Low-cost carrier battle looms in Japan

AirAsia Japan is still flying under the control of ANA but it will be grounded in October. Its five A320s will be handed back to Fernandes. That reduces Japan’s budget market to two, the Japan Airlines (JAL)-Qantas-owned Jetstar Japan and another ANA offshoot, Peach. But ANA says it will re-launch AirAsia Japan under a new brand in December.

And Fernandes says he’s looking for a new local partner to get AirAsia Japan back into the skies over Mount Fuji. So where there were three, now two, by next year there could be four.

That many budget airlines in a market which, unlike most other places, has yet to prove it has a future, adds up to a red flag scenario and real potential for further failures. Japan is a latecomer to the genuine no-frills sector. Previous entrants such as Skymark and AirDo have not really been LCCs but hybrids. The Japanese culture remains very much welded to domestic full-service offerings with the high volume, frequent schedules of ANA and JAL.

The new breed of LCCs entered the market only last year and so far their fortunes have been mixed. AirAsia launched in August last year with an ambitious target to fill 80 per cent of its seats. The country’s industry average is actually a meagre 56.4 per cent. Even during this year’s Golden Week holidays, Japan’s primary travel season, AirAsia managed only a 67.6 per cent load factor. Jetstar hit 78.8 percent and Peach, which launched first and has been the best performing of all the LCCs, achieved 91.3 per cent.

Of course there are other factors making the budget road a tough path to travel in Japan. High costs for ground handling and airport charges don’t help. For AirAsia, the fact it operated from Narita, 64km from Tokyo central and not yet operating 24 hours a day, also made flying with the airline unattractive to potential customers. The proof came on the bottom line. It lost $31 million during its brief few months of flying last year and another $21.4 million in the first quarter of this year.

Other issues have also arisen concerning LCC operations. In July the Japanese National Consumer Affairs Center called for caution by users of low-cost carriers following a sharp rise in complaints about their services. It urged the airlines to make improvements. In the year ended March 31, according to the consumer body complaints related to LCCs more than quadrupled from the previous year to 579. They included complaints about unexpected charges, misleading information on websites and cases in which LCCs wrongfully refused consumer requests for refunds due to reservation cancellations caused by unilateral changes to flight schedules.

Fernandes remains insistent he believes there is a huge future in Japan for his brand. He is currently scouting for new partners and has suggested some employees of the original operation are interested in in taking a slice of any new venture. But he has also said he is in “no hurry” to relaunch, which is probably wise.

********Overall, Japan’s LCCs have managed to capture less than five per cent of the market.*********** All of this results in a puzzle.

Why, when it already has a budget operation – Peach – does ANA want to persist in relaunching a second player? Why not roll its now wholly-owned AirAsia Japan business into Peach and extend its operations to give it a larger, single market force? And given the obvious disadvantage of basing at Narita, why has ANA decided its new LCC will remain there?

“Japan’s LCCs have managed to capture less than five percent of the market.”

Despite all of that, it seems certain ANA will go ahead. It has already appointed a president for the new airline, former AirDo general manager for sales Tomonori Ishii. He will start with two planes and increase the fleet to five by March.

As for a name, it is interesting to note ANA has just spent $139.5 million acquiring Florida-based Pan Am Holdings, which operates the Pan Am International Flight Academy, as part of a move to strengthen its pilot training resources. Pan Am Japan? It’s only a thought.