While uncertainty remains over when — or even if — travel demand will make a full recovery from the COVID-19 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 (LCCs).
But the moves 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 said Friday it will make Spring Airlines Japan Co. a consolidated subsidiary in June. The unit of major Chinese 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 a cautious stance on LCCs.
“The coronavirus pandemic is greatly changing the structure of air travel demand and consumer behavior, along with the market environment. We will promote reform to create a sustainable business structure,” JAL President Yuji Akasaka said at a news conference Friday on the company’s latest earnings.
“We will seriously cultivate the LCC market’s growth potential,” he said as the firm 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. While JAL posted a smaller net loss of ¥286.69 billion, 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 won’t 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 utilization efficiency. They offer nonfrill 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.
In that environment, JAL and ANA were able to coexist with LCCs without either firm 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.
It remains uncertain whether such momentum will return.
ANA President and CEO Shinya Katanozaka said ANA was becoming “smaller” to overcome the current crisis but will come out of it resilient.
“When the major banks extended subordinated loans (worth ¥400 billion 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 travelers 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 sector.
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. With JAL set to boost its investment in Spring Airlines Japan, major LCCs in Japan will belong to either JAL or ANA.
Hajime Tozaki, a professor well-versed in the airline industry at J.F. Oberlin University, said this may lead to a “proxy war” between the two groups.
“JAL and ANA are anxiously looking at what the other is aiming to do. The next step (following the initial COVID-19 shock) could be expanding (services for the charter of) business jets that have met robust demand, but there is a question mark over whether it should be the LCC business,” Tozaki said.
The yearlong delay in the Tokyo Olympics and Paralympics has added to difficulties for domestic airlines, which had 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 travelers to the nation hit a record 31.88 million in 2019 but plunged to 4.12 million last year. In 2030, the government plans to raise the number to 60 million.
JAL’s latest business plan, covering the five-year period through March 2026, shows that 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 travelers. Spring Airlines Japan will seek to launch direct flights to major Chinese cities while Jetstar Japan Co., a joint investment with Australia’s Qantas group, will mainly focus on domestic flights from Narita Airport near Tokyo.
Japanese airlines had faced little difficulty in turning profits as they rode waves of inbound tourism in recent years, but a long-term growth strategy is needed, according to Tozaki at J.F. 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 now forecasts global air traffic to reach 43% of 2019 levels in 2021, down from the 51% that had been expected.
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