Big in Japan

‘JAL’s new LCC represents aprospective traffic bonus rather than a threat.’

Jetstar management had no need to worry. The new no-frills offering, yet to be named, will launch in 2020 with two Boeing B787 Dreamliners and its target are economy-minded travelers on medium to long-haul routes from Asia, Europe and the Americas. That, in fact, will be a help rather than a hindrance to Jetstar. Why? Because Qantas’ Japanese budget sector pacesetter has a totally different game plan from its rivals. While most scramble to expand their international networks, throwing more and more capacity into big growth markets such as China and India, Jetstar Japan has a heavy focus on domestic operations. That is where it continues to expand, feeding not only on local traffic but the growing number of inbound tourists feeding onto its flights from international destinations. Because of that, JAL’s new LCC represents a prospective traffic bonus rather than a threat.

“If you look at us, especially compared to some of the other LCCs in the market, we’ve got the same product but we’ve got different strategies,” explained Australian Nick Rohrlach, Chief Executive Adviser and Executive Director at Jetstar Japan. “We have been very focused on domestic. We just recently announced a new route to Nagasaki. We opened Miyasaki last year. We are opening domestic ports much faster that we are opening international and what we are seeing is a lot of stimulation in the secondary markets… we will definitely have more in that domestic sector.”

‘We’ve got the same product but we’ve got different strategies.’ Nick Rohrlach

He isn’t saying international is not important but points out a growing number of inbound tourists are arriving into Japan and connecting on to Jetstar for local flights. “You look, especially during Chinese New Year, all of our flights around are heavily focused on a lot of Chinese tourists flying around domestically as well. We play a role there in growing these smaller cities. That’s been our focus and I think that will be our focus, certainly for the next few years.”

The strategy is clearly seen in its network. While it has 12 domestic destination it has only four international routes, to Manila, Taipei, Hong Kong and Shanghai. The single Chinese destination clearly delineates it from rivals. Between them, for example, ANA’s Peach and Vanilla operate nearly 20 international routes.

Given that Japan’s internal air traffic is mature – the country actually has a declining population – Jetstar’s strategy may seem strange. But it is the inbound market that holds the promise. Already attracting more than 20 million inbound foreign tourists annually, the Japan National Tourism Organization has an ambitious target of lifting that to 40 million by 2020, the year of the Tokyo Olympic Games. After the Olympics, the government’s aim is to attract 60 million visitors a year by 2030.

It may not be so ambitious. It recently announced that the estimated number of foreign visitors to Japan from January to April this year topped 10 million, with growth at the fastest pace on record. It is expected that LCCs from China, South Korea, Taiwan, Hong Kong and South East Asia will be one of the key drivers of this growth. One of the reasons JAL may have decided to get in on the long-haul LCC budget game is that a growing number of foreign players are entering its market in that space. For example, in June last year Malaysia’s AirAsia X launched flights from Kuala Lumpur through Osaka to Hawaii. Then, in December, Singapore Airline’s Scoot followed suit with flights from Singapore to Osaka and on to Honolulu.

For Rohrlach and the team at Jetstar, the more foreign visitors the better because it represents a mouth-watering prospect. He has a strong background in strategic planning, starting his career in Australia’s Department of Finance and Administration, with a Bachelor of Commerce (Honours) in Finance, Management, Marketing from the University of Western Australia (UWA), then spending several years in The Boston Consulting Group in Sydney and Dubai before joining Qantas, where he became head of Strategy and Planning. It hasn’t all been plain sailing.

He was Executive Vice President of the ill-fated Jetstar Hong Kong, which ultimately failed to get an operating licence. But he went on to take on the job of Jetstar’s Executive Manager of Customer and Strategy, in charge of the overall customer experience and business roadmaps of all Jetstar branded airlines across the Group; Jetstar Airways (Australia and New Zealand), Jetstar Asia (Singapore), Jetstar Japan and Jetstar Pacific (Vietnam), before taking up the Tokyo post in September last year.

He says things are going well at Jetstar Japan. “We are still Japan’s number one LCC and have just taken delivery of our 22nd aircraft. We’ve had two years of profits now and have confirmed a couple of months ago that our first half (the Financial year is the same as Australia) was a record profit so hopefully we will be able to announce something similar for the full year in a few months’ time as well. Overall for us we see great growth in the business and great profits as we are coming up to our sixth anniversary. It’s pretty positive all round.”

That may be so but Jetstar does have challenges ahead, although it has put some behind it. Qantas and JAL initially each held a 33.3 per cent stake, with the remainder in the hands of Mitsubishi Corporation (16.7 per cent), and Century Tokyo Leasing Corporation (16.7 per cent).
In November 2013, Qantas and JAL each injected A$66 million of fresh capital, with both lifting their shares to 45.7 per cent. Then, in November 2014, the two agreed to inject a further A$66 million. These fresh injections were required to keep the carrier going but their confidence in the future has certainly paid off.

There are a number of budget operators in Japan but the market is dominated by Jetstar and LCCs of the rival All Nippon Airways (ANA) group, Peach and Vanilla. ANA announced recently that in 2020 it will merge Vanilla, which it wholly owns, with Peach, after increasing its stake in Peach from 67 per cent to 77.9 per cent at a cost of up to $107 million. The new entity will be called Peach. Will that knock Jetstar of its market-leading domestic perch?

“No,” says Rohrlach. “The first thing is we have a 50 per cent market share, so even when Peach and Vanilla merge we will still be bigger than the new Peach domestically. We will make sure we try and protect our number one domestic position. Obviously, they have a lot more international routes so we are actually behind both of them anyway in that sector so that will just take them further ahead of us from an international market share perspective. But we feel comfortable with that.

Obviously, I’d prefer them not to merge but I don’t get a say in it. Our main response will be to do what has worked for us, which is again a primary focus on domestic and I’m quite confident we will hold our position by doing what we’ve done so far, which is growing our existing routes and ensuring we have the best network and frequencies but then also looking for those new opportunities to secondary cities. Over the next few years we will be looking to add a few more domestic points as well. Hopefully through that process in a few years’ time when the new Peach emerges we’ll still have the biggest and best domestic network.”

There has also been a culture shift in the attitude towards budget flying in Japan. Many analysts predicted it wouldn’t succeed because the Japanese were too accustomed to the powerful full-service offerings of JAL and ANA, which had dominated the market for years. “That sort of headline was in every other market too,” says Rohrlach. “They said that in Australia back when Virgin Blue came in 1999. I think every market goes through that initial hesitation phase and then there are always, almost like a new technology, early adopters. But we’re right now into what I describe as the maturity stage. It is quite common now for people in Japan to fly LCCs. Is it everybody’s cup of tea? Of course not. Certainly, there are still people who hold out just in the same way that some people still prefer to go to bank counters.”

Today, Japan’s low-cost sector holds around 12 per cent of the market. Government forecasts predict this will rise to 30 per cent by 2030. “I am sure like any forecast you can probably find a range of people that have slightly different views to that. But as far as Jetstar is concerned we assume that is probably about right,” says Rohrlach. “The only thing that might hold us back in Japan is probably infrastructure.” As in many other countries around the region, major airports are heavily congested and suffer from slot constraints. However, Narita has recently announced it is expanding its terminals, lengthening its second runway and adding a third runway. Both Narita and Osaka now have LCC terminals and Nagoya is building a similar facility. Besides, away from the big hubs at Tokyo and Osaka, where Jetstar is venturing into many secondary locations, the congestion is nowhere near is bad.

International expansion certainly isn’t off Jetstars agenda but it is being extremely cautious on that front. “We’ve got the Shanghai route at the moment. We are facing competition from the other end in a lot of cases, so that includes Chinese LCCs coming in. We just have to pick the right battles. It is a matter of finding a market that will respond well to the Jetstar product, where we believe we can get the demand at the right price. Shanghai works for us. As a result, we probably haven’t gone to every single Chinese city. There’s a lot of demand out there but it’s got to be profitable. We are being selective. We are always looking at whether the next aircraft is going to be used domestically or internationally and so far most of those have gone to domestic. We will take it as each aircraft comes up and seeing where the right market is. So far, we have seen more domestic opportunities that international, including China.”

In terms of fleet, Jetstar’s business plan commits to 28 aircraft by next year, although it isn’t set in stone. “We have said publicly we are committed to 28 aircraft by 2019. We have a different style,” Rohrlach says. “They (Peach and Vanilla) talk about bigger numbers and longer term. We don’t discuss numbers beyond then but obviously we are going to look to grow and that alone would say that with my target of staying number one domestically we will have to do more than 28 aircraft.

We were looking at that plan anyway, independent of the merger. Frankly, there is actually enough room for both of us. We’d both have to grow quite a lot just for the industry to get close to that 30 per cent market share forecast. I think the biggest thing here is how we grow ourselves as opposed to what competitors are doing.” Peach currently operates 19 A320-200, with four more to come and an order in place for 10 A320 NEO. It has said it plans to boost its fleet to more than 50 post-merger and to add more routes as it looks to expand into medium-length international flights. Vanilla has 13 A320-200.

Another key to future growth for Jetstar is going to be a significant expansion of its code-share and interline arrangements, critical to expanding the feeder traffic it needs from international markets. At present, it only has three code-share agreements, not surprisingly with Qantas, Japan Airlines and American Airlines. There are also a number of interline pacts with other foreign carriers. Rohrlach says Jetstar Japan wants to replicate the highly successful strategy of its sister operator, Jetstar Asia in Singapore, which has a swathe of code-share and interline agreements with full-service carriers ranging from Qantas and Emirates Airline, to British Airways, Air France, Lufthansa, Turkish Airlines and China Southern Airlines. “We have the biggest domestic network out of Narita, even bigger than JAL or ANA, because this is our home base and domestic focus.

We see a few hundred passengers a day coming across not only our code-shares but also our interline connections. For Jetstar Asia they play a massive role in Changi obviously. We’re a few years behind that but we are seeing the same demand from other foreign airlines. The growth of other airlines coming in is all good for us because as Narita expands and other full-service airlines come in we would hope very much to replicate Jetstar Asia’s success in that sense.” Would Jetstar ever consider venturing into long-haul itself. “We look at all sorts of different things but given all the constraints in Japan I think the bigger opportunities for us are really going to be in domestic and really making sure that we stay number one as we get to 30 per cent LCC penetration,” he says.

While the future looks bright, no-one is pretending there won’t be challenges ahead. “Probably for the next year but also out to that 2030 view there is always going to be constraints,” says Rohralch. “The first thing of course is the resources generally here in Japan. We talk about it a lot. It is a declining population. Then of course aviation has very specialized resources. There is a lot of press attention on the pilot shortage. That’s a global problem obviously but here in Japan it is actually much broader than just pilots. For us, finding the right talent and the right resources at the right price is a challenge.

It’s hard enough for any LCC but I think it is going to be particularly hard in Japan. Also, this is a country which is usually a very good adopter of technology so it is now incumbent on us to meet that human capital challenge with IT and stuff like that. We’re trying to drive things like on-line check-in and kiosk usage. We are the first LCC here that allows you to check-in on your mobile phone and go straight to the gate. Those sort of things are even more important here than in other markets around the region. Responding to that resourcing challenge in smart ways is probably challenge number one, two and three on the list.

‘Responding to that resourcing challenge in smart ways is probably challenge number one.’ Nick Rohralch

Probably the second constraint obviously is airport infrastructure… this is obviously not China… we’re not able to throw up an airport in a year. This will be a really big challenge for Japan generally.”