the intention of completing the concession in FY2014, after the passing of a long -awaited privatisation bill.

For the first concession of its kind in Japan, bids for these merged airports were expected from major trading houses, leading real estate companies, megabanks and other businesses.

The Japanese government invited bids for the operating rights at New Kansai International Airport in Oct-2014. The minimum price for management rights was set at JPY2.2 trillion (USD22 billion), with the airport operator expected to pay off JPY1.2 trillion (USD12 billion) of its debt, a daunting prospect. Some of the debt dates back to the early days of the airport when it was found to be sinking, requiring complex and expensive renovation work.

Nevertheless, interest was quickly shown by over 20 firms and groups. Over a period of time, though, many dropped out as a result of the debt pay-off requirement and other factors. That left only two, which were a consortium of Japan's Orix Corporation, a diversified financial services company that is better known in the aviation sector as an aircraft financier and lessor, and France's Vinci, a construction conglomerate with a dedicated airport management division, which has been very active globally during the last few years.

There was nothing to prevent the procedure continuing with only one bidder, even if such deals have been abandoned elsewhere in the world under similar circumstances.

NKIAC announced in Dec-2015 that the consortium had signed a 44-year lease to operate the two airports from 01-Apr-2016, in a deal worth JPY2.2 trillion (now USD18 billion). To do so they formed a new company, Kansai Airports. Each holds a 40% stake in it, while local minority shareholder companies from the Kansai region hold the remaining 20%. Another 30 companies in the Kansai region are expected to invest in Kansai Airports by the date of the transaction completion in Apr-2016.

It will be one of Japan's biggest projects, employing private funds for the operation of public facilities.

The CEO of Kansai Airports, Yoshiyuki Yamaya, has stated that the company will target an increase in flights to Europe and the US.

Kansai Airports is aiming for around JPY250 billion (USD2.1 billion) in revenue in fiscal year 2059, the final year of the contract, up 60% from fiscal year 2014, ended in Mar-2014. The annual number of passengers at the two airports, Kansai and Itami, is projected by the company to increase by 70% to about 58 million.

It is important to note that New Kansai International Airport has sold the operating rights to the airports while retaining ownership, presumably hoping that involvement of the private sector will attract more customers and help the company repay its continuing debt of more than JPY1 trillion (USD8.4 billion).

While this is the first transaction, there are others under way in various parts of Japan (e.g. Fukuoka, and the New Chitose airport in Hokkaido). Already the Tokyu Group is heading a consortium that has purchased a 30-year public service concession to operate Sendai Airport, another loss-maker, and it intends to turn it into a Northeast Asian hub. Sendai International Airport will start running the passenger terminal building in Feb-2016 and then take over other operations, such as landing fee collection, in Jul-2016. Tokyu Group companies collectively comprise the major shareholder, and Maeda and Toyota Tsusho, which had been independent bidders, have joined the consortium.

Japan is well on its way to meeting its airport privatisation goals after decades of prevarication, but the spectre of debt lurks below both of the transactions so far.

Data above is taken from CAPA's Airport Ownership Database.

Summary and conclusions

While the Tokyo airports are ahead of OKIA by most measures, Kansai generally ranks highest when compared with other Japanese airports;
However, OKIA underperforms when compared with international airports having a similar catchment area, as a result of several factors including popular surface transport methods and the national influence of the Tokyo airports;
OKIA compares well in terms of total number of airlines and international airlines with both Tokyo Haneda and the Nagoya airport, and ranks second behind these airports in terms of freight destinations;
OKIA matches Tokyo Haneda on flights within Asia Pacific and to/from Europe;
Alliance airlines are not well represented at Kansai;
Landing charges are high compared with a peer group of Japanese and nearby foreign international airports;
Over a third of seats at OKIA are on low cost airlines, of which the main one is Peach;
There is no single dominant airline, the seat capacity of Peach and of ANA, the two largest airlines, is identical at present;
There are fewer First Class seats available at OKIA than the global average but more in business class. The ratio of Economy seats is identical;
China and South Korea are the two main markets as measured by seat capacity;
Passenger traffic growth has been strong during the last four years, currently outstripping the Tokyo airports and two primary foreign airports;
Four fifths of seat capacity is on flights of four hours or less, with only 1% on flights in excess of 12 hours;
Most frequencies are also concentrated in a 0-5 hour flight period category;
There are few evident discrepancies between arriving and departing passengers in any single hour, as measured by seat capacity;
A third of OKIA's airfreight is carried on dedicated cargo aircraft, a higher figure than all but one of its peer group;
Most of the cargo capacity is to and from Northeast Asia and Southeast Asia;
As with passenger flights, there is no single dominant airline for cargo;
OKIA has catered for the growth of the LCC segment by providing a dedicated terminal, and may now provide another one;
The airport is being privatised by way of a 44-year lease concession to a consortium of a Japanese company and a French one. Ownership is retained by the government. More privatisations may follow as a result of a successful conclusion to this one.