How aviation can provide an economic spark for stricken Japan


If Japanese aviation is a window to the economic soul of the nation, then there is cause for some hope of renewal and rejuvenation. Demoted to third place by China in the world economic rankings, the Japanese economy has been gripped by low growth and deflation for two decades. Now seeking to recover from a devastating earthquake and tsunami, described by Prime Minister Naoto Kan as the country’s “worst disaster since World War II”, the challenge takes on a new dimension.

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.





Reduced international and domestic capacity by JAL. To date, this downsizing has not been effective in reducing unit costs, although in the more hospitable 2010 market, JAL was able to return to profitability. The carrier is not out of the woods yet though, with key unions reluctant to accept cutbacks and a persistent culture that is inconsistent with today’s operating conditions. Post-tsunami conditions may make the process of change more difficult for management.


The joint venture operations with Star Alliance (ANA-United Continental) and oneworld (JAL-American) begin in earnest with the Spring 2011 schedules and should stimulate new traffic flows and flexibility of service.


ANA and Star Alliance leader Lufthansa have applied for effectively the same type of immunity from competition laws to combine their Japan-Europe operations. This would give a boost to ANA (and Lufthansa), but EU competition authorities have not yet ruled on the application. The EU approvals had been expected mid-2011. However, Lufthansa’s CEO suggested in Mar-2011 that “current developments” might affect the planned alliance.

THE B787

ANA was the launch customer for the B787 and much of its international growth strategy was focussed on receiving the long-haul aircraft over two years ago. This has been fortuitous for JAL’s competitive standing, but, assuming the first aircraft begin arriving later this year, ANA will be able to take advantage of a wider range of international service opportunities.


Out of step with most of their international rivals in the Asia Pacific region, neither JAL nor ANA has previously adopted an LCC subsidiary. Japan’s powerful airline unions make this form of low-cost entry difficult, but ANA will launch a low-cost subsidiary JV with its Hong Kong-based partner, First Eastern, later this year. JAL has, however, said it will not go along this course, perhaps to avoid upsetting sensitive restructuring negotiations.


Japan’s largest – and only true independent low-cost airline – has been profitable and is expanding quickly. The privately owned carrier shook the market with orders for four A380s in Nov-2010, confirmed in Feb-2011. The successful domestic low-cost operator operates a fleet of 18 B737NGs on domestic routes.


Recent rumours point to foreign airlines, Australia’s Jetstar and China’s Spring Airlines among them, possibly establishing joint ventures with Japanese interests to operate domestic and international low-cost services. The current limit of foreign airline ownership is 30%, but this may (should) be under review. Otherwise, foreign carriers, including AirAsia, Tiger Airways and Cebu Pacific, are either operating into Japan, or plan to. Jetstar has been operating long-haul services from Australia for some time.


Tokyo Haneda Airport opened a new international terminal and an expanded second terminal in Oct-2010. Haneda will now take on more long-haul international services, reversing the previous understanding that Haneda handled only domestic and regional (intra-Asian) flights, while Narita handled international flights. Narita has since reported plans to increase its domestic air service network.


Many airports in Japan were built without consideration for demand or cost of construction. Combined with an aviation policy that made international operations to Japan’s regional airports difficult, this has left a major cost/debt overhang that is reflected in very high landing fees. It will be politically complex to allow these charges to be reduced, but the benefits to regional development if the airports become more attractive to new entry should add weight to the supporting arguments.

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