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All Nippon Airways and the A380: Airbus wins a new customer in return for invaluable Skymark support

All Nippon Airways is likely to become an A380 operator, with three aircraft due for delivery from 2018. Operating the A380 was not in ANA's plans. In fact, as ANA itself has itself stated, there are many arguments against taking A380s.

The aircraft order appears to be a trade-off: ANA won the last minute support of Airbus to vote for its restructuring plan of the bankrupt Skymark Airlines. There was little obvious reason for Airbus to back ANA, a tiny Airbus customer, over the alternative restructuring plan proposed by Delta, itself a major Airbus operator. It may be that in exchange for Airbus' support ANA agreed to do more business with Airbus.

Thanks to Airbus, ANA has gained not just Skymark, but perhaps more importantly, also ensured that Skymark did not go to Delta, which would have been a significant competitive threat. In doing so ANA calculates the benefit of having Skymark outweighs the trade-off of operating the A380s, which were not part of its fleet planning.

Airbus switched Skymark restructuring support from Delta to ANA, despite ANA not being a major Airbus customer

Skymark, which was Japan's third largest carrier, entered bankruptcy following mismanagement of its A330 expansion and the looming debt of pending A380 deliveries, a contract that Airbus cancelled when it determined (at a critical point in the production process) that Skymark would be unable to pay for them. Skymark was placed under rehabilitation led by Japanese investment firm Integral. A number of airlines put forward proposals to take a stake in Skymark and to be a partner in the rehabilitation.

Bidders for the failed airline included ANA, Delta, Hainan and Jetstar, among others.

The attraction was not just Skymark's licence, but also its 36 daily slot pairs (third largest after ANA and JAL) at the restricted airport Tokyo Haneda, and the potential for a partnership that would greatly boost the other carrier's presence in Japan.

ANA initially rejected any involvement that would mean taking A330s or A380s, either formally or through a gentleman's agreement. Skymark returned its A330s to lessors Intrepid and CIT (who accounted for 38% and 14% of Skymark's debt respectively) while it never actually received its A380s, some of which were in the production process, and still sit forlornly in Toulouse. Airbus accounted for 29% of Skymark's debt and Rolls-Royce (the powerplant supplier for the A380s) - 16%.

ANA's unwillingness to take aircraft as part of its involvement in Skymark appears to have prompted Airbus to state: "If Skymark submits the plan (that involves ANA's sponsorship), there is a significant and realistic risk that it would not be able to gain the support of major creditors, including Airbus".

Skymark creditors: Jul-2015

In the final vote, however, it was ANA that the creditors backed. The Japanese government certainly preferred a local partner over a foreign one (even if it was US airline Delta, from a stable trading partner), but it was the creditors who voted.

There was little risk for Airbus in offending ANA. There are only 11 Airbus aircraft in ANA's fleet (a 5% share), all low margin narrowbodies. There are a further 37 Airbus aircraft, also all narrowbodies, on order. ANA has stakes in other Japanese airlines that operate Airbus narrowbodies, including StarFlyer, Peach and Vanilla Air, but unofficially Airbus never saw these airlines as the major Airbus operator it wanted to secure in Boeing-heavy Japan.

Unusually for previously Boeing-dominated US airlines, Delta operates 162 Airbus aircraft, including 36 widebodies. Delta also has 56 Airbus widebodies on order, as well as narrowbodies on order. There are presumably further sales opportunities at Delta, unlike at ANA, where the future long haul fleet has been cemented around the 787 and 777X.

Without an understanding that ANA would help Airbus there would appear to have been little reason for Airbus to support ANA's plan at the expense of upsetting Delta. (This excludes the other candidates [Hainan and Jetstar] whose proposals did not even made it as far as Delta's, yet they are also bigger Airbus customers than ANA.)

See related reports:

A380s under other circumstances would not fit in ANA's fleet

ANA has many times in the past studied the A380 and passed on ordering it. ANA established its long term long haul fleet needs with an order for 20 777-9Xs to supplement 787s. ANA has 35 787-8s and nine -9s in service, with one more -8 on order, 35 -9s on order, and three -10s on order. Between Mar-2014 and Jan-2015, ANA placed orders for 85 aircraft, including narrowbodies.

ANA aircraft orders: Mar-2014 to Jan-2015

Included in ANA's orders is planned replacement - such as 787s replacing 767s, 777Xs replacing current 777s - but also growth to bring the group fleet from 255 in Mar-2016 to 305 in Mar-2021, including LCCs. At ANA mainline growth was last projected to occur from 235 to 265.

The defining widebody type of aircraft is the 787, a strategy designed to let ANA take advantage of its geography and serve secondary long haul markets non-stop, while also having high frequency on trunk routes. Further, ANA suffers from a cost base disadvantage; it is Asia's highest cost airline, which ultimately limits where it can grow.

ANA Group projected fleet composition: Mar-2016 to Mar-2021

In the core trans-Pacific market that ANA competes in, frequency, not capacity per se, has been a key competitive factor - led by Cathay Pacific, which has four daily flights to Los Angeles, and five daily flights to New York City (three non-stop to JFK, one to JFK via Vancouver, and one to Newark).

Air China, an emerging long haul heavyweight, has upwards of three daily flights to Los Angeles. Tellingly, China Southern in 2015 evaluated deploying its A380 to New York or introducing a second daily frequency.

It chose second daily, despite having slack in its underutilised A380 fleet.

See related report: China Southern Airlines may deploy A380 to New York City to accelerate US east coast development

Asia-North America destinations by carrier: North American destinations for Asian and Gulf carriers (red and tan), Asian destinations for North American carriers (blue): 12-Oct-2015 to 18-Oct-2015

Asia-North America average weekly frequencies per destination by carrier: North American average frequency for Asian and Gulf carriers (red and tan), Asian average weekly frequency for North American carriers (blue): 12-Oct-2015 to 18-Oct-2015

ANA benefits from a fiercely loyal local market that prefers to travel on Japanese airlines, giving high point-to-point yields that ANA can supplement with discounted connecting traffic. Outbound Japanese travel, however, is declining and passengers of other nationalities do not have the same attachment to flying on a certain airline as ANA's core Japanese passengers are.

ANA has difficulty accessing markets, including China and India markets, which are staple connecting traffic sources for North America, since its cost base is so high. This ultimately limits potential. 777Xs and 787s allow ANA to deploy frequency, with the newest, cost-effective aircraft, while limiting capacity.

The A380 brings limited opportunities to help ANA overcome slot challenges. ANA has long haul hubs at Tokyo Narita and Tokyo Haneda. Narita is no longer slot limited the way it was a decade ago; more slots have been created while carriers have shifted capacity from Narita to Haneda. At Haneda, international slots are allocated by the government to a specific country. ANA cannot redeploy its slots freely, at will.

The A380 is not ideal for ANA to improve connectivity

Haneda is the preferred airport for point-to-point business travellers, as well as those making domestic connections, since Narita has very limited domestic flights. Most of ANA's European services, and many of its Asian services, operate from Haneda, and these tend to include only limited sixth freedom traffic.

In comparison, ANA's USA network is mostly from Narita and carries far more sixth freedom connections than European services. Tokyo is a convenient hub between North America and other points in Asia, but from Europe Tokyo has not cultivated connecting hub status, since there are numerous direct options to other Asian countries.

Consolidating flights (possibly at the expense of frequency) does not necessarily allow ANA to add a flight to a new market. ANA has two daily Singapore flights from Haneda but at opposite times of the day, to facilitate business travel and two-way connectivity. There is some overlap with its double daily Singapore-Tokyo Narita flights, but Narita services are needed for two-way long haul connections. It is unlikely that ANA will be able to consolidate its long haul network to Tokyo Haneda any time soon, therefore it needs connecting flights at both airports.

Regional A380 use is hardly productive; other carriers do it to utilise ground time or, as in the case of Thai, they have found the originally intended deployment into long haul flying to be too challenging.

The share of ANA's Tokyo-area international flights departing from Haneda has increased from 8% in 1Q2006 to 43% in 1Q2016. This has occurred due to growth at Haneda. ANA's international Narita operation is as large as ever, even though Haneda is catching up in size.

Average daily ANA international flights from Tokyo Haneda and Tokyo Narita: 1Q2006-1Q2016

Another argument for the A380 is to upgauge without adding frequency. Many airlines have done this; Korean Air, for example, has preserved some trunk route frequency but increased capacity by upgauging. The A380's touted low cost base is relevant only if the aircraft can be filled. ANA would likely struggle to fill an A380 on trunk routes profitably.

Besides, ANA being the launch operator of the 787 and one of the first for the 777X means it will have newer and more efficient aircraft than carriers who evaluated the A380 against other types of aircraft, such as the 747-400 (which Korean Air replaced with A380s).

The introduction of the A380 brings the cost and complexity of an all-new widebody aircraft type. ANA's long haul fleet is built around the 777/787, which have some commonality. The A380 would be entirely separate, and would require ANA to establish its first (in its current era) Airbus widebody support.

Other airlines have more complex fleets, but simplicity has been an objective of ANA. ANA said of its simplified long haul fleet structure: "we will be able to streamline personnel training and assignment, such as for cockpit crew and mechanics, and generate cost savings by reducing inventories of aircraft maintenance parts and other items". The introduction of the A380 goes against those stated objectives.

ANA must find a way to make the A380s work – or minimise the impact

Like other airlines, ANA has probably identified a handful of routes that could justify an A380, based on variable costs, but performance is not strong enough, and the routes are not numerous enough, to cover the full costs of the flights, including acquisition and maintenance. Still, ANA's A380 situation is unlike any that of other carrier: having very large aircraft is not the objective. The A380s are the trade-off for ANA securing Skymark.

Thus ANA's evaluation is not whether the A380 is justified on its own, but whether the A380 can be offset by profits from Skymark. The calculation is probably impossible to quantify, where the alternative scenario is for Skymark to fall into the hands of Delta.

Delta has demonstrated its equity investments are not mere tokens; the airline turns its acquisitions into more sustainable operations, integrated into the Delta framework. Delta would likely have made Skymark far more efficient than ANA will ever be able to, as well as generating significant synergies. The threat of a third competitor in the domestic and long haul market was so great as to make any other option preferable. The complexity of an A380 operation, and possibly even of sustaining losses, becomes an acceptable trade-off.

See related reports:

Now ANA must work out where to deploy A380s, not because it wants to, but because it has to.

ANA, for its upcoming mid-term management plan debut, is expected to give more insight into its plans for the A380 operation. For now, press leaks have suggested Hawaii as a market for the A380s.

This immediately brings the A380 discussion to a different point: the leisure nature of the Hawaii market means that A380s cannot be optimally operated on both Hawaii and trunk routes.

Three A380s on Hawaii would be overkill, so other markets must come into focus, but it seems these will need to be outside the Pacific Ocean "beach" resort markets, since Hawaii is the only sizeable market in the region. CAPA has previously examined ANA's wish to gain a stronger footing in Hawaii and elsewhere, a market where JAL is still larger, despite ANA overall being larger than JAL.

ANA and JAL group seat capacity to Guam, Palau and Hawaii: 2015

See related report: Vanilla Air could give All Nippon Airways a larger group presence in Hawaii and Pacific Islands

There is a smaller impact for Vanilla Air, which had been considering Hawaii expansion

Establishing a larger ANA Group presence in Hawaii had been an option considered for ANA's wholly owned and newly established LCC, Vanilla Air. This would have been facilitated by giving widebodies to Vanilla Air. At one point there was consideration of Vanilla operating Skymark's former A330s. Vanilla had planned to double its fleet from eight A320s, at the end of 2015, to over 16 A320s by the end of 2018.

Vanilla may continue with this plan. A bolder move from the ANA Group would be to end the overlap between wholly owned Vanilla Air and partially owned Peach, consolidating the two into one LCC, but this may be too bold a step for ANA - and Peach's independent owners would extract a high rent.

See related reports:

Outlook: ANA must promote conservative strategy while Airbus still needs A380 promotion

The savings from combining two regional flights to an A380 and upgauging one or two long haul routes to an A380 does not justify the acquisition and programme cost of an all new widebody, let alone one whose size brings risk and does not have the same efficiency as other current and future aircraft in the fleet. Still -  this was never the calculation ANA was making.

A question is now whether ANA will expand beyond the three A380s it is said to have committed to. Three is a sub-optimal fleet size, and additional aircraft would bring scale – but perhaps will not find enough suitable markets to be justified.

There are wider issues from this scenario. The first is with ANA. There is already some concern that it is growing too fast, and in too many areas. ANA is partially looking to expedite growth while JAL, under bankruptcy exit conditions, is limited in making new investments, such as in routes.

ANA, having spent years as Japan's secondary carrier, wants to cement its position as the largest in Japan – and one of the largest in Asia. ANA still has considerable fleet growth coming in but there are concerns that it has started to exhaust its market options. One of its newest routes, Kuala Lumpur, is considered by some to be a stretch. Yet there will need to be more routes after Kuala Lumpur.

The easy North American opportunities have been taken; others will be more challenging and will put ANA under market conditions it has not encountered before. Meanwhile, ANA's international airline investment strategy has yet to make a solid move. Its first attempt with an airline in Myanmar was linked to a US sanctions list.

Deploying A380s on trunk long haul routes would raise concerns, so the suggestion that the aircraft will be deployed to Hawaii, and other unnamed points, at least may calm the doubters. ANA will be eager to promote the A380s as being tactical vehicles for specific markets, relatively isolated from competition. The main trans-Pacific Asia-North America market is suffering from overcapacity; recent capacity growth is already enough of a concern before vaulting A380s into the scene.

Yet a restricted use, predominantly on leisure routes is not the message of the future that Airbus would ideally like ANA's A380 order to connote: the prestige, iconic fleet member that characterised it initially. It would perhaps prefer ANA's use of the aircraft to result in other Asian carriers placing top-up or new A380 orders.

There could be many looking to find links and inflate far-fetched order scenarios resulting from ANA and the A380. Most airlines, however, will likely see the situation for what it is. Although a big name carrier that has previously resisted very large aircraft will now probably take the A380, it is unlikely to offer a new model for ANA's peers to follow.

Then again, timing is everything; Emirates' new use of the aircraft as an ultra-high density leisure vehicle may be a way for the future.

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