Skymark Airlines

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.

Japan's StarFlyer looks to expand its successful niche – but change is afoot

Japanese aviation is dominated by All Nippon Airways and Japan Airlines, who account for nearly 75% of capacity in the world's fourth largest domestic market. A number of carriers divide the rest, and while they may be small, they are looking to grow domestically, branch out internationally and be innovative to set themselves apart from the ANA and JAL behemoths.

StarFlyer is one of those carriers, and has had profits to support its strategic positioning. It is now slightly accelerating aircraft deliveries to grow domestically – it was the second-largest recipient of newly released slots at prized Haneda airport – and is looking cautiously at the international market.

But mighty change is afoot in Japan, and as LCCs offer seats at prices never before seen and incumbents like Skymark flex their muscles, StarFlyer will see tests of its model of boutique flights that come at a yield premium to the LCCs but priced lower than ANA or JAL. There is comfort in obscurity, with ANA codesharing and taking an equity stake in publicly-listed StarFlyer.

But there are many chapters still to be written in Japanese aviation.

Skymark switches first A380 destination from London to New York but viability remains to be proven

Skymark Airlines, Japan's third-largest domestic carrier, is switching its first A380 destination from London to New York in a bid to improve profitability amidst an atmosphere of economic uncertainty in Europe that shows no signs of relenting. But Skymark has far more work ahead of it, and success from its A380 operation seems an elusive goal. The carrier faces significant hurdles in three key areas: network, partnerships and aircraft configuration.

An entirely domestic carrier, Skymark accounts for only 5% of domestic Japanese seats, limiting feed opportunities. It has no earnest partnerships of its own despite much-bigger All Nippon Airways and Japan Airlines having joint-ventures across the Pacific and to Europe that deliver far greater traffic opportunities and a larger customer pool. Finally, Skymark intends to have the least dense A380 with a mere 394 seats in all premium economy and business configuration – and aims to have an average load factor of 60%, requiring tickets to be sold at yields too high to see profitable take up.

LCCs to hold one-fifth domestic market share in Japan by Oct-2012 and possibly 50% by end of decade

The previously unfathomable scenario of a strong role for low-cost carriers in Japan is quickly becoming reality following government liberalisation. LCCs in Oct-2012 will account for the largest percentage yet of available seats in Japan's domestic market with a 19% share, or nearly one-fifth. Based on current capacity forecasts, CAPA expects that LCCs could account for half of all domestic seats in Japan by the end of the decade. This represents rapid growth in a market that had single digit LCC penetration rates for the last decade.

These seismic changes will not be absorbed without significant ramifications to the incumbents. All Nippon Airways (ANA) and Japan Airlines (JAL) are planning to reduce their domestic capacity, but only by a fraction. Skymark, the largest LCC in Japan, may position itself upwards as a hybrid carrier to combat its higher operating cost and also to better feed its forthcoming long-haul flights. Some of the remaining incumbents, largely high-cost but low-fare carriers, may pursue alignment or consolidation with others.

A380 operators finding configuration sweet spot as value halo persists

When the latest A380 delivery to China Southern occurs at the beginning of March, there will be 70 Airbus A380s criss-crossing the globe. With close to 30 more expected to be delivered over the year, the in-service fleet will approach 100 by the end of 2012.

This year, two new operators – Thai Airways and Malaysian Airlines – will join the existing seven airlines family of A380 operators. Airlines are still finding the sweet spot in terms of A380 seating but more and more configurations are edging above 500 seats, after much experimentation.

Japan Airlines plans for future: more regional & long-haul flights as LCCs swallow short-haul market

Japan Airlines (JAL) emerged from bankruptcy last year with a new lease on life, realising – although it was never in danger of absolute collapse – little is sacred and that the status quo cannot always continue, a radical change of thought in entrenched corporate Japan. This new thinking is evident in the carrier’s medium-term business plan from 2012 though 2016 which seeks to address the significant structural change that will start to occur later this year as low-cost carriers rapidly increase in the domestic market and expand on regional services.

While passengers and Japan as a whole will benefit from lower cost travel, that growth will be at the expense of Japan’s incumbent full-service carriers. JAL is smartly preparing to de-emphasise its mainline domestic market, which will be most exposed to LCCs, and concentrate on two areas LCCs will not reach in full force in the medium term: domestic regional flights and long-haul markets. In 2016 JAL plans to operate 13% more available seat kilometres (ASKs) than in 2011, with all growth in international markets; JAL’s domestic network will shrink.