Budget airlines see turbulence as U.S. carriers evolve

by Keiichiro Otsuka

Kyodo

Taking off years ahead of their Japanese peers, U.S. budget airlines appear to have outgrown their strategy of undercutting competitors on fares and shifted attention to boosting profit margins by offering such options as luxurious seats and expanding overseas.

While it remains to be seen whether these U.S. examples portend what will happen in Japan, Japan’s low-cost carriers still rely on fare competition as their main tool for drawing passengers from rivals and traditional carriers in the still-growing market.

U.S. airlines can afford to raise ticket prices now that the market is getting a lift from the steadily recovering economy. This buoyant state of business is allowing budget carriers to provide increased value-added services and shore up fares, albeit at levels lower than what full-service airlines offer.

According to the U.S. Department of Transportation, per-passenger spending on domestic fares rose 1.6 percent last year to $381, rising for the fourth consecutive year.

In December, American Airlines and U.S. Airways merged into America’s largest carrier to meet the challenge posed by its two major rivals in the market — United Airlines and Delta — which had both expanded via mergers themselves in recent years. The emergence of three big aviation groups completed the consolidation of conventional U.S. carriers.

Having relied largely on low fares to spur demand, the budget airlines are apparently alarmed by the resurgence of the conventional carriers, who control the bulk of the aviation market.

On June 15, for example, JetBlue Airways Corp. introduced flat-bed seats and large monitors in its premium cabins for the business-oriented New York-Los Angeles service. These seats start at $599 for one-way flights, more than 40 percent lower than the premium fares offered by their full-service competitors, depending on the day.

On July 1, domestic stalwart Southwest Airlines Co. opened multiple international routes, its first expansion beyond the U.S. since its debut in 1971.

By contrast, the Japanese market for low-cost carriers is still in the expansion phase, and fare competition is heating up.

Spring Airlines Japan Co., a unit of China’s Spring Airlines Co., jumped into the fray on Aug. 1 by launching operations with three domestic routes from Narita International Airport to Takamatsu, Hiroshima and Saga.

Narita is a major battleground for budget airlines. It is also home to Jetstar Japan Co., owned partly by Japan Airlines Co., and Vanilla Air Inc., which is under the wing of ANA Holdings Inc.

Jetstar Japan has been using Kansai International Airport in Osaka as its second hub since June 12, flying to Sapporo, Narita, Fukuoka and Naha. It will add Oita to its domestic route map on Oct. 9.

Kansai International is the base airport of domestic LCC pioneer Peach Aviation Ltd., which opened for business in March 2012. On July 19, Peach inaugurated a Naha-Fukuoka service, turning the capital of Okinawa Prefecture into a second hub to extend its reach in west Japan.

Major Malaysian budget carrier AirAsia Bhd is set to re-enter the Japanese market next summer. Its new unit AirAsia Japan Co. is getting financial backing from Internet retailer Rakuten Inc., cosmetics maker Noevir Holdings Co. and two other Japanese firms.

AirAsia had previously partnered with ANA Holdings to set up identically named AirAsia Japan, which launched domestic flights in August 2012, but the partnership was dissolved in June 2013.

“We had differences in business plans, such as how to run the reservations website and how to market tickets,” an executive of ANA Holdings said. The former AirAsia was taken over by ANA Holdings and renamed Vanilla Air.

Skymark Airlines Inc., the first new carrier born from the deregulation of the Japanese airline industry in the 1990s, doesn’t view itself as a budget airline but nonetheless carved a niche for itself with budget flights. Flying since 1998, it is now facing stiff competition from the sudden wave of low-cost carriers.

In its latest financial statements for the April-June quarter, Skymark logged an unconsolidated net loss of ¥5.7 billion, expressing “material doubt” about its ability to stay afloat.

Skymark’s fate hinges on the outcome of its dispute with Airbus Industries SAS, which is demanding a hefty ¥70 billion charge for not honoring a contract to buy six Airbus 380s, the world’s biggest passenger aircraft.

Regarding the financial latitude enjoyed by the U.S. LCCs, an executive at a Japanese budget airline said, “To those of us exposed to this cut-throat fare war, they look like they are flying in a different sky.”

  • Jamie Bakeridge

    The JT needs to dig a little deeper on the reasons for the failure of the ANA AirAsia partnership. “Differences in business plans, the website and ticket marketing” only scratch the surface. The Financial Times cites very different and far more plausible reasons – namely that ANA were using the partnership to stifle the competitive threat of AirAsia against their own business and were using AirAsia as a vehicle simply to attack routes where JAL enjoyed the majority market share.