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ANA & JAL dominate Japan's domestic airline market: record traffic

Japan is aviation's fifth largest domestic market after the US, China, India and Indonesia. Unlike those four countries with sustained growth, Japan has an economy that has undergone deep highs and lows while addressing substantial questions about future existence.

Despite this, in Japan's domestic market in its most recent financial year (the 12 months to 31-Mar-2018) there is forecast to have been record traffic as the market conservatively handles 100 million passengers.

Although Japan has more airlines, including LCCs, competition is restricted as most operators belong to the dominating ANA and JAL. CAPA's LCCs in Northeast Asia Summit in Seoul in Jun-2018 will gather industry leaders, including from Japan's airlines, to discuss domestic, regional and long haul markets.

Summary

  • Japan's annual domestic traffic for the year to 31-Mar-2018 is forecast to reach 100 million at conservative estimates.
  • This will be record traffic, and the first time Japan's domestic market will exceed the 100 million level.
  • ANA and JAL still dominate the domestic market but have had market share decreases.
  • Almost all of Japan's domestic market is part of ANA or JAL. Skymark and AirAsia Japan can be independent operators.

2017/2018 record domestic traffic forecast; first time 100 million pax p/a

Japan's domestic market in FY2016 (the 12 months to 31-Mar-2017) flew 95.0 million passengers. This was the fifth year of growth since traffic slumped in 2011 after an earthquake, tsunami and depressed economic activity. The figure of 95.0 million passengers in FY2016 was the highest aside from the early and mid-2000s, when there were 96.7 million passengers in FY2002, 95.5 million in FY2003, and the record 97.0 million in FY2006.

In the nine months to 31-Dec-2017, the latest statistics available, Japan's domestic market expanded 5.4%, the fastest growth rate since FY2012 (although FY2012's 8.7% growth rate was distorted due to the slump in FY2011).

Assuming a conservative case of slower growth in the last three months of the financial year, FY2017 domestic traffic will reach approximately 100 million passengers, besting the previous record by three million.

Japan domestic passengers: FY1994-FY2017E

Japan gains 5 million passengers in a single year

FY2017's net growth of approximately five million passengers will exceed FY2013's net addition of four million passengers. This also represents the largest net addition of passengers – even higher than during Japan's '90s boom era. (This excludes the nearly seven million passengers added in FY2012, distorted due to the natural disasters of 2011.)

Japan additional domestic passengers from proceeding year: FY1995-FY2017E

Domestic market: evolving away from full service

Japan's domestic market has changed over 12 years in a strictly quantitative evaluation, but effectively the market remains under the domination of ANA and JAL.

The next series of analysis looks at Japanese domestic market share in 2006 (the previous peak), 2012 (the start of LCCs) and 2016 (most recent full year data).

There have been declines in the market share of the ANA and JAL brands: 94% in 2006, 83% in 2012 and 78% in 2016. They both carried fewer passengers in 2016 than 2006. But ANA and JAL carried more passengers in 2016 than 2012 as they pursued incremental growth and load factor additions.

Domestic Japan market share: 2006, 2012 and 2016

Japan's other airlines have made not only market share gains, but also significant increases in total volume.

Airlines outside the ANA and JAL brands carried 6 million passengers in 2006, 14 million in 2012 and 21 million in 2016. 2016's volume throughput from airlines other than ANA or JAL is equivalent to two thirds the size of JAL or half the size of ANA. However, this group of airlines is highly fragmented – and many are affiliated with, or partially owned by, ANA.

Skymark and AirAsia Japan break the cosy ANA-JAL duopoly

Over the decades Japanese aviation policy has sought to generate competition, but the Japanese domestic market is still almost exclusively a market for ANA and JAL. While more airlines have launched and grown market share, most (Air Do, StarFlyer, Solaseed) fall under the umbrella of ANA.

Even the wave of LCC launches earlier this decade is largely due to ANA and JAL. JAL has a minority stake in Jetstar Japan. ANA had a minority stake in Peach Aviation and wholly owned Vanilla Air (after initially having majority ownership in the first iteration of AirAsia Japan). ANA will have majority ownership of the merged Peach-Vanilla entity. Even without majority ownership, ANA and JAL were able to have controlled LCC disruption: by the setting of cash funding, for example, there were natural limits on growth.

Japan still seeks a "third arrow" competitor to ANA and JAL. Skymark was to be the "third arrow", but slow development and bankruptcy have set it back. Although Skymark has minority ownership from ANA, it has fiercely held back ANA's efforts to influence and control.

AirAsia Japan looks to be the only independent LCC of scale. Of the existing LCCs, Jetstar Japan, Peach and Vanilla belong to ANA or JAL. Spring Airlines Japan has reduced its size and focused on the Japan-China market for its mainland Chinese (partial) parent owner. AirAsia Japan's local investors are not airlines, but AirAsia Japan has lost time to make up for. The AirAsia Group is not as aggressive as it once was – and that may be a good thing globally.

A mixed celebration, as competition remains subdued

The Japanese domestic market's growth and reaching of new levels has in many ways defied the odds, especially from underlying economic changes. This is ultimately good for consumers.

Yet compared to other markets that have rebounded and reached new records, there has not been substantial change in competition.

Market share of the two flagship airlines has decreased. There are lower-fare options from LCCs, and tactical sales (and load factor increases) from major airlines. But Japan's domestic disruption has been controlled, with resulting small benefits compared to more open competition. AirAsia Japan's struggle to launch will make prospective new entrants think twice.

It is a big ask for the status quo of airlines and policy to change. Even the practical and smart options for Skymark to move upmarket may not be achieved. Even if all this is to stay the same, Japan could benefit from greater efficiency from airlines, airports and regulators. Some features of the conservative mindset are for legacy reasons, others to create a safety framework well above any international standard.

Unlike other markets that have grown, restructured, experienced the entrance and exit of airlines and the wide-spread change of business models, Japan is still operating in a familiar bandwidth.

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