Rising Sun?

The statistics and forecasts tell the story. Over the past decade there have been significant declines in capacity between Japan and Australia. Last year direct capacity from Japan to Australia actually decreased by five per cent following limited growth in previous years.

The overall Japanese international outbound market declined in 2014 for the first time in five years.

And when it comes to projections, the forecasts have been suggestingthat tourism arrivals from Japan into Australia are likely to see growth of less than two per cent over the next five years. Compare that to China, where growth is expected to be a mouth-watering 23. 7 per cent. It hardly points to bedrock for a Japanled air travel boom.

But forecasts are mere forecasts and there may be a number of reason to believe air travel within, to and from Japan has a far brighter future than many believe. They include: >>An emerging low-cost airline domestic market, still in its embryo stages but if experience elsewhere is anything to go by set to spark renewed growth in both domestic and international travel.

>>Improving economic conditions that are already seeing a lift in corporate travel, both domestically and internationally.

>>Improved airport infrastructure and, in particular, the ongoing opening up of the once solely domestic Haneda airport in Tokyo to increasing numbers of international flights.

>>Reinvigorated local national airlines ANA and Japan Airlines (JAL), now both rolling in cash and churning out profits that are among the largest of airlines anywhere around the world.

All of this is coming together to spark renewed interest in the Japan market, both as a destination for inbound travellers and a source of outbound traffic. Already, airlines have seen improved load factors and yields on Japan routes and Australia’s experience is no different.

Presently, direct Australia-Japan air routes are a virtual monopoly for the oneworld alliance partners JAL, Qantas and its budget brand Jetstar. More than 40 per cent of Japanese visitors to Australia travelon Jetstar, with Qantas carrying 16 per cent and JAL14 per cent. The remaining 30 per cent travel between the two countries on one-stop services through other hubs such as Singapore, Hong Kong and Seoul.

The balance of power is about to shift. ANA, which last operated to Sydney in July 1999, will be back in the game on December 1 with a daily Boeing 787-9 Dreamliner service between Tokyo’s Haneda and Kingsford Smith. It is part of an expansion push by the Japanese operator and will be one of four new international destinations this year, having launched to Houston in June and with Kuala Lumpur to be added this month (September) and Brussels in October. ANA’s president and chief executive Osamu Shinobe says the new Sydney route will take full advantage of the convenience and comfort of Haneda, a hub for 42 of ANA’s domestic routes, as well as flights to North America, Europe and Asia.

In the meantime Qantas’s adjustment to its Japan flying is already underway. In August it launched a daily service from Sydney to Tokyo’s Haneda (replacing Sydney-Narita flights) and a new service from Brisbane to Tokyo Narita, almost doubling its capacity overnight.

Qantas International chief executive Gareth Evans said it marked a new era for the national carrier’s presence in Japan in the wake of a growing Australia-Japan travel market. “This significant capacity expansion has been extremely well-received by Qantas customers and especially by corporate travellers heading directly to downtown Tokyo, who can now save up to one and a half hours on their airport commute by flying into or out of Haneda. ” The significance of access to Haneda cannot be underestimated.

Traditionally, international travel

The number of Australians heading to Japan did rise by 22 per cent.

into Japan’s major gateway left passengers a long way from the city centre. Narita is some 65 kilometres from Tokyo and getting into town involved a very expensive taxi ride, a less expensive bus trip but through heavy traffic, or a one hour commute on the Narita Express train. Haneda is only 15km from the CBD andintroduction of its 787 Dreamliner – replacing Airbus A330s – on the Melbourne-Narita route in July, increasing the available seats between the two cities by 20 per cent over the next year.

But the arrival of ANA, which is now Japan’s largest airline, will certainly be welcomed by the local tourism industry. The number of Japanese visitors to Australia fell by 0. 1 per cent to 323,900 in the 12 months to May relative to the prior year, according to the latest arrivals data from the Australian Bureau of Statistics. That is well down on the 800,000-plus annual Japanese visitors to Australia in the mid-1990s and the low growth rate makes it one of the worstperforming inbound markets.

However, the number of Australians heading to Japan did rise by 22 per cent to 267,300 over the same period, apparently driven by factors such as a weak yen and the new Jetstar flights between Melbourne and Tokyo. The increase in capacity from the new ANA flights and Qantas’s Brisbane- Tokyo route could place pressure on fares, making it an even more attractive outbound destination for Australians. Japanese visits, meanwhile, are expected to be worth up to $3. 3 billion in economic income to Australia by 2020.

This resurgence in interest in Japan has been slow in coming but for the first time in years there are real signs that the Japanese market – and its airlines – are healthier than ever. In August, ANA reported a net profit of A$67. 5 million, for the first quarter of 2015, more than doubling the A$37. 6 million of the yearago period. The group’s mainline carrier, All Nippon Airways (ANA), said it was maintaining demand levels in its domestic network, despite new challenges from Japan’s high-speed rail system. Traffic, revenue and load factor all improved in the domestic network for thethree months ended June 30, an achievement given it was the first full quarter following the launch of a Shinkansen bullet train line from Tokyo to the Hokuriku region.

Overall, ANA grew its domestic revenue 2. 7 per cent as traffic rose 0. 7 per cent despite a 2. 5 per cent capacity reduction, and domestic load factor increased 2 per cent to 61. 2 per cent. In contrast, it has continued to grow its international network. With the increases in capacity international traffic rose 8. 5 per cent on capacity increases of only 2. 7 per cent. Increasing its focus on international air travel is at the heart of ANA’s long-term business strategy and it aims to increase its international flight revenue by 50 per cent in the next ten years.

Over at rival JAL net profit in the quarter also more than doubled on the back of a jump in tourist arrivals, particularly from China andSouth-East Asia, a weak yen and cheaper fuel. It reported a net profit of A$360 million as international capacity rose 2. 4 per cent and passenger numbers were up nearly nine per cent, resulting in a 4. 6 per cent international load factor improvement to 77. 9 per cent.

Domestically, JAL faces the same challenges as ANA and cut domestic capacity by one per cent during the quarter, with traffic remaining essentially flat. JAL (which just a few years ago was bankrupt) has left its full-year profit forecast unchanged since its last update in April, expecting a massive A$1. 6 billion net profit, although this would be down slightly from the previous year.

Internationally, the upswing is clearly showing up on Australia routes. Over 300,000 Japanese travel to Australia each year. It is an established destination both for traditional tourism and English studies. The numbers are finally on an upward trajectory. Visitors from Australia to Japan amounted to 302,656 visitors in 2014, an increase of 23. 8 per cent from the previous year and the number is rising. Economic ties between Japan and Australia are also strengthening, with an Economic Partnership Agreement (EPA) between Japan and Australia forged in January this year expected to increase business traffic in both directions.

Of course Japan is hardly pinning its hopes on Australasia to underpin the major growth it is hoping for in the air travel and tourism sector. When JAL announced its latest profits in late July it said visitor arrivals had surged as a weak yen puts more purchasing power in the hands of foreign tourists. “Due to robust inbound passenger demand, the number of visitors from overseas to Japan has increased significantly from the previous year. Oil prices, which greatly affect our fuel purchasing costs, have been low compared to the year before,” it added. Economic recovery is helping but the bulk of the increased international traffic is coming from the rest of Asia, not Australia.

The latest Japanese government statistics, for April to June, showed spending by foreign travellers totaled A$9. 8 billion, a record high thanks to Chinese spending small fortunes on Japanese-made products. By country, Chinese travellers spent the most, at A$3. 97 billion, 40. 3 percent of the total and up more than threefold from a year earlier. Travellers from Taiwan followed with A$1. 6 billion, South Koreans with A$714. 4 million and Hong Kong travellers with A$671 million. The government of Prime Minister Shinzo Abe has approved a revamped growth strategy under which it aims to double the amount of money foreign travellers spend in Japan over the next few years.

In the background of this brighter outlook and probably critical to a sustained recovery and expansion of both domestic and international air travel markets is an unknown: just how fast will Japan’s embryo lowcost airline sector grow and will it replicate the impact budget operators have had elsewhere? Will it bring a boom in first-time flyers who will then get a taste for further air travel, including a propensity to upscale onto full-service airlines? Most analysts believe that while it may take a little longer than in other markets – Japan for years has been an extremely conservative airline market where customers are slow to change – it is inevitable.

There are currently seven LCCs operating in Japan: Jetstar Japan (a joint venture between Qantas, JAL and Mitsubishi Corporation), Vanilla Air (owned by ANA), Peach(part-owned by ANA), Skymark (in financial trouble but about to be rescued by ANA), Solaseed (also part-owned by ANA), Star Flyer and Chinese-owned Spring Airlines Japan. An eighth, AirAsia Japan (part owned by Malaysia’s AirAsia group) plans to launch next year.

At present LCC penetration amounts to only around nine per cent of the total domestic air travel market, although Jetstar Japan is now the country’s fourth largest operator and holds some 60 per cent of the low fares travel market.

“There is still a lot of room for growth and we intend to cement our leadership position,” says Jetstar group chief executive Jayne Hrdlicka. Speaking at the CAPA Australia Pacific Aviation Summit in Sydney in August, she outlined some of the challenges involved in the budget sector in Japan, which requires a different approach from other markets.

“We’ve done a lot of really interesting things thinking about how you build new trust in the Japanese market. It’s an aviation market that has had no growth for over seven years. No trip growth. And we set about the task of bringing new trips into the marketplace and we did that from the first principle. We have 12,000 kiosks in convenience stores to sell tickets. It’s the only market in the world I’ve ever seen that done. It’s the only Jetstar business that does that. Why do we do that? Because that’s a comfortable place for Japanese consumers that think about their first trip. ” The carrier also has a mascot, a cuddly bear called Jetta, which appeals to the Japanese. “We’re the strongest brand in every market we operate in and in Japan we went from nothing to a very highly talked-about brand that’s known and loved in the marketplace quickly.

Why was that? Because we thought

It’s an aviation market that has had no growth for over seven years. JAYNE HRDLICKA

about the market through the eyes of the customer and built a brand from passion for bringing trips to the marketplace,” explained Hrdlicka.

“When you are building a new market from scratch in a market that is as traditional as Japan you need to come in through some traditional comfortable distribution position, and while we are definitely building a very savvy digital interface in Japan it’s going to see a big step change in the next six months. By December we’ll have a completely revamped digital interface across the whole Jetstar business, including Japan. But we also have to build trust and relevance and build the brand through more traditional means. So having a mascot, having social media tools… Jetta now has nine million followers on social media. . and we now have the first retail shop that is dedicated to merchandise in the new terminal at Narita. ” Hrdlicka says Jetstar is building for the long term in Japan, not just trying to take the low road and grab what it can. “We are genuinely building a long term footprint. ” Interestingly, she also points to the differences between Japan and other low-cost markets. In many ways, travellers are less sophisticated because they have not been used to LCC flying. Indeed, when Jetstar first launched its contact centre it crashed in the first couple of months because “we didn’t factor in the volume of calls and the time it would take to explain how to get to the airport, what you needed to take with you, how to think about the appropriate type of baggage. ” There is also a different travel profile. Older consumers are able to travel because they have the time and money to take longer trips. Among younger Japanese, who don’t get many holidays, there is a propensityfor short weekend or long weekend trips and not long trips.

Jetstar Japan, which has 20 aircraft, also launched internationally about six months ago with flights from Narita to Hong Kong (ironic given Hong Kong’s denial for the launch of a Jetstar Hong Kong – Hrdlicka says the choice of first international destination was no accident). It now also flies from Osaka to Hong Kong and it is likely that as the Japanese budget sector grows more and more of the country’s low-cost players will spread their wings offshore. “Our international footprint for Japan will be significant and important,” she adds.

It has not, however, been a smooth ride for Jetstar in Japan. The operation is still losing money. In November last year Qantas and JAL agreed to inject $120 million into the LCC to keep it going and Qantas in June looked at putting in a further $21 million sometime this year. Despite the lack of returns on investment both the big airlines are confident it will eventually pay dividends.

In June, at the International Air Transport Association (IATA) annual general meeting in Miami, JAL chairman Masaru Onishi did tell this writer the carrier wasn’t entirely satisfied. “Who would be satisfied with a red ink company?” he declared. “We are investors so we do not make comments about their business model, but as an investor we don’t like any red ink company. ” Nevertheless, Onishi did point out that when the joint venture with Qantas was originally signed off it was accepted there would be losses for a period of time. “It is a longer-term investment and Alan (Qantas CEO Alan Joyce) has confidence Jetstar Japan will be in the black. ” Onishi is more than keen to see Jetstar succeed and fly more internationally because he sees it as a critical vehicle in the Chinese market. “How can we (JAL mainline) compete with the very low cost of the Chinese airlines. They don’t care about supply and demand. There is a huge supply available and with ticket prices going down, how can we compete? We cannot, so Jetstar Japan must expand onto short-haul routes into China,” he said.

Also interesting on the budget front will be the future of LCC Skymark, which plunged into financial difficulty after ambitious plans that involved flying Airbus A380s on overseas routes. It ordered six of the big planes but then couldn’t pay for them and tried to pull out of the purchase. Airbus demanded a A$970 million cancellation fee after the airline was unable to keep up with payments. ANA and US operator Delta (with no alliance partner in Japan it was hoping to achieve better access to Japan’s domestic market) offered to lead a turnaround to get Skymark out of bankruptcy, but ANA won creditor backing in August to save the discount carrier. If it does so it will be interesting to see whether Skymark can become a major player and add strength to the proposition that the budget sector has big things ahead.

Given the uncertainties of the aviation sector and the propensity of airlines to move quickly between profit and loss, depending on market conditions and unexpected events, there are still many questions to answer about the future of Japan’s domestic and international airline scene. But the land of the Rising Sun, it’s rays having been clouded over the past decade by tough trading conditions, may well be on the verge of a new dawn. It’s an aviation market that has had no growth for over seven years.

JAYNE HRDLICKA there is even a monorail that can take passengers speedily into the city. JAL will continue to operate directly between Sydney and Narita but travellers can expect some good fare deals as Qantas and ANA fight to win the biggest share of Haneda traffic. Indeed, Qantas launched its Haneda services with A$899 return fares and ANA can be expected to at least match or even better this.

The big full-service carriers are not the only ones lifting their efforts in Japan. Qantas’s capacity increase followed Jetstar’s