Japan Airlines

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.

Japan Airlines and Jetstar Japan embrace LCC hybridity, codesharing – and reap rewards

While some parts of the industry spend time seeking to define what makes a low-cost carrier or debating who is and is not a “true” LCC, most airlines are looking past labels and instead offering services that give them a yield premium and expand traffic flows.

This hybridisation of airlines that, by their own term, started as LCCs is exemplified by Jetstar. One feature that may be most contentious for a LCC to have is interline and codeshare relationships. Jetstar has three codeshare and 25 interline agreements following the main addition of Jetstar Japan codesharing with part owner Japan Airlines. This will further help Jetstar increase interline and codeshare revenue, which grew 80% in 2012.

The Jetstar Japan-JAL deal has its own nuances worthy of examination. Not only is this a partnership between one of the most adaptive LCCs and what was one of the most hardened legacy carriers, the relationship will enable JAL to expand its domestic network virtually and at a low cost, critical for high-cost JAL at a time of transformation in North Asia.

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.

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.

Malaysia Airlines finally gives oneworld a presence in fast-growing Southeast Asia market

Malaysia Airlines (MAS) formally joined oneworld on 1-Feb-2013, giving the alliance 12 full members and its first member in Southeast Asia. For oneworld, MAS fills a white spot in one of the world’s fastest growing regions. For MAS, oneworld supports the carrier’s new focus on the premium end of the market.

MAS is in the latter stages of a restructuring which began at the end of 2011, when it unveiled a new business plan. Joining oneworld is a key component of the business plan. While only three oneworld members currently serve MAS’ Kuala Lumpur hub, joining the alliance expands its virtual network and increases its relevance in the premium market.

Delta sees solid demand as it diversifies its Asian network to offset Japan's weakness

Delta Air Lines believes 2013 is starting on a favourable note as overall demand trends remain positive and its unit revenue for 1Q2013 is forecast to grow in the mid-single digits. The carrier anticipates solid results in all its geographical entities, with the exception of Asia-Pacific, where its concentration in the important Japanese market has dragged down revenue performance in that region. To combat weakness in its Japanese markets triggered by the country’s weak economy, Delta during 2013 plans to centre the majority of its trans-Pacific capacity outside of Japan.

Carrier executives offered guidance for 2013 as Delta recorded a 4Q2012 profit of USD238 million and net income for the full year of USD1.6 billion.

Excluding special items that included charges related to its domestic fleet restructuring and a loss on the early extinguishment of debt, the carrier’s 4Q2012 profit was USD7 million and full year net income was USD1 billion. During 4Q2011 Delta recorded a profit of USD425 million and net income of USD854 million. Delta felt a sting of roughly USD100 million during 4Q2012 from the effects of “Superstorm Sandy” that struck the US east coast in Oct-2012.