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Industry watchers have been skeptical of Japan Airlines lately. On June 30, JAL announced it would issue stocks to raise much-needed cash, a move that has many wondering about the long-term prospects of the embattled carrier. A revealing point about the issuance is JAL neglected to inform shareholders before making the announcement — even though it held a shareholders’ meeting only two days before.

The bid to raise funds comes as yet another bad sign for the struggling company. Internal dissent by management-level employees forced a change in the executive board, and a series of safety gaffes — all fortunately without serious injury — have driven customers to rival ANA, which surpassed JAL as the nation’s leading carrier.

Not only does JAL have to play catch-up with its main competitor, it must also keep an eye on the new breed of carriers starting to make bold strides in domestic travel.

The Tokyo-Sapporo connection is estimated to be the world’s top money making route, with almost 100 arrivals and departures daily and as many as 9 million passengers per year. It has been a steady source of income for both JAL and ANA, but now it is being serviced by no fewer than four operators.

Skymark and AirDo have been waging a price war against their larger rivals. Because service is a minor factor on a 90-minute flight, the two have opted to compete on price.

Skymark introduced a 10,000 yen fare in April, about 40 percent less than normal. Initially, JAL and ANA refused to compete, but when they saw travelers move in droves to the upstarts, they had no choice but to follow. AirDo answered with a 9,000 yen ticket for Hokkaido residents.

But small airlines offering cheap prices and reduced service are nothing new. The global airline industry has seen drastic changes and the era of airlines like JAL has been eclipsed in many markets by the emergence of low-cost airlines like Ireland’s Ryanair, England’s EasyJet and many others. The business model of low prices and minimal services on high-volume routes has caused a revolution in Europe.

Another factor in the mix is the Cold War era military bases in both East and West, which have found new life as low-cost gateways. Startups have found these bases offer high-quality infrastructure at low prices. Similarly, lesser-known destinations like Charleroi, Belgium, a former coal town, have been “rediscovered” by low-cost airlines looking for airports with low usage fees.

The results have meant a boom for backwater towns. With U.S. military bases in Japan under review, such a transformation could happen in Japan as well, albeit to a lesser extent.

The battle between low cost and high service has also been taking place in Germany, with small player Air Berlin competing against national carrier Lufthansa. With a staff of 2,500, compared to 92,000 for Lufthansa, the tiny airline has become the second-largest in Germany, and one of Europe’s most popular airlines.

One aspect that has driven Air Berlin’s growth is its flexible booking system, which allows customers to easily reserve flights online. This approach also worked for Skymark and AirDo.

On top of the troubles at JAL and the changes in Japanese air travel, the airplanes themselves are due to change. JAL will phase out its Boeing 747s by the end of 2009. The 747 was a landmark design and one that symbolized the new age of air travel when it debuted in 1969. But the days of airplane design have reached a watershed: efficiency vs. volume.

Boeing has developed the new 7E7, also called the Dreamliner. The new plane flies higher, burns less gas and is quieter than the 747. It is also smaller, carrying fewer than 300 passengers compared to more than 500 on the 747.

Conversely, European rival Airbus will launch the new A380 by the end of the year, a behemoth that can carry up to 840 passengers.

Boeing has gambled that airlines will choose economy over size, and so far they are right: ANA has ordered 50 Dreamliners and JAL will buy 30 in 2008. Airbus, however, has sold no A380s in Japan — yet.

But will the difficulties at JAL offer Airbus an opportunity? Airbus would like to increase its 5 percent share of the Japanese market for airliners. And with intensifying competition in the low-price sector, an ultra-high volume plane like the A380 could be just the ticket.

A low-cost megashuttle on the Tokyo-Sapporo route is not hard to imagine. What is hard to predict in concrete terms is the future of carriers like JAL.

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