Japanese airlines eye low-cost to drive post-pandemic growth

While there is still plenty of uncertainty over when or if travel demand will make a full-fledged recovery from the coronavirus pandemic, Japan’s two major airlines are positioning themselves to take advantage of any upturn with a punt on low-cost services.

With leisure demand expected to recover much faster than business travel, ANA Holdings Inc and Japan Airlines Co are both strengthening ties with low-cost carriers (LCC).

But the move by the two airlines, which have established themselves as full-service carriers, could be a double-edged sword, aviation experts say.

ANA Holdings, the parent company of All Nippon Airways Co, is planning to launch a new LCC brand in the year to March 2023 with flights connecting Japan with Southeast Asia and Oceania.

Its domestic rival JAL, meanwhile, said on Friday it will make Spring Airlines Japan Co a consolidated subsidiary in June. The unit of China’s major LCC Spring Airlines Co will take its place in the JAL group alongside wholly owned budget airline Zipair Tokyo Inc, which started operations last year in the midst of the pandemic.

The two budget carriers reflect JAL’s strategic shift away from what used to be seen as the Japanese airline’s cautious stance on LCCs.

“The coronavirus pandemic is greatly changing the structure of air travel demand and consumer behaviour, along with the market environment. We will promote reform to create a sustainable business structure,” JAL President Yuji Akasaka said at a press conference on its latest earnings on Friday.

“We will seriously cultivate the LCC market with growth potential,” he said as JAL also unveiled a medium-term business plan.

The move to rethink both short-term and long-term strategies comes as both carriers continue to burn through cash and cut costs to stay afloat.

In the business year ended March 31, ANA Holdings reported a record net loss of 404.62 billion yen ($3.7 billion). While JAL posted a smaller net loss of 286.69 billion yen, it was its first red ink since its 2012 relisting.

But Shinya Hanaoka, a professor of aviation policy at the Tokyo Institute of Technology, warned that LCCs may only provide a stopgap solution.

“As a safe business strategy for the immediate future, they apparently choose LCC services. But such LCCs will not be sufficient to become a strong revenue source for the respective groups,” Hanaoka said.

LCCs typically focus on short-haul flights and high flight frequency per day or route to raise fleet utilisation efficiency. They offer non-frill services to keep costs at a bare minimum. But competition has been fierce in the market, which began in Japan when Peach Aviation Ltd, now an ANA subsidiary, began operations in 2012.

Before the pandemic, Japan’s air travel demand had been on a rising trend helped by a surge in foreign visitors, mainly from China, South Korea, Taiwan, Hong Kong as well as Southeast Asia, under the government’s initiatives to spur tourism as a pillar of its growth strategy.

Against this backdrop, JAL and ANA were able to coexist with LCCs without either losing a large chunk of business as the market itself became bigger, industry observers say.

In pre-pandemic 2019, LCCs held a 10% share of the market for domestic flights in Japan and about a quarter of that for international flights, according to Japanese government data.

But it is still uncertain whether such momentum will return.

ANA President and CEO Shinya Katanozaka said ANA is becoming “smaller” to overcome the current crisis but will come out of it resilient.

“When the major banks extended subordinated loans (worth 400 billion yen last year) to us, they did so because they had confidence in our profit outlook for the next five to seven years,” Katanozaka said.

ANA has seen Peach succeed in capturing demand from travellers from Taiwan, which likely served as a catalyst for launching its new LCC brand to serve a growing Southeast Asian market, according to Hanaoka, an expert in the LCC business.

Last year, AirAsia Japan Co, a unit of Malaysian budget airline AirAsia Group, decided to abolish all its routes, effectively closing down its Japan operations. As JAL is set to boost its investment in Spring Airlines Japan, major LCCs in Japan will now belong to either the JAL or ANA camp.

Hajime Tozaki, a professor well-versed in the airline industry at JF Oberlin University, said this may lead to a “proxy war” between the two groups.

“JAL and ANA are anxiously looking at what the other side is aiming to do. The next step (from the initial Covid-19 shock) can be expanding (services for the charter of) business jets that have met robust demand. But whether it should be the LCC business is a question mark,” Tozaki said.

Signs for social distancing are seen on seats at the arrival zone of Narita, east of Tokyo, on Nov 2, 2020. There are fewer passengers than usual at the airport amid the coronavirus outbreak in Japan. (Reuters photo)

The yearlong delay in the Tokyo Olympics and Paralympics has added to the woes of domestic airlines, which anticipated a windfall from the events. Japan is still scrambling to rein in infections with only three months to the major sporting event, which international spectators will not be allowed to attend.

The number of foreign travellers to Japan hit a record 31.88 million in 2019 but plunged to 4.12 million last year. In 2030, the Japanese government plans to bring the number up to 60 million.

JAL’s latest business plan covering the five-year period through March 2026 shows the carrier aims to draw clear business boundaries among the LCCs. Zipair will target Asia, the West Coast of the United States and Hawaii, a popular tourist destination for Japanese travellers. Spring Airlines Japan will seek to launch direct flights to major Chinese cities while Jetstar Japan Co, jointly invested with Australia’s Qantas group, will mainly focus on domestic flights from Narita airport near Tokyo.

Riding waves of inbound tourists in recent years, Japanese airlines faced little difficulty in turning profits but a long-term growth strategy is needed, according to Tozaki at JF Oberlin University.

Air travel is expected to see a recovery but it will likely take years to fully return to pre-pandemic levels. The International Air Transport Association forecasts global air traffic to reach 43% of 2019 levels in 2021, down from the 51% expected earlier.