As new Japanese LCCs – AirAsia, Jetstar and Peach – settle in, strategy differences become apparent

AirAsia Japan and Jetstar Japan to link networks with long-haul services

LCCs are becoming network carriers, leveraging their wide access in multiple markets to offer connecting flights. The AirAsia and Jetstar groups practice this outside of domestic Japan: AirAsia offers single ticket itineraries from Singapore to Tokyo via Kuala Lumpur while Jetstar offers single ticket itineraries from Melbourne to Tokyo Narita, amongst other examples.

The two groups do not yet offer connecting flights on their domestic Japanese networks. The only other AirAsia affiliate currently serving Japan is AirAsia X, which operates to Tokyo Haneda and Osaka Kansai from its hub in Kuala Lumpur. AirAsia Japan is based at Tokyo Narita and does not offer Haneda flights and is also currently not in Osaka Kansai, giving it no ability to offer single ticket itineraries with AirAsia X. (Anecdotal evidence suggests however that passengers are self-connecting.) Connectivity between AirAsia Japan and AirAsia X will be possible if AirAsia X, as is being mulled over as part of a large expansion, enters Tokyo Narita to supplement its Haneda route, and if AirAsia Japan enters Osaka Kansai to counter Jetstar Japan's presence.

See related article: AirAsia X, accelerating growth in response to Scoot, looks to capture Asian market once and for all

The Jetstar Group has international services to Osaka Kansai and Tokyo Narita from both Australia's Cairns and the Gold Coast while also having a service from Singapore to Tokyo Narita via Taipei. From 01-Nov-2012 Jetstar Asia will launch a non-stop service from Singapore to Osaka Kansai.

Jetstar Japan CEO Miyuki Suzuki tells CAPA that domestic connectivity was not a priority in the lead up to Jetstar Japan's Jul-2012 launch, but it is now turning its attention to it. Connecting opportunities in the short-term however will be limited.

Jetstar's international services from Australia arrive in Narita between 18:00-20:00, limiting onward connections as Jetstar Japan's fleet is currently based at Narita (and from 28-Oct-2012, Kansai too), so aircraft cannot depart Narita too late as otherwise they will be unable to return to Narita by the airport's 23:00 curfew. As Jetstar Japan becomes more comfortable with its schedule and adds aircraft as well as bases, more connections from its Australia network will be possible. With Jetstar services from Japan to Australia all departing Japan in the evening, there is ample connecting opportunity.

All carriers in the Jetstar Group (as well as Jetstar Japan's parents Japan Airlines and Qantas) are located in Terminal 2 at Narita. Kansai has a single terminal.

Japan international capacity (seats) by region: 01-Oct-2012 to 07-Oct-2012

Source: CAPA - Centre for Aviation & Innovata

Jetstar's Singapore-Taipei-Kansai service arrives and departs around the middle of the day while its Darwin-Manila-Tokyo Narita service arrives into Narita at 12:15 and then departs at 18:00 (there are similar times for Jetstar's Manila-Kansai service), providing some connectivity, but on a low scale since the service is operated four times a week with A320s.

Jetstar's new Singapore-Osaka Kansai service, ramping up to an initial four weekly flights, will provide greater connectivity options with a 06:10 arrival into Kansai and departure at 11:30, a significantly longer layover at over five hours than the typical two to three hours for Jetstar's existing long-haul flights into Japan.

Additional connecting opportunities will open as the carriers enter more markets, especially short-haul international markets that AirAsia and Jetstar do not serve. In Korea, for example, AirAsia X has service only to Seoul while Jetstar has no services. The Japan-Korea market will be a large portion of international traffic for the Japanese LCCs, and AirAsia Japan intends to make Korea its first international market.

See related article: AirAsia Japan prepares for South Korean services and evaluates under-served cities in China

Japan LCC capacity (seats) by carrier: 01-Oct-2012 to 07-Oct-2012

Source: CAPA - Centre for Aviation & Innovata
* Indicates foreign carrier

Peach is steadfast that it will not complicate its model by offering connecting short-haul flights (it has no long-haul services or partner). It says passengers can self-connect if they want connecting services. While the argument is valid and avoiding complexity has traditionally been at the heart of LCCs, airlines are finding that the cost of added complexity can be outweighed by higher yields, such as by offering connecting flights.

Revenue managing connecting flights on a LCC can be done in multiple ways. At the most simplest, two segments' price could be combined. Or the fare could be increased to reflect the cost of connecting flights, or decreased if there is a certain market the LCC wants to target (say a competitor's non-stop option). Taxes are not to be overlooked. In a case where an airport or government waives or reduces taxes for transit passengers, it is possible for an airline to offer a passenger an overall lower ticket price while obtaining a higher yield by not passing all of the tax savings back to the passenger. Formulas also need to be created for calculating baggage services and other ancillary fees.

Mis-connections need to be planned. For AirAsia and its "Fly-Thru" connecting service, that entails the passenger being placed on the next flight at no charge, or covering accommodation expenses if necessary.

Japan full service capacity (seats) by carrier: 01-Oct-2012 to 07-Oct-2012

Source: CAPA - Centre for Aviation & Innovata
* Indicates foreign carrier

For AirAsia and Jetstar, the upsides are big and downsides small. But those carriers are planning to be primarily domestic ones - giving feed opportunities - whereas Peach is placing more emphasis on international markets, restricting feed opportunities. As for international connections, Japan does not favour a wealth of efficient opportunities, either geographically or financially: neighbouring South Korea, once it wakes up to the LCC revolution, can offer a lower cost base, as can China today. So Peach may not find itself with enough volume to support connections.

While less about connecting flights and more regarding leveraging multiple AOCs, Jetstar has applied to Australian regulators to be able to coordinate services amongst its operations. This would allow Jetstar Japan and forthcoming Jetstar Hong Kong to coordinate Japan-Hong Kong schedules and then sell an itinerary with one flight on Jetstar Japan and the other on Jetstar Hong Kong. While the Jetstar Group will give operating preference for a service to the carrier with the lowest operating cost (Hong Kong over Japan, Singapore over Australia), exceptions will be made when schedule benefits can be realised, such as having Jetstar Japan operate a morning service to Hong Kong rather than have a Jetstar Hong Kong aircraft and crew overnight in Japan to be able to operate a morning sector from Japan.

Projected Japan domestic capacity share (% of seats) by carrier: 21-Oct-2012 to 27-Oct-2012

Source: CAPA - Centre for Aviation & Innovata

Jetstar Japan considers codeshare with JAL as part of integrated approach; AirAsia Japan and Peach cite independence

Japan's aviation scene had long been a duality of ANA or JAL. That entrenched the country into marketing loyalty, especially for frequent flyer points. All three of the new LCCs can claim heritage from ANA or JAL. Some elements of the market will choose the LCC of their preferred full-service carrier if there is overlap amongst the LCCs. "We have common customers across the JAL Group," Ms Suzuki said, and anecdotal evidence suggests AirAsia Japan is finding traction amongst ANA loyalists.

But there is greater opportunity to derive pedigree value through frequent flyer points associated with ANA or JAL. However, so far only Jetstar Japan looks likely to consider this, a result of a possible codeshare with JAL.

Jetstar Japan prior to its launch disclosed it was in discussions with JAL about the latter placing its code on Jetstar Japan. The agreement would find traction, especially in regional Japanese markets that are not profitable to JAL. Transferring service from JAL to Jetstar would improve profitability (JAL has a 33.3% stake of Jetstar Japan) while the codeshare will enable JAL to sell the destination directly and, as a secondary benefit, offer frequent flyer miles, a critical appeal for the corporate market. Jetstar itself has no loyalty programme and in other markets sells Qantas points.

This strategic move will require close cooperation between JAL and Jetstar Japan. The two have replicated the "Flying Committee" of Qantas and (Australian) Jetstar in which representatives from both sides conduct network planning, a proposition that sounds better on paper. Ms Suzuki said Flying Committees are "not all honky-dory, peaceful affairs but allow you to knock out what's good for the market and balance sheets".

The committee's prominence in Australia has waned in recent years as Jetstar has taken a sizeable position in the country and overlaps with Qantas on 30 routes. JAL and Jetstar overlap, although the overlap is not as direct as in Australia owing to JAL primarily having domestic operations at Tokyo Haneda and Osaka Itami while Jetstar Japan will be at Tokyo Narita and Osaka Kansai. But that will not always force one of the two out of a market if the other wants to operate. "Sometimes overlapping routes are a good thing," Ms Suzuki said, as doing so enables the carriers to "squeeze competition".

The opposite of this type of cooperation is the lack of a relationship between British Airways and its former LCC subsidiary Go in which BA learned of Go routes when publicly announced. This is how AirAsia and Peach claim to operate from their common airline shareholder, All Nippon Airways, which has a 67% stake of AirAsia Japan and a 33.4% stake of Peach. That minority shareholding was intentional, Peach corporate advisor Patrick Murphy said during a CAPA conference in Macau in Sep-2012. The "first thing to ensure was that ANA doesn't have majority shareholding," Mr Murphy said.

Go ended up cannibalising BA and was sold off, which could serve as a lesson to ANA, although there are distinct differences between the British and Japanese environments. Although London too has a fragmented airport system, it has no equivalent of Haneda or Itami in which a full-scale airport offers a wide range of flights and is close to the city. Haneda and Itami are slot restrained, restricting entry, and Mr Murphy says Peach for one is simply not interested. "Would we fly into Haneda? No. Not because of All Nippon. Because we simply have a business plan that doesn't see Tokyo as part of it."

The cannibalisation threat to ANA - and JAL - is real and already occurring. Information ANA disclosed on Peach's first month of operations shows Peach has grown the size of markets it is in but also taken some passengers from ANA.

See related article: Peach reports strong first month of LCC operations, but at expense of declining ANA traffic

The relationship between AirAsia Japan and ANA is opaque, with ANA not giving formal approvals or rejections but needing coaxing and discussion. As for codeshares, the two are firm they will not code with each other. AirAsia is more tight-knit whereas Jetstar, owing to its Qantas heritage, is externally-focused and has relationships with 20 carriers, including with Air France-KLM. Without a formal route coordinating committee, or scope for ANA to hand markets over to AirAsia Japan, the need for a codeshare is reduced.

As for frequent flyer points, ANA members will need to fly their own metal and pay a premium for doing so, although pressure may mount for that to change depending how successful a JAL-Jetstar relationship is from the perspective of a loyalty programme, which if done correctly can have margins higher than airlines. AirAsia is also vested in its loyalty programme, Big, which awards points for ticket purchases but also has critically signed up with credit card companies, first in its home of Malaysia and recently in Indonesia too. No doubt AirAsia will want to see a big Japanese membership pool. Peach and ANA also do not plan to code with each other.

Daily departures for AirAsia Japan, Jetstar Japan and Peach: 01-Mar-2012 to 01-Nov-2012

Source: CAPA - Centre for Aviation & airline timetables
Note: As of 01-Aug-2012

Jetstar Japan to enter Osaka: AirAsia Japan will respond, challenging Peach too

These nascent nuances will be tested but also thrown on a collision course at Osaka Kansai, where Jetstar Japan will expand its presence to a physical hub on 28-Oct-2012 with the basing of two A320s at Kansai by the end of 2012. Jetstar Japan launched its Tokyo Narita base on 03-Jul-2012 and on 24-Aug-2012 began operations from Kansai to points other than Narita with a daily Kansai-Fukuoka and daily Kansai-Sapporo service. Service from Kansai will be expanded to include Kansai-Okinawa (Naha) from 28-Oct-2012. Eventual international services could be to markets like Vietnam and Thailand that Jetstar Japan would not want to serve from further north than Tokyo.

Even before Jetstar Japan formalised its position at Kansai with a base, there were strong indications AirAsia Japan would enter Kansai to compete with Jetstar Japan and not let its closest competitor - in Japan and broader Asia - tie up the market. Yet any AirAsia Japan entrance, expected from 2013, will impact Peach, which like AirAsia Japan has a shareholding from ANA. The view being taken is that AirAsia Japan and Jetstar Japan are a different tier of LCC owing to their lower cost bases than Peach; Peach alone, in AirAsia Japan's view, will not be sufficient competition for Jetstar Japan. AirAsia Japan and Peach will certainly not cooperate.

Peach's higher cost base than AirAsia Japan or Jetstar Japan, but still significantly lower than ANA or JAL, is a result of internal and external factors. Peach inherited many ANA staff, and also some of their legacy practices. AirAsia Japan and Jetstar Japan meanwhile have fleets smaller than Peach but because they are part of the larger AirAsia and Jetstar groups, gain the scale and efficiency of the groups' 100-odd fleet - and that extends beyond heavy metal to IT and other areas.

Cost advantages can be gained depending on aircraft utilisation, and Peach has so far shown itself to be aggressive with its Hong Kong service departing Kansai at 21:10 and arriving back at 05:30 the next morning. The carrier is open to considering having flights to slot-restricted airports like Beijing and Shanghai where available slots are mainly in the middle of the night. Ms Suzuki says Jetstar Japan has not made up its mind on similar midnight flights to Beijing; its international services will commence in early 2013.

Carriers like AirAsia X and Jetstar that have a midnight Beijing arrival and departure typically have daylight arriving/departing times at the other end, but owing to the short distance between Japan and coastal China, such Peach flights would arrive and depart in the middle of the night on both ends - but such is demand for affordable air travel. (Jetstar Japan in partnership with the Keisei bus company has a Tokyo City-Narita Airport shuttle that leaves Tokyo city after the last trains stop running around midnight. It takes a break at a highway rest stop before continuing to Narita airport in time for Jetstar Japan's 06:00 departures.)

Given Peach's more international focus, any overlap between itself and AirAsia Japan would not be huge, at least initially. Peach would also have a larger presence at Kansai than AirAsia Japan. But depending on overlap, at Kansai and future bases, the two will make their qualms against each other known to ANA, which will be conflicted between the two.

It is not unimaginable to consider a long-term scenario of more independent AirAsia Japan separating itself from ANA. But in the short term there will be overlap between AirAsia Japan and Peach but only as part of a market with large potential, and a market that saw ANA invest in two LCCs, if only to keep another carrier - Skymark - from investing in AirAsia Japan. ANA having its two LCCs compete against each other in certain segments will for now be a necessary evil but not a defining market characteristic. Jetstar Japan should expect no leniency in Kansai.

To support expansion, the carriers are planning fleet additions. Jetstar Japan will have eight A320s by the end of 2012 and 13 by Jun-2013, at which point Ms Suzuki expects her carrier to have at least a third base. Peach's board has approved a fleet expansion beyond 2013/2014 and its initial tranche of 10 aircraft. ANA had anticipated AirAsia Japan growing by four or five aircraft a year, a target AirAsia quickly found to be too small and which ANA has come to accept. AirAsia Group CEO Tony Fernandes expects AirAsia Japan to now grow by eight to 12 aircraft a year, supported by delivery acceleration and a looming A320 top-up order being made after the carrier showed distant interest in Bombardier's CSeries aircraft.

See related article: AirAsia has need for smaller aircraft but CSeries interest for now is more of a negotiating tactic

AirAsia Japan considers base at Nagoya, beginning secondary hub expansion

Jetstar Japan has so far outpaced AirAsia Japan, launching first and with a wider network, although the advantages so far are relatively small and it is still early days in the market. Nonetheless, Jetstar Japan is maintaining its lead when concerning second bases. But AirAsia Japan is not entirely out of the picture. It has mulled over opening a base from 2013 in Nagoya, about mid-way between Tokyo and Osaka, and statements made on Twitter in Sep-2012 from Mr Fernandes about his visit to Nagoya - including meeting with the local government, constructing a low-cost terminal at the airport and what user fees would be - support an eventual entrance.

"I have just met the best airport company ever. Nagoya airport. CEO said we build an LCCT to what tax u want to pay. Wow. Love it," Mr Fernandes wrote in his typical Twitter patois.

Situated on Honshu, Nagoya is about 100 miles from Osaka and 200 from Tokyo yet supports its own catchment area as the fourth largest city after Tokyo (encompassing all of its wards), Yokohoma and Osaka. Being in the central area of the country, Nagoya supports a potential route network to the north and south, and indeed AirAsia Japan flagged initial destinations from a Nagoya base could include Fukuoka, Okinawa (Naha) and Sapporo, all of little surprise given they are existing AirAsia Japan destinations.

A base expansion in Nagoya by AirAsia Japan would represent the first base from one of the new LCCs in a city other than Japan's traditional Tokyo and Osaka heavyweights. While such catchment areas are certainly smaller, they can be more under-competitive with far greater fare stimulation availability.

AirAsia Japan's possible entry into Nagoya will be the first of many hub expansions for the LCCs, and it is possible Peach or even Jetstar Japan could open a new base before AirAsia Japan does. Okinawa (Naha), Japan's largest southernmost point, is a strong contender for the near future. Offering flights to the island getaway from assorted points around Japan would be popular, and being about 700 miles from Osaka and 1000 from Tokyo, it expands the range of southern international destinations the Japanese LCCs could serve, a boon for tourism. Its international potential makes it particularly attractive for Peach.

Okinawa is the 59th largest airport in the world based on available seats for 01-Oct-2012 to 07-Oct-2012, but 95% of capacity is in the domestic market. Okinawa is a mere two hours from coastal China, which has most of the country's wealthiest individuals with rising disposable incomes - and who look for a nature getaway from their polluted homes.

The Okinawa Government, prior to the Sep-2012 dispute over island territories, had been looking to meet with Chinese carriers to expand their service. With an open skies agreement between Japan and China, and an eventual simmering of relations over the current territorial dispute, the impact on tourism at Okinawa would be at a scale that cannot be processed today - although that could be said for many other Japanese cities and possible bases, too.

Peach wants to benefit from being a local brand

Each of the three LCCs is counting on brand to help differentiate themselves. Jetstar has pointed to its early success of being named in 2010 as one of the top 100 brands in the country. Itself and AirAsia Japan will look to ride on the success of their brands elsewhere in the region. Long-haul flights and connecting services will help.

Peach does not have those explicit advantages. Jetstar originated in Melbourne and AirAsia in Kuala Lumpur while the Peach brand was formed for the carrier. While seemingly perplexing - peaches are an expensive fruit in Japan - the brand has resonated well amongst women, who Peach say book the vast majority of leisure tickets and on Peach flights account for a higher percentage of passengers, 50%, than traditionally found on Japanese carriers (30%). Mr Murphy expects the market to favour a local brand. "We're not Asian. We're not Australian. We're Japanese," he said at the panel discussion.

But other markets have shown themselves to be oblivious of a brand's origin. Jetstar COO David Koczkar remarked that one study found that Singaporeans thought Jetstar was a Singaporean, not Australian, brand. While Japan was a brand-focused society, that has shifted, reducing any allegiance a discernible public may have.

LCCs are a group of carriers where the winning factor is typically price, not branding, which is weak overall in aviation. Peach may be able to offer a Japanese-styled menu onboard flights, but AirAsia Japan and Jetstar Japan do that too, featuring miso soup and rice balls.

Airlines call for a more LCC-friendly regulatory environment

The three LCCs are reporting early success and results ahead of expectations, albeit with few quantifiable metrics, although Mr Fernandes disclosed AirAsia Japan made a profit to an untold sum in its first month (Aug-2012) of operations. Ms Suzuki said Jetstar Japan had under-estimated ancillary revenue. "I wasn't expecting any ancillary revenue because these flights are one, one and a half hours long. But in fact ancillary is way above expectations," she said on a panel at the CAPA conference.

"Significant revenue", she said, is supplied by fees from changing date and flight times, a popular practice in Japan. Baggage fees, a staple of other LCCs, are low; even before the entry of LCCs, Japan was known as an efficient bag-packing market. Jetstar Japan also has a late arrival fee in which passengers arriving late will be accommodated on another flight if they select the JPY3000 (USD38) add-on during booking, otherwise they have to buy a new ticket.

But Japan is hardly as efficient a market as it could be. Mr Murphy cited restrictions prohibiting Peach from boarding through front and rear doors while AirAsia Group head customer experience and technology Zaman Ahmad remarked at the CAPA conference that AirAsia's typical 25 minute turnaround cannot be achieved in Japan owing to regulations that prohibit Japanese carriers from boarding passengers while re-fuelling (a Jetstar Japan A320 for example could not board and re-fuel in Japan while a Jetstar Asia A320 in Japan could).

Ms Suzuki noted Jetstar Japan recently hired a pilot with 8000 hours of experience but noted the pilot still had to complete 24 hours of training. She added different regulators - increasing bureaucracy and negotiations - cover airport runways and terminals. "I've never seen a passenger who uses the airport runway but doesn't use the airport terminal," Ms Suzuki said light-heartedly.

The combined effect has been a hit - well expected - to a LCC's heart: CASK. "It's taken AirAsia back a bit," Mr Ahmad remarked. AirAsia has one of the lowest costs in the world of reporting carriers. The three new Japanese LCCs do not disclose CASK although ANA has previously said that based on a 10 aircraft fleet, AirAsia Japan could have a CASK of JPY6 (USD7.7 cents) in 2013 or 2014.

What the carriers have not been able to anticipate are the anecdotal changes of how the LCCs are changing daily life in Japan, which Ms Suzuki said did not previously include flying owing to high cost and limited competition. Peach has promoted previously unthinkable day trips to Seoul for shopping and as recent as Sep-2012 had a sale focused exclusively on day trips. Mr Ahmad cited a 16-strong school football team travelling from Tokyo Narita to Sapporo to participate in a match for the day.

Further regulatory change - Japan has already undergone a seismic re-thinking - will only increase potential and ensure Japan's once sleepy market becomes dynamic for years to come as airlines, with their nuances, respond to and create demand. And with even greater implications, this process will be watched - and replicated - in nascent markets.

Background information

New Japanese LCC snapshot: Aug-2012

	AirAsia Japan	Jetstar Japan	Peach Aviation
Ownership	ANA (67%) & AirAsia 33% (voting-right share basis); ANA (51%) & AirAsia 49% (capital basis)	Qantas/Jetstar (33.3%) JAL (33.3%) Mitsubishi Corp (16.7%) TC Lease (16.7%)	All Nippon Airways: (38.67%) First Eastern Aviation Holdings Limited: (33.33%) Japanese Investment Group - Innovation Network Corp: 28.00%
Capital	JPY5 billion (paid in) with initial capitalisation of JPY1 billion	JPY4800 million (Registered capital)	JPY30.1 billion before capital increase. JPY15 billion after a JPY7.52 billion capital increase in Nov-2011
Launch	01-Aug-2012	03-Jul-2012	01-Mar-2012
Hub	Tokyo Narita	Tokyo Narita	Osaka Kansai
Other base	n/a	Osaka Kansai	n/a
Launch fleet	Two 180-seat A320s	Three 180-seat A320s	Three 180-seat A320s
Current fleet	Two A320s	Three A320s	Four A320s
Projected fleet growth	30 aircraft by 2016	100 aircraft by 2020	50 aircraft by 2020
Route launches	Domestic: Narita-Fukuoka (01-Aug-2012) Narita-Sapporo (01-Aug-2012)	Domestic: Narita-Fukuoka (03-Jul-2012) Narita-Naha (09-Jul-2012) Narita-Osaka (09-Jul-2012) Narita-Sapporo (03-Jul-2012) Osaka-Fukuoka (24-Aug-2012) Osaka-Sapporo (24-Aug-2012)	Domestic: Kansai-Fukuoka (01-Mar-2012) Kansai-Kagoshmia (01-Apr-2012) Kansai-Nagasaki (25-Mar-2012) Kansai-Naha (18-Oct-2012) Kansai-Sapporo (01-Mar-2012) International: Kansai-Hong Kong (01-Jul-2012) Kansai-Seoul Incheon (08-May-2012) Kansai-Taipei Taoyuan (30-Sep-2012)
CEO	Kazuyuki Iwakata (formerly with ANA)	Miyuki Suzuki (non-airline sector)	Shinichi Inoue (formerly with ANA)

Source: CAPA - Centre for Aviation