AirAsia Japan

The AirAsia Japan joint venture stumbles. Can LCCs survive in Japan?

AirAsia announced on 11-Jun-2013 that its LCC joint venture with All Nippon Airways has “been facing some challenges attributed to a difference of opinion in management, most critically on the points of how to operate a low cost business and operating from Narita,” and that it “would not rule out any options... including dissolution of the joint venture”.

This is tantamount to talking of “irreconcilable differences” in a divorce case. If the two airlines have been unable to consummate something that meets their mutual goals after almost a year of operations, this is an ex-marriage.

Even ANA, less bluntly, effectively acknowledges that the partnership hasn’t worked and that it is considering combining the operations of its part-owned Peach with the residue of the AirAsia Japan operation.

So where to next? The next steps could be the genesis of a whole new scenario, or – something less. AirAsia might withdraw completely, form a financial JV partnership – or perhaps go back to talking to Skymark.

AirAsia’s 2013 outlook marred by intensifying competition and continued losses at new affiliates

AirAsia faces a potentially challenging 2013 as it accelerates expansion in its three core markets as part of an attempt to fight off intensifying competition within Southeast Asia. Meanwhile, the group will continue to incur losses at the two affiliates it launched during 2012, in the Philippines and Japan, and will incur start-up costs for its new joint venture in India.

The AirAsia Group plans to focus growth in 2013 at the three affiliates which are profitable – AirAsia Malaysia, Thai AirAsia and Indonesia AirAsia. This established trio of LCCs, all of which are now at least seven years old, will take a record 25 aircraft in 2013 for a total of 138 A320s, representing 22% fleet growth.

AirAsia Philippines, AirAsia Japan and AirAsia India are only expected to take about seven A320s in 2013, a surprisingly small figure for the Philippine and Japanese affiliates given they have not yet reached initial economies of scale. The group is waiting for AirAsia Philippines and AirAsia Japan to move into the black, which could take a few years, before pursuing more ambitious expansion.

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

AirAsia Japan and Jetstar Japan are about six months old now and already there is significant change at the fledging carriers: AirAsia Japan has switched CEOs after sagging performance while Jetstar Japan will reduce its second base at Osaka Kansai, the home of Peach Aviation, Japan's first new LCC, which launched in Mar-2012 - suggesting Peach has efficiently maintained its presence in Japan's second-largest metropolitan area.

Peach launched with services to a number of secondary cities whereas AirAsia and Jetstar entered only trunk routes. But now Jetstar will launch some secondary city routes of its own, suggesting an evolving route network strategy as well as responding to the market with agility, which airlines – especially in Japan – do not typically have strength in.

Finally, Jetstar looks as if it will steal AirAsia's thunder by opening a base in Nagoya, Japan's third-largest metropolitan area. AirAsia since nearly its launch has talked of a Nagoya base, making it likely Asia's two leading LCC groups will continue to battle head on in Japan.

LCCs in Japan welcomed with open arms, despite the many arguments against

For years it was said that Japan, despite high air fares and inefficient incumbent airlines, would never be a breeding ground for low-cost carriers. Excuses were many – airport taxes were too high, there were no low-cost terminals – but the last resort claim for why LCCs would not work in Japan was that the Japanese people, used to pampering in their service-oriented society, would never accept the core principles of LCCs.

With breathtaking speed the Japanese government and companies broke down barriers to support LCCs, three of which launched in 2012. They could do everything but change public attitude about LCCs. Yet it turned out the Japanese public did not need the open-heart surgery many thought would be required. Japan's air market has been devolving on service, closing the gap between full-service incumbents and LCC start-ups. The LCCs are also not the bare-bones, service-adverse airlines many stereotyped. 

This poses a challenge to how full-service carriers can maintain a yield premium, which received a bleak reminder with Skymark pulling off routes in response to LCCs entering. The Japanese experience also offers a lesson to other markets, like South Korea, Taiwan and Hong Kong, where some claim the population will not ever accept the concept of a LCC.

Spring Airlines moves to establish Japanese base while ANA sees cannibalisation from new LCCs

The launch excitement of three new low-cost carriers in Japan, by some arguments the country's first LCCs, has passed but Japan continues to see significant developments. First, Spring Airlines is finalising plans to launch a Japanese subsidiary. Spring Airlines Japan is expected to launch in late 2013 on domestic services with international services to commence in 2014. Spring Airlines will be competing in a space occupied by the AirAsia and Jetstar groups, which are well versed in LCC operations. While AirAsia Japan and Jetstar Japan serve trunk routes for now, Spring will likely serve secondary cities from its planned Tokyo Narita base.

Japan's new LCCs are increasing passenger numbers – travel propensity is low in Japan – but there will of course be some levels of cannibalisation, although some refuse to acknowledge this. All Nippon Airways will end its Tokyo Narita-Seoul Incheon service, which competes with AirAsia Japan's new service, following Japan Airlines' withdrawal on the Tokyo Narita to Osaka Kansai route, which Jetstar Japan also operates. These reductions are minor – but only the start.

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

References to "the Southwest model" or "the Ryanair model" can be a common refrain in the low-cost carrier industry, but no two LCCs are identical. Indeed, there are a number of models that have seen success. So it comes as no surprise that Japan's nascent LCC industry is diverging, with this year's three new entrants – AirAsia Japan, Jetstar Japan and Peach – showing their future more clearly now that their operations are bedding down.

The divergence is not the result of differentiation in an over-competitive market; there is still plenty of untapped demand in Japan. Rather the nuances at the three new LCCs are reflective of different shareholders and market positions. There are different outlooks on domestic-international balances but most commonly the distinctions go to the heart of industry discourse on hybridising, adding services to tap new markets and increase yields. Jetstar Japan is set to be the most hybrid, followed by AirAsia and then Peach.