All Nippon Airways

South Korea-Japan airline market sees structural change from LCCs, political tension & weakening yen

The once tidy and highly profitable Japan-Korean market is undergoing fundamental change – accompanied by double-digit yield declines.

It is difficult to identify precisely which ingredients are provoking the greatest change in the South Korea-Japan airline market. First, in mid/late 2012 the market was transformed as new airlines entered and others added capacity; these were mainly LCCs with unprecedented low fares. Then late 2012 saw Japanese outbound tourist numbers fall sharply due to political tensions between South Korea and Japan over largely uninhabited but disputed islands.

In 2013 the Japanese outbound market remains soft as the yen weakens. While the international political situation will eventually cool down, the Korean response has been to target individual tourists rather than tour groups, a change that was long overdue in any event.

But the difference now is that those individuals have LCCs to provide for their needs. These carriers are here to stay, and they will grow – for the usual reasons, but also due to the weakening yen. While the economic and political factors favour the Korean side, it is the Japanese side that has a larger share of the market.

Air New Zealand poised to deliver on "go beyond" strategy, still facing stiff competition

Air NZ has returned to “growth mode” adding capacity to North American routes, resuming daily operations to Tokyo and Shanghai and strengthening its short-haul network.

After restoring its long-haul network to profitability and reporting a 300% increase in underlying profit for the first half of FY2013 Air NZ is focusing on developing a partnership-based Pacific Rim network.

The carrier has forged an alliance with Cathay Pacific on the Auckland-Hong Kong route and consolidated its China mainland capacity to Shanghai, dropping Beijing. Capacity to North America has been increased partly taking advantage of being handed a monopoly on the trans-Pacific after Qantas pulled its Melbourne-Auckland-Los Angeles service in May-2012, redeploying the A330 capacity in the Australian domestic market to support its domestic battle with Virgin Australia.

Closer to home, a new short haul fleet of A320s and ATR72-600s are arriving to drive domestic growth and keep a menacing Jetstar at bay.

Low-cost airline Peach boldly pursues Japan-Southeast Asia one-stop market using new Okinawa base

Japan’s Peach Aviation is looking at several potential markets in Southeast Asia as part of a new base in the southern Japanese island of Okinawa. The low-cost carrier is bullish on the Okinawa market, which it already serves from its Osaka Kansai base.

Peach is planning domestic expansion at Naha on Okinawa, starting with service to Shin Ishigaki in Sep-2013. It aims to start international operations at Naha as soon as the airport’s low-cost terminal, which opened specifically for Peach in Oct-2012, is upgraded to handle international flights.

Peach expects the Okinawa base will attract a high volume of transit passengers heading from its various destinations in Japan to Southeast Asia. But at least for now Peach plans to rely on self-connections rather than offer a connecting product. Peach already sees a large number of self-connections coming from its international destinations, particularly Hong Kong.

ANA's capital-raising and international acquisition strategy raise questions for investors

Call it an unusual, even fortunate, position, but some are quietly wondering if Japan's All Nippon Airways has more cash than it has strategic plans to utilise that capital. ANA in Jul-2012 announced plans to raise as much as JPY211 billion (USD2.2 billion) of capital in a move with coincidental timing, or not: just ahead of the re-listing of rival Japan Airlines, freshly emerged from bankruptcy.

ANA said the funds would primarily support the purchase of 787 aircraft, but then ANA gave the shell shock announcement it would invest in foreign airlines. Another seeming reversal came in Dec-2012 when ANA acquired a stake in an airline – but it was the domestic operator StarFlyer.

Press reports in late Jan-2013 said ANA had been in discussions with Indian carriers following the country's foreign ownership relaxation. ANA has given cool responses to the rumour, and either way synergies from an ANA investment in an Indian carrier would be low and the challenges high.

All Nippon Airways' 787 grounding mitigated by very low domestic load factors and utilisation

Every cloud has a silver lining, and All Nippon Airways’ remedy to the current 787 grounding could make it a more efficient airline in the long-term. Domestic Japanese load factors are typically woefully low – 60.9% in the year to 31-Mar-2013 for ANA, Japan’s largest carrier and Asia’s largest airline by revenue.

ANA is the world's largest 787 operator, with a third of the global in-service fleet. Much attention has consequently been directed towards it. But the impact from the 787 grounding is disproportionately lower as ample slack in ANA's schedules allows for re-shuffling. That is however not a simple task.

An expected rise in load factors for the duration of the grounding could give ANA a taste for greater efficiency, which it could then use to leverage against JAL’s lower cost base.

US-Japan airline alliances become lopsided as JAL, ANA expand while US to shift to other markets

The anti-trust immunity alliances between All Nippon Airways and United Airlines as well as Japan Airlines and American Airlines are past the honeymoon phase. Whereas the airlines a decade ago were bullish on linking the mighty US with Japan Inc., today the latter's economy is still underperforming.

Japanese airlines are now ramping up US capacity to existing and new destinations as they seek to woo markets with their premium products, efficient hubs and services to secondary US cities, reducing connections.

But US carriers are expanding less than their Japanese partners, which impacts the competitive potential of the JVs, as Japanese carriers have far higher CASKs. The US airlines are also looking to diversify what United calls its "non-Japan Asia" network, a reflection of the growing importance of China. United will resume services to Taipei while American will expand to Seoul, but the pot of gold is mainland China.

Expansion there will be steady as slots are difficult to secure and airlines are dependent on next-generation aircraft to make secondary cities profitable. China services would likely be excluded from the JVs with Japanese carriers due to the Chinese regulatory environment – possibly spearheading the formation of new JVs. But that will depend on the pace of liberalisation.