28-Jan-2013 11:35 AM

Peach holds strong, AirAsia Japan drops CEO & Jetstar Japan reduces Kansai; Nagoya new battleground

Analysis

AirAsia Japan and Jetstar Japan are about six months old now and already there is significant change at the fledging carriers: AirAsia Japan has switched CEOs after sagging performance while Jetstar Japan will reduce its second base at Osaka Kansai, the home of Peach Aviation, Japan's first new LCC, which launched in Mar-2012 - suggesting Peach has efficiently maintained its presence in Japan's second-largest metropolitan area.

Peach launched with services to a number of secondary cities whereas AirAsia and Jetstar entered only trunk routes. But now Jetstar will launch some secondary city routes of its own, suggesting an evolving route network strategy as well as responding to the market with agility, which airlines - especially in Japan - do not typically have strength in.

Finally, Jetstar looks as if it will steal AirAsia's thunder by opening a base in Nagoya, Japan's third-largest metropolitan area. AirAsia since nearly its launch has talked of a Nagoya base, making it likely Asia's two leading LCC groups will continue to battle head on in Japan.

Summary

AirAsia Japan has switched CEOs after underperforming compared to Jetstar Japan, which launched one month prior.
Jetstar Japan will reduce its operation at Osaka Kansai, suggesting Peach Aviation has maintained its presence in Japan's second-largest metropolitan area.
Jetstar Japan will launch routes to secondary cities, indicating an evolving route network strategy.
Jetstar Japan will open a base in Nagoya, Japan's third-largest metropolitan area, potentially competing with AirAsia Japan.
AirAsia Japan has had poor on-time performance and cancellation rates, as well as sagging load factors and yields.
Peach Aviation has achieved higher load factors and has expanded its distribution channels.

AirAsia Japan, lagging behind Jetstar Japan, appoints new CEO

AirAsia Japan received a jolt on 17-Dec-2012 with the resignation of CEO Kazuyuki Iwakata. Mr Iwakata was at the helm of AirAsia Japan since 2011 when the project was launched as a joint venture between ANA (51%) and AirAsia (49%). The abrupt change was smoothed over by Mr Iwakata taking up the position of chairman, largely a ceremonial one. In his place Yoshinori Odagiri was appointed, was previously AirAsia Japan's head of operations division and safety management.

Official statements about the change were vague, but in the mere four months since AirAsia Japan launched in Aug-2012, it had clearly under-performed compared to Jetstar Japan, which launched one month prior in Jul-2012. Both LCCs are based at Tokyo Narita and offer an almost identical route network. The core network - services on trunk routes to Fukuoka, Naha (Okinawa) and Sapporo - is the same but with Jetstar typically having greater frequency than AirAsia. Jetstar Japan also has a smaller operation at Osaka Kansai and AirAsia Japan in Oct-2012 launched international services to Seoul Incheon and later Busan, also in South Korea. Jetstar Japan remains an entirely domestic operation for now.

Daily domestic flights for AirAsia Japan, Jetstar Japan and Peach: Aug-2012*

Route	AirAsia Japan	Jetstar Japan	Peach
Fukuoka-Osaka	0	2	6
Fukuoka-Tokyo	4	8	0
Kagoshima-Osaka	0	0	4
Nagasaki-Osaka	0	0	4
Okinawa-Tokyo	2	4	0
Sapporo-Osaka	0	2	8
Sapporo-Tokyo	8	8	0
Tokyo-Osaka	0	4	0
Total	14	28	22

Jetstar Japan had a stronger launch than AirAsia Japan, beginning with an initial three A320 aircraft and building up to its present seven. AirAsia Japan launched with two A320s and as of Jan-2013 has three.

AirAsia and Jetstar launched during the peak summer travelling season and enjoyed high load factors before those fell as the off-season kicked in. Initial load factors would also have been higher given the extensive promotions ahead of their launches that included extremely low lead in fares.

The two had initial load factors in the mid-80s, well above the high-60s full-service incumbents ANA and JAL achieve. The loads at ANA and JAL held through the latter half of 2012, but based on historical trends will dip in the first half of 2013 before climbing again during the summer season. AirAsia and Jetstar saw their load factors change from nearly unprecedented highs for the Japanese domestic market to levels more similar to what ANA and JAL experience.

Select Japanese carriers' domestic load factors: Jul-2012 to Nov-2012

A critical difference, however, is that AirAsia's load factor dropped to around 10ppt below Jetstar's despite the two having a very similar network strategy. In Oct-2012 and Nov-2012 (latest months for which data is available), AirAsia even dropped around 8ppt lower than ANA and JAL, a somewhat worrying trend, as AirAsia's typical break-even load factor is significantly higher than the full-service carriers. Mr Iwakata's elevation to the position of chairman may have had something to do with this.

Peach Aviation has not released consistent month-by-month load factor performances but has said its first month of operations in Mar-2012 saw the carrier achieve a load factor of 83% while the average load factor across its network from Mar-2012 through Sep-2012 was 79%.

AirAsia has also had poor on-time performance and cancellation rates. ANA and JAL have on-time performance rates (within 15 minutes) typically in the high 90s, although this is at the expense of low utilisation rates. AirAsia Japan has been a stark contrast with local reports citing ministerial data of an on-time performance rate of 43%. Jetstar Japan has been at 74%, Peach 84% and Skymark 86%.

These poor operational figures as well as stories of substantial delays have received considerable attention in the local Japanese press, which has extensively reported on the formation and launch of the LCCs with impeccable detail. While some outlets are embracing the long-term potential of LCCs for Japan, others are firing short-term warning shots.

While AirAsia Japan and even Jetstar Japan have clearly had operational problems - for one, they have under-estimated their home hub of Tokyo Narita's 23:00h curfew (Peach's hub at Osaka Kansai has no curfew) - part of the problem is also that Japanese travellers have been exceptionally pampered, as they have been in other aspects of daily life. The near perfect on-time performance of ANA and JAL stands out, but this is nearly expected: the high-speed rail shinkansen is seldom late and apologies are often issued for trains running a mere few minutes behind schedule. This high performance at ANA and JAL has come at considerable costs, in terms of utilisation and other areas that the LCCs are now trying to strip away. AirAsia has clearly not found the balance while Peach and Skymark, with mid-80 precentages on time performance, appear to be doing better.

Nor have AirAsia's sagging load factors been compensated with higher yields; for the three months ending 30-Sep-2012 (again, the latest data available), AirAsia's yield was approximately the same as Jetstar's.

Japanese domestic carriers' yield: three months ending 30-Sep-2012

Passenger yield per RPK: JPY18.3 (USD 23.3 cents), -1.6%;

Japan Airlines: JPY18.9 (USD 24.0 cents), -0.5%;
All Nippon Airways: JPY19.0 (USD 24.2 cents), -1.0%;
Japan Transocean Air: JPY17.6 (USD 22.4 cents), +6.7%;
Skymark: JPY13.5 (USD 17.2 cents), -4.9%;
Air Do: JPY19.0 (USD 24.2 cents), -2.6%;
Solaseed: JPY14.5 (USD 18.4 cents), -11.0%;
StarFlyer: JPY17.9 (USD 22.8 cents), stable;
Peach: JPY9.7 (USD 12.3 cents);
Jetstar Japan: JPY7.9 (USD 10.1 cents);
AirAsia Japan: JPY8.0 (USD 10.2 cents);

Cancellation rates were also high at AirAsia Japan. The highest rate across Japan went to Japan Transocean Air (JTA), majority owned by JAL, with a 6.4% cancellation rate, but this was attributed to the typhoon that hit Okinawa, the hub of JTA. AirAsia Japan had a 3.5% cancellation rate while Jetstar Japan was at 1.4% and Peach 1.1%.

What went wrong at AirAsia Japan?

The market, looking for explanations on the performance of AirAsia Japan, has focused on the professional career of the former CEO, Mr Iwakata. A storied ANA veteran who joined the carrier in 1988, Mr Iwakata in 2010 was the head of strategic planning Asia Pacific, the very department that examined the potential of LCCs in Japan and created the base for how ANA could enter.

Some believe that Mr Iwakata was judged as a natural fit for the AirAsia Japan CEO position given his analysis of the market, but in the end did apparently not have enough of a naked LCC mindset after over two decades at full-service ANA, which can be a common problem in the industry. But his successor as AirAsia Japan CEO, Mr Odagiri, was also a member of the strategic planning Asia Pacific division before joining AirAsia Japan.

The CEO position at AirAsia Japan is not an easy one. Besides the typical competitive challenges, there is the need to balance the interests of ANA and the AirAsia Group. ANA has theoretical control with its 51% shareholding but, as is typically the case in these cross-border JVs, it is the branding airline (in this case, AirAsia) that seeks to control operational activities. Some strategic elements are even carried out at its main office in Kuala Lumpur. Cultural clashes are inevitable, given AirAsia's shoestring nature versus ANA's more bloated organisation. AirAsia Japan may have sought to reduce the number of hands involved when, at the time of the CEO switch, it reduced its directors from 10 to seven.

The ownership challenges are less at Peach and Jetstar Japan. Peach has a minority stake from ANA and is adamant, publicly at least, that ANA does not interfere. Jetstar Japan has the most formalised relationship with JAL and Australia's Jetstar Group, which are some of the investors in Jetstar Japan. The carrier replicates the Jetstar-Qantas "flying committee" to determine which unit should fly where in an effort to optimise profits and the strategy of each carrier. While this may be formal, it does not guarantee straight forward outcomes; negotiations can be extensive, but at least they are expected.

AirAsia Japan also may not have targeted its flights effectively. The carrier charged a JPY1,000 (USD11) fee for passengers checking in at counters as opposed to kiosks or online, before dropping it on 19-Dec-2012 in the wake of the CEO changeover. The carrier on 23-Jan-2013 expanded its distribution channels by accepting payments from half a dozen convenience store chains whose countless outlets dot the country. AirAsia Japan also incorporated payments direct from bank accounts. Credit cards are usually the staple of online ticket purchases but credit cards have a low take-up rate in Japan. Cash is popular, as are re-loadable chip cards associated with public transport but available for use at other stores.

Australia's Jetstar, which commenced long-haul services international operations to Japan mid-last decade, has had time to build up its distribution and its brand recognition. In launching Jetstar Japan, the Jetstar Group routinely noted its experience in the country and the Jetstar brand ranking in the top 100 in Japan, a respectable feat for a young and foreign airline.

Jetstar Japan reduces operation at Osaka Kansai, home to Peach

Adaptation to the market is also occurring at Jetstar Japan, which will nearly halve its operation at Osaka Kansai. Kansai was Jetstar's second base and operations from there were launched relatively quickly after its Jul-2012 launch. Despite there being flights from Kansai to destinations other than Tokyo Narita (Jetstar's other base), Kansai was not due to be formally incorporated as a base until 28-Oct-2012 with plans to station two A320s there by the end of 2012.

But from Mar-2013 Jetstar will reduce its Kansai presence, keeping all routes open but halving frequency, indicating performance has been impacted by the presence of Peach, which is based at Kansai and launched services there nearly five months before Jetstar. Peach's frequency exceeds that of Jetstar's current frequency, except on routes Peach does not serve (Narita-Sapporo, as Peach does not have a base there, and Narita-Kansai, as Peach is avoiding the hub of AirAsia Japan, believing there are other viable markets now).

Summary of Jetstar Japan frequency increases and decreases: 31-Mar-2013

Route	Current	After change	Peach frequency from Mar-2013*
Tokyo (Narita) = Sapporo (Shin Chitose)	3 return services/day	6 return services/day	0
Tokyo (Narita) = Osaka (Kansai)	3 return services/day	2 return services/day	0
Osaka (Kansai) = Sapporo (Shin Chitose)	3 return services/day	1 return service/day	5 return services/day
Osaka (Kansai) = Fukuoka (Fukuoka)	2 return services/day	1 return service/day	5 return services/day
Osaka (Kansai) = Okinawa (Naha)	2 return services/day	1 return service/day	4 return services/day

Jetstar Japan to enter secondary cities after focussing on trunk routes

The scaling down in Kansai will enable capacity to be re-deployed, including doubling Tokyo Narita-Sapporo service to six daily return flights. Jetstar will also launch two new routes from Tokyo Narita: Oita and Kagoshima in Kyushu in Japan's west. Oita is known as a cultural city while Kagoshima has a more nature bent to it. Peach has upwards of four daily flights to Kagoshima while no LCCs serve Oita.

Jetstar Japan new routes from Tokyo Narita: 31-Mar-2013

Route	Current	After change
Tokyo (Narita) = Oita (Oita)	New routes	2 return services/day
Tokyo (Narita) = Kagoshima (Kagoshima)	New routes	2 return services/day (From 31/5)

Kagoshima is Japan's seventh-largest domestic airport while Oita is much smaller, at 19th, although Peach serves Japan's 20th largest domestic airport, Ishigaki.

Top 20 Airports in Japan ranked on domestic seat capacity: 21-Jan-2013 to 27-Jan-2013

Rank	Airport		Total Seats
1	HND	Tokyo Haneda Airport	1,566,384
2	CTS	Sapporo Chitose Airport	450,450
3	FUK	Fukuoka Airport	392,289
4	OKA	Okinawa Naha Airport	356,909
5	ITM	Osaka Itami Airport	285,330
6	KIX	Osaka Kansai International Airport	159,785
7	KOJ	Kagoshima Airport	139,198
8	NRT	Tokyo Narita Airport	132,950
9	NGO	Nagoya Chubu Centrair International Airport	128,932
10	KMI	Miyazaki Airport	93,632
11	KMJ	Kumamoto Airport	86,073
12	NGS	Nagasaki Airport	79,004
13	SDJ	Sendai Airport	76,796
14	UKB	Kobe Airport	66,790
15	HIJ	Hiroshima International Airport	64,842
16	KKJ	Kita Kyushu Kokura Airport	56,994
17	KMQ	Komatsu Airport	56,850
18	MYJ	Matsuyama Airport	52,154
19	OIT	Oita Airport	45,400
20	ISG	Ishigaki Airport	43,004

Oita sees competition to Tokyo, but only at Haneda airport (Jetstar Japan will serve it from Narita). ANA, JAL and Solaseed all operate between Haneda and Oita, which is mainly a domestic airport with 99% capacity in the domestic market. Most domestic capacity is to Haneda, but there is also service to Nagoya and Osaka Itami.

Oita seat capacity by carrier: 21-Jan-2013 to 27-Jan-2013

Oita domestic routes ranked on seat capacity: 21-Jan-2013 to 27-Jan-2013

Kagoshima is also primarily a domestic airport with 98% of seat capacity within the domestic market. As with Oita, Kagoshima's largest route is to Tokyo, but its only service is to Haneda, Tokyo's more convenient downtown airport. LCCs are banking on their lower fares - as well as inexpensive ground transportation they are helping to pioneer - offsetting the longer trek to the airport.

Kagoshima seat capacity by carrier: 21-Jan-2013 to 27-Jan-2013

Kagoshima domestic routes ranked on seat capacity: 21-Jan-2013 to 27-Jan-2013

Jetstar's move away from trunk routes mirrors that of Peach (it was also inevitable), although Peach moved into secondary markets much earlier. In Jan-2013, about 31% of domestic seat capacity was outside of Japan's top six airports that collectively account for 65% of domestic capacity.

Peach domestic routes by seat capacity: 21-Jan-2013 to 27-Jan-2013

Jetstar Japan has acknowledged it may codeshare with JAL, with gains being particularly strong on regional sectors.

It remains to be seen if the codeshare will eventuate, and if some of Jetstar Japan's smaller routes would be suitable for JAL. Neither AirAsia Japan nor Peach intend to codeshare with ANA.

As CAPA previously wrote:

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".

Peach's secondary cities in Jan-2013 include Kagoshima and Nagasaki. From Mar-2013 Peach will expand to New Ishigaki and Sendai, at which point it will serve more secondary destinations than primary destinations (ranked exclusively on destinations and not capacity).

Nagoya to be new base for Jetstar - and AirAsia too?

Jetstar's re-deployment of capacity and expansion will also include its third base at Nagoya, about mid-way between Tokyo and Osaka. Destinations will include Fukuoka and Sapporo, which Jetstar serves from Narita and Kansai, giving scale. Jetstar will also link Nagoya with Kagoshima, which it will also serve from Narita.

The Nagoya base commences on 31-Mar-2013 and in advance of its opening Jetstar Japan will receive two A320s in Feb-2013.

Jetstar Japan Nagoya base network summary: 31-Mar-2013

Route	Current	After change
Nagoya (Chubu) = Fukuoka (Fukuoka)	New routes	2 return services/day
Nagoya (Chubu) = Sapporo (Shin Chitose)	New routes	2 return services/day
Nagoya (Chubu) = Kagoshima (Kagoshima)	New routes	2 return services/day (From 31/5)

Nagoya is Japan's ninth largest domestic airport but a more international one than others in the top ranking: only 53% of capacity is in the domestic market. International services include regional flights to China, Hong Kong, Singapore, South Korea and Thailand but also intercontinental service from Delta, Finnair and Lufthansa.

Other intercontinental airlines include Etihad (to/from Beijing, where the service continues to Abu Dhabi) and United (to/from Guam).

ANA is the heavyweight at Nagoya, controlling about 67% of domestic seats.

Nagoya Chubu Centrair International Airport domestic seat capacity by carrier: 21-Jan-2013 to 27-Jan-2013

As Nagoya is the sole airport serving the region, unlike Tokyo's Haneda and Narita or Osaka's Itami and Kansai, Jetstar's services will go head-to-head with those from incumbents. Jetstar will serve Sapporo and Fukuoka, which are respectively Nagoya's largest and third-largest destinations by available seats (second-largest is Okinawa Naha). Kagoshima is the sixth-largest route.

Nagoya domestic routes ranked on seat capacity: 21-Jan-2013 to 27-Jan-2013

Jetstar is taking the fight to AirAsia, which has discussed the possibility of a Nagoya base.

As CAPA previously wrote:

[AirAsia Japan] 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.

With Nagoya giving indications to AirAsia Japan it will construct a LCC terminal, it remains to be seen if Jetstar will be able to use the facility as well. Jetstar is unable to use the LCCT at Kansai built for Peach, a sore point for the carrier it had been seeking to address.

Peach is fortifying its Osaka Kansai base but also giving strong indications it will open a base at Okinawa Naha, which Peach currently serves from Kansai but will expand service with a Naha-New Ishigaki route. (A base at Naha is more likely than New Ishigaki.)

Still early days in Japan, but Peach holding the lead

After seeing the launch of three new LCCs in 2012 after years of stagnation, Japan is becoming a dynamic market, and the evolution of the new LCCs testifies to that. AirAsia Japan has got off to a slower start, and Jetstar Japan has suffered its own challenges. But to the surprise of many, Peach, which has been more reserved in publicity and outlook, seems to be faring the best, thanks to a combination of its Kansai base and route selections.

The LCCs have stressed how their pedigree (purely Japanese for Peach, the backing of larger pan-Asian LCC parents for AirAsia Japan and Jetstar Japan) gives them unique advantages, but the results so far are relatively muted. It is easy to put this down to the roles of the Japanese legacy airline partners in each of the new LCCs and undoubtedly these do raise their own unique issues. But, having remained oblivious to the charms of LCCs for a decade while Asia changed around them, Japanese consumers may also be taking a little longer to cross the lines and respond to price and opportunity incentives.

But despite some observers' scepticism, it is inevitable that this change in the not so distant future as Japan continues to understand and adapt to this new wave of competition. The eggs have been scrambled and will not easily fit back in their shells.