How aviation can provide an economic spark for stricken Japan

This article appears in the April edition of Airline Leader, CAPA's airline management magazine. Go to www.airlineleader.com to download the full edition.

The aviation sector's equivalent of deflation, in terms of its impact on blunting growth and dampening innovation and vitality, has been the lack of growth in Tokyo-area airport capacity, under-development of regional airports and the strangulating effect of policies previously designed to protect the failed flag carrier, Japan Airlines.

A little over a year on from JAL's bankruptcy and commencement of its restructuring process, positive signs had been emerging that the country's aviation sector can help lead its economy into a better place. While not itself a major piece of the economic picture, aviation is a highly visible and symbolic area of activity, with very substantial flow-on effects for the wider economy.

Internationally Japan had been, until 2008, Asia's biggest aviation market, with well over 70 million seats p/a. China overtook it to become the largest (although it, like Japan, contracted in 2009), surging ahead in 2010. South Korea and Thailand follow, well behind. Japan will not recover the leadership mantle, but a new focus could do much to stimulate higher growth.

While Japan waited passively for the 2010 "big bang" (of long-awaited new capacity at Narita and Haneda), in this heavily Tokyo-centric airline system, domestic aviation in Japan had stagnated. Domestic capacity in 2010, at 126 million seats, was 4.2% below the level of 2001. International capacity rose a modest 9.6% above 2001 levels. ANA and foreign carriers have been responsible for this increase, as JAL contracts rapidly.

Paradoxically, after restraining entry to safeguard JAL and ANA's position, all the new airport capacity at the Tokyo airports eventually arrived simultaneously with JAL's downsizing, freeing up even more space for expansion by others.

However, over the past 12 months, a new broom has swept though. JAL is finally being restructured in a meaningful way, and the new Haneda and Narita capacity is being taken up. And a more open attitude appears now to be entrenched at the Ministry.

This national aviation revival began when the desperately troubled JAL was not simply bailed out in late 2009, a course which would have been followed under previous regimes. Thanks to keen intervention by the Finance and Transport Ministers in the then-recently appointed Kan government, the flag carrier was pushed to seek bankruptcy protection in Jan-2010, with the support of interim financing to help it through. The deep restructuring programme was the quid pro quo.

The desire for All Nippon Airways, supported by JAL, to achieve antitrust immunity (ATI) to operate in partnership with their US alliance partners, simultaneously prompted the Japanese government to conclude an open skies agreement with the US. This laid a strategy platform for renewal and for a different, less-protectionist policy internationally. The newly available capacity at Haneda and Narita, along with JAL's downsizing, conveniently now made expansion and new entry possible. Subsequently, a more enlightened policy posture has been taken, enabling numerous new initiatives that would have been unthinkable only five years earlier.

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The stage was therefore set for a synchronised recovery, as economic conditions appeared more positive than for several years. The persistent challenge of overcoming deflation still hung over the longer-term outlook, but the strength of China's growth continued to overflow into its neighbours' backyards.

A Bank of Japan spokesman noted in late Feb-2011: "Japan's economy appears to be getting out of the pause for the time being, and on the price front, the deflationary situation is improving." However, he added, "There will be twists and turns until overcoming deflation is in sight." The central bank was not expected to move on interest rates (still near zero - and the lowest in the western world) until at least 2013, in a bid to tackle deflation.

The devastating impact and massive loss of life from the 11-Mar-2011 earthquake and tsunami will cause an enormous setback, both in human and economic terms, but assuming no major nuclear disaster, the outlook for the Japanese economy over the medium term should remain relatively solid. In the immediate aftermath of the disaster, views were mixed on just how far-reaching the impact would be. Several major companies were temporarily shut down and there will undoubtedly be an immediate and wide-ranging short-term slowdown in domestic production. Power supplies will need to be reinstated and industrial production may well be inhibited for some time.

But looking further ahead, the inevitable rebuilding programme could actually have a positive impact on economic activity. Some of the worst affected airports, notably Sendai, which is relatively small, but had been growing into a more significant regional role, with international services, will be temporarily curtailed. But, as was seen after the 1995 Kobe earthquake, the Japanese people are enormously resilient and committed to restoring normality. Continuing along a path of aviation regulatory relaxation could contribute effectively to aiding that recovery.

The aviation sector issues will not only be practical ones. Japan's arcane political system is never far from the surface, with many reactionary voices ready to turn back the clock.The architect of JAL's redirection, former Transport Minister Seiji Maehara, was forced to resign (from his later position as Foreign Minister) shortly before the earthquake and Prime Minister Kan will come under heavy pressure to avoid unpopular measures as part of the inevitable recovery programme. Always uncertain, Japan's post-earthquake political scene could become more complex than ever.

It appears, however, that this aviation egg has already been scrambled. As ANA and JAL start to benefit from the effects of their alliance partnership ATI (and ANA seeks extended partnership with Lufthansa), they will have little interest in turning back the clock. By now, it is obvious too that further protectionism designed to support JAL will only be counter-productive. The venerable flag carrier still has a long way to go to secure a sustainable future and there will be many more difficult negotiations with unions along that track.

Meanwhile, the likely flurry of new entry and of LCC, Skymark's, expansion should help contribute in renewing Japan's claims as a leading aviation power in the region. If allowed to, this renewal could also go some way to aiding economic recovery in what will inevitably be a very difficult year ahead for Japan.

TOUCHPOINTS FOR JAPAN'S AVIATION EVOLUTION