Japan's LCC markets: Jetstar and Peach expand internationally
Japan's inbound tourism continues to expand rapidly, and the government has further growth targets. This may appear to be ideal for Japan's growing LCC sector.
Japan's LCCs are expanding internationally, although in recent times they have been maintaining balance with domestic flying. Peach is Japan's largest international LCC and is nearly twice the size of the second largest, Vanilla Air, with which it will merge. Yet the largest LCC serving Japan is actually a foreign one: Jeju Air.
International flying represents growth for Japan's LCCs, but there are significant challenges. Even though Japanese LCCs are low cost, they are medium and high cost compared to airlines from other countries - even full service Chinese airlines. Foreign airlines hold a geographical advantage for serving Japan's large network of underexploited secondary cities.
Summary
- Peach has Japan's largest international LCC footprint - nearly twice that of Vanilla Air.
- Japan's largest LCC presence is from a foreign airline: Jeju Air.
- Japan's LCCs are expanding internationally, but broadly in proportion to domestic expansion.
- Japanese LCCs have cost and geographical disadvantages for international expansion.
Peach Aviation is Japan's largest international LCC
Peach Aviation has Japan's largest homegrown LCC footprint measured in absolute size. In terms of balance between domestic and international, Peach and Vanilla have a matching proportion of their capacity in the international market.
Peach began international services in the same year as it launched (2012), whereas Jetstar Japan also began its domestic services in 2012 but did not fly internationally until 2015. The 2015 timeframe represents a delay due to regulatory challenges, but Jetstar Japan always expected that its main opportunity was in the domestic market, where its part-owner JAL is smaller than ANA, which invested in Peach. In contrast, Peach believed that its main opportunity was in the international market.
For 9M2018, Peach has 92% more international seats than Vanilla Air. Although Vanilla is one third the size of Jetstar Japan in the domestic market, Vanilla has almost twice as many seats in the international market as Jetstar Japan does.
Jetstar Japan, Peach and Vanilla Air international seat capacity: 2012-2017
In recent years the LCCs have slowed their rate of international expansion.
Since 2016, approximately 88% of Jetstar Japan's scheduled capacity has gone into the domestic market. In 2016 Vanilla Air was nearly balanced between domestic and international as 51% of its capacity was in the domestic market. This period included a fifth freedom Taipei-Ho Chi Minh service that proved unsustainable. Through wise rebalancing, domestic accounts for 58% of capacity in 9M2018.
Peach accelerated international growth in 2016 and 2017, when domestic exposure decreased from 70% in 2015 to 57% in 2017. 9M2018 domestic exposure continues to be at 57%.
Jetstar Japan, Peach and Vanilla Air domestic seat capacity as share of total: 2012-9M2018
Foreign LCCs are larger than Japan's home LCCs
Of the 10 largest LCCs serving Japan, only one - Peach Aviation - is a local airline. The largest and second largest LCCs serving Japan are foreign, both from Korea: Jeju Air and Jin. Peach Aviation will soon overtake Jin Air as Japan's second largest LCC, but there will need to be more time for Japan to claim one of its own as being the country's largest LCC.
Japan international LCC seat capacity by airline: week commencing 30-Apr-2018
The LCC trend of foreign airlines dominating the market reflects the broader trend of Japan. CAPA and OAG data indicate that local airlines account for only 25% of Japan's total international seat capacity. This contrasts to nearby Korea, where local airlines account for 68% of international seat capacity.
Japan share of international seat capacity by airline type: week commencing 30-Apr-2018
Korea share of international seat capacity by airline type: week commencing 30-Apr-2018
Japan's LCCs have disadvantages for international services
Japan's inbound tourism is booming, and the government has set aggressive growth targets. This may seem like ideal conditions for growth, but although it is an advantage, Japanese LCCs have structural disadvantages when flying internationally. Inbound visitors to Japan are a larger growth market than outbound Japanese travel.
Financially, Japanese cost bases are undeniably high. A Japanese LCC cost base can be comparable to a full service airline from China, which is Japan's largest source of foreign visitors.
Geographically, Japanese LCCs are disadvantaged in linking Japan's secondary cities with foreign cities. It is these secondary cities that have high growth opportunity due to underpenetration and availability of slots. Foreign LCCs are well placed to fly from their major home city to a smaller Japanese city, turn around, and return home. Japanese LCCs will have some smaller bases, but adding international operations will introduce complexity and cost.
Taiwan is the largest market for Japan's LCCs
Given the large presence of Korea's LCCs in Japan, it is unsurprising that Japanese LCCs do not have an overwhelming focus on Korea. The Korean LCCs served the market first, they have a lower cost base, they are the home carriers of the larger market (there are more Koreans travelling to Japan than Japanese travelling to Korea), and they have an advantage serving smaller Japanese cities.
Peach's largest market is Taiwan. Taiwan has an even stronger cost advantage compared to Japan than Korea has ahead of Japan. But Taiwan's later and smaller LCC development has created room for Peach, Jetstar Japan and Vanilla Air. Jetstar Japan's three largest international markets are served equally. Taiwan is the largest market for Vanilla Air.
Peach Aviation international seat capacity by market: week commencing 30-Apr-2018
At Vanilla Air Taiwan dominates the international footprint, since it accounts for 80% of international seat capacity. Hong Kong and the Philippines hold the balance.
Vanilla Air international seat capacity by market: Week commencing 30-Apr-2018
Jetstar Japan has Hong Kong, the Philippines and Taiwan in equal proportions, and a small footprint in mainland China. The only other Japanese LCC serving mainland China is Spring Airlines Japan. Spring Airlines Japan serves mainland China exclusively, and has not yet started services to other countries.
Jetstar Japan international seat capacity by market: week commencing 30-Apr-2018
Japanese LCC growth is challenged by Japan's high costs. Geography does not easily allow expansion further into Asia on the A320 platform.
Peach has been able to serve Bangkok by flying from Okinawa Naha in Japan's south, and is planning to reach further into Asia by using long range narrowbody aircraft such as the A321neoLR, including services from Japan's main cities (which are north of Okinawa). In contrast, Korean LCCs can reach further into Asia due to Seoul's geography.
Peach's A321neoLR development may point to the future for the region's international LCC growth. While intra-Northeast Asia markets have unmet demand, infrastructure, traffic rights and other political issues are precluding growth.