Profit-hungry airlines court upscale passengers

by Yasushi Azuma

Kyodo News

From beer to automobiles, the market is teeming with various products and services dubbed “premium” — a seeming magic word among many Japanese consumers.

No exception, the airline industry is betting on high-end services to raise profits at a time when record-breaking crude oil prices are pushing up the cost of jet fuel.

On Dec. 1, Japan Airlines Corp. became the first carrier to offer first-class on a domestic flight when it installed 14 first-class seats on its flight connecting Tokyo’s Haneda airport and Osaka’s Itami airport. The flight time is only about one hour.

For an extra ¥8,000, JAL provides a comfortable reclining seat with various meal plans and other priority services for luggage and airport lounges.

“We have received a pretty good reputation for our first-class service from customers, with the 14 premium seats marking an average capacity rate of 85 percent in the first three months from December, beating our in-house target,” said Takeshi Umezu, manager of product and service planning for JAL’s domestic flights.

Although first-class is currently offered only on seven of JAL’s 15 flights connecting Tokyo and Osaka, the airline will make it available for all 15 flights in July.

JAL also plans to expand the first-class service to other cash-cow routes — flights connecting Haneda and Fukuoka airports on April 1 and Haneda and New Chitose Airport in Hokkaido on June 1.

To counter the move, All Nippon Airways Co. launched “premium class” service April 1 by upgrading its current “super seat premium” service.

Passengers flying premium class are charged an extra ¥7,000, which is discounted to between ¥2,000 to ¥5,000 if the ticket is purchased in advance.

Hideki Hoshi, manager of products and services marketing at ANA, said the new premium class service will likely attract many passengers because it will be available for most domestic flights, in contrast with JAL’s first-class service, which is now offered only for the Tokyo-Osaka flights.

On March 1, ANA started marketing 100 Premium Pass cards for ¥3 million each that allow passengers to fly premium class on any domestic flight without an additional charge. They sold out in about two weeks.

Though pricey, the prestigious passes were snapped up by frequent fliers, including corporate executives, doctors and lawyers. ANA has decided to issue an additional 50 Premium Pass cards.

Transport sector analysts said Japanese airlines are rushing to attract wealthy passengers by offering luxurious seats and better meal plans to fend off repeated fare hikes.

“Because consecutive hikes in airfare may dampen overall transport demand, airlines have no choice but to profit from upscale passengers,” said Yasuaki Kudamatsu, senior credit analyst at Mitsubishi UFJ Securities Co.

ANA will spend ¥1.6 billion to launch the new premium class service, which it projects will increase the airline’s annual profit by ¥3 billion.

JAL, struggling to turn around its business with the help of a fresh capital injection of around ¥150 billion from creditor banks and other business allies after falling into the red for the second straight year through business 2006, will invest several billion yen in its domestic first-class service.

The new first-class service is expected to boost annual profit by ¥4 billion eventually, although it forecasts the contribution will likely remain around ¥1 billion this business year through March 31.

“I think Japanese consumer trends are becoming polarized, reflecting a widening gap between the haves and the have-nots,” JAL’s Umezu said, adding there is a growing demand from upscale customers for top-grade services.

Analysts, however, are skeptical about the profit-boosting effects of such premium services.

Toshiyasu Ohashi, credit analyst at Daiwa Securities SMBC Co., said even if JAL and ANA raise profits in line with their forecasts for their premium services, the overall impact will be minimal.

“The strategy of enhancing services for upscale passengers is not wrong, but the two airlines are basically doing the same thing in a domestic market that has already matured and has little prospect for growth,” Ohashi said.

In addition to first-class, JAL is offering Class J seats, currently available on many domestic flights for a supplementary charge of ¥1,000.

ANA has no plans to introduce such a class on domestic flights, in addition to the economy and premium class services. “I wonder whether maintaining the three classes of service might not result in trimming total profits,” another ANA official said.

Ohashi said it is not so difficult for airlines to raise fares to cover rising jet fuel costs, compared with daily commodities, due to fixed business demand.

“After all, JAL’s first-class seats and the launch of ANA’s Premium Class are nothing but announcement effects to attract the attention of passengers,” he said.