Tokyo Haneda Airport

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.

Hawaiian Airlines endures short-term pain to secure, it hopes, successful longevity

Hawaiian Airlines faces a challenging time during 1H2013 as its efforts to diversify outside of the Hawaii-US west coast market during the last few years need more time to bear fruit. Its ambitious long-haul expansion is accompanied by the introduction of a new inter-island subsidiary and the reworking of other portions of its inter-island network.

All of the changes Hawaiian is undertaking or planning to introduce are intended to bolster efforts to preserve its profitability, which has been fairly consistent during the last few years. But in the near future the carrier is facing pressure as its new long-haul Asian markets spool up and increases in competitive capacity create pressure in its trans-Pacific service to the continental US.

While the strategy Hawaiian is adopting to persevere in the long-term is solid, the airline might be attempting to accomplish too much too fast, which in the shorter-term is creating pressure on yields and unit revenues.

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.

Japan's aviation liberalisation may stall under a new government as Gulf airlines use new rights

Japan has long been a standout in protecting its airline sector. It was only the surprisingly "big bang" of 2010 that provoked a new direction, as JAL was thrust into bankruptcy, an open skies agreement was signed with the US and the JDP government began pursuing a much more liberal bilateral policy, allowing new LCCs and establishing open skies agreements with regional neighbours. But now, under the new (but old LDP) Shinzo Abe-led government, things may change. The Gulf airlines may be the touchstone.

The country's long standing protectionism in bilateral air services had created the position that, of the world’s five-largest air markets – the US, China, Japan, UK and Germany – it was Japan that received the least capacity from the major Middle East network airlines.

When Emirates and Etihad finally secured approval to fly to Tokyo Narita in 2010, they inaugurated services immediately.

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.

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.