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Aviation Industry Overview

11, 01. 2004

Current State

An Age of Two Major Airlines Begins in Japan with the Consolidation of JAL and JAS

The second passenger terminal of Haneda Airport where common use was startedon December 1,2004.
The second passenger terminal of Haneda Airport where common use was startedon December 1,2004.

As consolidations of airlines, centered on those in Europe and the United States, progressed one after another and international competition intensified, the 9.11 terrorist attacks that occurred in the US in September 2001 became a serious blow to airlines around the world. Japanese airlines were not exempted. Furthermore, the war against Iraq that began in March 2003 as well as the outbreak of the acute respiratory syndrome (SARS) and the bird flu made matters even worse. Air passenger traffic, focused around those for international flights, declined and sales fell sharply.

It was while such major tides were hitting that Japan Airlines Co., Ltd. (JAL) and Japan Air System Co., Ltd. (JAS) integrated their operations in October 2002 to establish Japan Airlines System Corporation (name changed to Japan Airlines Corporation in June 2004). The turnover of the new JAL Group was two trillion yen, bringing JAL to a number three position in the world. With this integration, an age of two major airlines (JAL and All Nippon Airways Co., Ltd., or ANA) began in Japan.

However, the future of these two major airlines in Japan may not be so rose colored. The consolidated results of the new JAL Group (for the year ending March 2004) reported a sharp decrease in its international passenger traffic, a mainstay of the group's revenues. JAL posted net losses of 88.6 billion yen for the fiscal year. This was the largest deficit ever for JAL, and as a result there were no dividends paid to shareholders. Meanwhile, partly because the proportion of domestic flights - which were unaffected - was high, ANA posted profits for the year through cost reductions despite the fact that turnover remained basically unchanged from the previous year. Although international passenger traffic is heading towards recovery in FY2004, the high appreciation of crude oil prices is working against profit-making.

Emerging Airlines Still Unable to Take Off Due to the Price War

Meanwhile, emerging airlines have been subjected to a fierce price war against the two major airlines, on top of which weak managerial planning and lack of funding have placed them under difficult circumstances. After competing against the major airlines, Hokkaido International Airlines Co., Ltd. (Air Do) fell into a severe business environment and filed for bankruptcy protection from creditors under the Civil Rehabilitation Law in June 2002. Air Do later concluded an alliance with ANA and is trying to rehabilitate its operations. As a result of this alliance, Air Do posted profits in FY2003, the first time for it to do so since the airline was founded in 1996.

The business environment for Skynet Asia Airways Co., Ltd. (headquarters in Miyazaki City), which operates flights between Tokyo's Haneda Airport and Kyushu's Miyazaki and Kumamoto airports, is similar to Air Do. The Industrial Revitalization Corporation of Japan (IRCJ) announced in June 2004 that it would support the rehabilitation of Skynet Asia Airways' operations. Corporate rehabilitation is said to be made through the development of new air routes.
Continued deficits were posted by Skymark Airlines (headquarters in Tokyo), and the airline was taken over by Internet service provider Zero Inc. (headquarters in Tokyo) in November 2004. Although the Haneda - Fukuoka and Haneda - Kagoshima routes are taking off, the expansion of routes does not seem at all easy to achieve.


Deregulation Proceeds in Stages From 1986

The basics of Japan's airline administration were that it regulated everything even down to the minute details. Licenses were granted per route, and the number of flights and even fares were subject to regulation. Airport landing slots were approved at the same time as the number of flights, etc. Furthermore, the monopolization of commercial passenger flights by three major airlines continued, and it was an industry that saw absolutely no competition. What changed this was movement that took place in the US. The Airline Deregulation Act was enacted in America in 1978, and entry by newcomers and the liberalization of fares gradually progressed. Discount fares were set, and fare levels dropped. Reorganization of the aviation industry in the US proceeded rapidly, including the failure of time-honored Pan American World Airways, Inc. in 1991.

In Japan, deregulation of the skies began in 1986. The system of segregating the route operations of the three airlines - international and domestic routes for JAL, overall domestic routes for ANA, and local domestic routes for Japan Air Systems - was abolished. In 1994, it was decided that a certain number of flights from Haneda Airport's landing slot would be allotted to companies with a late start, and air fares, which were based on an authorization system, were deregulated.

Aircraft maintenance hangar of All Nippon Airways Co.,Ltd.
Aircraft maintenance hangar of All Nippon Airways Co.,Ltd.

Skymark Airlines launched its Haneda - Fukuoka route in September 1998, and Air Do began operating flights between Haneda and New Chitose Airport (Hokkaido) in December the same year. In 2000, the setting of routes and changes in the number of flights were essentially liberalized, air fares also went from a permission system to a prior notification system. This was how airline deregulation proceeded in stages in Japan.

Three Key Points towards the Future

Point 1
How Much Liberalization Is Possible?

The lowering of air fares is still rapidly progressing in the US even after the 9.11 terrorist attacks. US Airways Group Inc. filed for bankruptcy in September 2004. Majors such as United Airlines and Delta Air Lines are all in a pinch. Traditional-style majors are becoming unable to compete in the price war being launched by discount airlines. There are many people in Japan who think that this is taking things too far, that this is cutthroat competition. Meanwhile, the United States is advocating an open sky policy in which air routes, the number of flights, etc. would be completely liberalized through bilateral agreements between countries. The US is pressing on Japan, too, to open its market. However, the conditions in Japan differ from those in the United States. Japan is a small country, there are few large-scale airports, and there is a lack of the basic infrastructure to support free competition in even landing slots. The style that competition and liberalization should take in Japan - one that differs from the US and is unique to the country - is coming into question.

Point 2
How Much Cost Reduction Can Be Achieved?

A Boeing 777, state-of-the-art passenger aircraft which Japan Airlines Corp. introduced, is taking off. B777s have been put into service also on the Europe line from August, 2003 taking advantage of the long cruising range of 14,390km.
A Boeing 777, state-of-the-art passenger aircraft which Japan Airlines Corp. introduced, is taking off. B777s have been put into service also on the Europe line from August, 2003 taking advantage of the long cruising range of 14,390km.

One of the reasons why Japan Airlines and Japan Air Systems integrated their operations was to thoroughly reduce expenses through integration. Personnel cutbacks are already in progress, centering on ground workers. In the United States, there are airlines that have implemented major reductions in the wages of pilots and flight attendants, extended working hours, and some that have almost completely discontinued inflight meal services. It looks as if the condition for survival will be whether Japanese airlines can make cost reductions while leaving no sanctuary.

Point 3
What Will the Expansion of Haneda Airport Bring About?

A new terminal building opened at Haneda Airport in December 2004. A fourth runway will be completed in 2009, and the characteristic of Haneda will become more that of an international airport rather than a domestic one. With the addition of a new runway, the number of takeoffs and landings will increase by over 40 percent, and a landing slot of 30,000 is planned to be newly created for international flights. The future enhancement of Haneda Airport will prove to be a blow for major international airports such as Narita, Kansai and Chubu (AKA Centrair, opening February 2005). It is expected that there will inevitably be airlines that will transfer their flights, with a focus on those serving Asian routes, from Narita to Haneda. It will also pose a threat to Kansai Airport, which is suffering a slump in use. It seems likely that how Haneda Airport will be utilized for both domestic and international flights will have a major impact on the airline strategies.

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