Since it opened 20 years ago, Kansai International Airport has operated under a massive debtload — a legacy of the costs of building the facility on a man-made island in Osaka Bay based on rosy business plans. Passenger demand went off target amid economic doldrums that followed the burst of the bubble just before it opened. In addition, the government’s wavering aviation policy left three airports servicing the greater Osaka area.
Now, with business picking up in recent years — thanks to the launch of new flights by budget airlines and a surge in the number of foreign passengers on the back of robust demand from fast-growing Asian economies — the government-owned operator of Kansai International plans to sell its management rights in a bid to repay debts.
While concern lingers that the high reserve price could deter potential buyers, there is hope that the introduction of private-sector business know-how in running the airport will improve its profitability. As the local business community expects, the sale of the airport’s management rights should serve as a test case for utilizing private-sector capital to help fund the nation’s public infrastructure.
The airport, which opened in 1994 with joint funding by the central and local governments and the business sector, was initially billed as a future hub of international flights in Asia. But its huge construction costs, well over ¥1 trillion, cast a pall over its operations. The initial plan to make an annual profit within five years, start paying dividends in nine years and pay off the debts in 23 years soon proved to be unrealistic.
Landing fees that were set high in accordance with the business plan resulted in the number of flights and passengers falling short of targets, leaving the airport saddled with ¥1.2 trillion in debts, including ¥946 billion in interest-bearing liabilities, 20 years later. The interest payments alone top ¥10 billion each year.
Much of the 20 years of Kansai International operations coincided with the “lost decades” after the burst of Japan’s economic bubble through the early 1990s. Construction had gone into full swing in the late 1980s just as the boom was pushing up costs. The post-bubble recovery of the Kansai economy proved slower than in the greater Tokyo area.
Events such as the 2001 terrorist attacks on the United States and spread of severe acute respiratory syndrome (SARS) also dampened international travel demand, pushing down the number of passengers on international flights to and from Kansai International from 12.85 million in 2000 to 8.54 million in 2003.
Frequent changes in aviation policy also added to management woes. It was initially thought that Osaka International Airport, popularly known as Itami airport — which was located in an urban area on the border between Osaka and Hyogo prefectures and caused severe jet noise problems — would be closed once Kansai International opened. But it remained open for domestic flights due to requests from local governments. Then Kobe Airport opened in 2006 as a project symbolizing the reconstruction of the port city from the 1995 Great Hanshin Earthquake.
To achieve a turnaround in the fortunes of the debt-laden airport, the government created a publicly funded New Kansai International Airport Co. in 2012 to run both Kansai International and Itami airport. The operator has announced plans to sell the management rights of the two airports for a lease of 45 years, with the minimum bid set at ¥2.2 trillion.
Many companies, including foreign firms, have reportedly expressed interest in bidding. The process to select the concession holder is set to begin shortly, and in June the current operator plans to choose the party — likely a consortium — to be given priority negotiation rights. The new operator will start running and servicing the runways, terminal buildings, and refueling and railway facilities as early as in January 2016.
The business trend in which private-sector firms operate public services is growing overseas. There have been cases in which private operators of airports have increased nonflight revenues through the establishment of restaurants, retail sales at terminals and so on — activities that enabled the operators to reduce landing fees and invite more flights.
The sale of management rights is also being considered at Sendai, Shin-Chitose, Shizuoka and Fukuoka airports, and the central government has a plan to have concession holders start operating at six airports across Japan by the end of fiscal 2016. How the bid for Kansai International evolves, and how its operation is expected to change as a result, should be closely monitored.
Business has indeed been picking up for Kansai International in recent years, with the number of foreign visitors rising on the back of the yen’s decline, easier visa requirements for tourists from Southeast Asian countries, and the launch of new flights to and from Asia by budget airlines. The number of passengers on international flights recovered to 12.05 million last year, with tourists from overseas hitting a record 4.96 million.
Budget airlines have come to account for roughly 20 percent of international flights using Kansai International. Since locally based Peach Aviation started flying out of Kansai in 2012, the current operator has actively sought to lure budget airlines by expanding exclusive terminals for them and offering landing fee discounts. Currently a weekly total of about 170 flights by domestic and overseas budget airlines service routes to East Asia and Oceania.
While long-range flights to U.S. and European destinations have continued to decline since the 1990s, Kansai International should have more potential to draw on growing travel demand from Asia, given its proximity to popular tourist destinations such as Kyoto, and the fact that it’s closer to many Asian cities than Narita or Haneda airports.
Local governments and business organizations should cooperate with the airport to work out a long-term strategy to attract more passengers not only from overseas but also from the Kansai region.
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