News Backgrounder
Skymark appoints new president after airline enters bankruptcy protection
February 1st 2015
In a dramatic turn of events for Japanese aviation, internet entrepreneur and president of Skymark Airlines, Shinichi Nishikubo, faced the inevitable and resigned from the carrier on January 29, 18 hours after the airline announced it would file for bankruptcy protection. Read More »
The 50-year-old's decision was quickly followed by the appointment of Skymark’s chief financial officer, Mazakazu Arimori, (58), as Nishikubo’s successor.
At a press conference called after his elevation to the top job, Arimori sought to reassure shareholders with the news that the Integral Group would provide interim financing so that the carrier could continue to operate as Japan’s third largest carrier. It is believed the private equity group is interested in investing in Skymark.
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| Skymark over extended itself when in introducing the A330 into its fleet |
After an extraordinary general meeting on January 28, the Skymark board filed for protection with the Tokyo District Court under the Civil Rehabilitation Law as it faced debts of 71 billion yen (US$603 million). Analysts said this amount could blow out to 100 billion yen when off balance sheet items were included.
Earlier in January, Skymark announced JAL and ANA, its fiercest rivals, came together to offer Skymark code-shares on key routes out of Haneda, with a starting date of March 29.
At the time, the partnership of the strange bedfellows was regarded as the financial lifeline that would sustain Skymark through its darkest hours. However, mounting debt, coupled with an impending compensation duel with Airbus over the cancellation of a US$2.2 billion order for six A380s, pushed the carrier beyond its financial limits. Airbus has filed notice of an intended suit in the British courts.
Skymark, based at Tokyo Haneda airport, was profitable for several years, but had been running at a loss for most of 2014, particularly after it incurred unanticipated high costs for the introduction of A330s on some of its 27 domestic routes. It is forecast to lose 13.6 billion yen for the year, to March 31, a figure that could go higher.
Skymark Airlines broke new ground in Japan’s highly regulated domestic airline industry when it set up in 1998 to challenge the dual supremacy of Japan Airlines (JAL) and All Nippon Airways (ANA).
After its years of success, when it offered lower fares than either JAL or ANA, the landscape changed with the arrival, in 2012, of local low-cost carriers and a consequent drop in its market share.
The situation was exacerbated by the start-up costs of adding A330s to its fleet and a commitment to six A380s.
Adding to the negative cash flow was a huge leap in the price of jet kerosene made worse by a declining Japanese yen. Almost all airline deals are done in US$ denominated currency. Negative publicity about its struggles did not help. Japan’s notoriously risk averse travelers increasingly went elsewhere.
The airline has been selling off assets, such as ground handling and training equipment, since mid-2014 and has been actively seeking investors prepared to finance it through its very rough patch.
Skymark has almost completed domestic route code share agreements at Tokyo’s Haneda Airport with JAL and ANA, which were predicted to add 16 billion yen to Skymark’s bottom line.
Before the bankruptcy decision was made, investors told Skymark that a successful sign-off of the code share deals was a pre-requisite for any funding support.
At the time of Arimori’s appointment, the airline said the code-share talks with JAL and ANA are continuing.
It is a highly unusual proposed arrangement, which in effect was intended to help their competitor survive. Skymark initially approached JAL last year on a possible code-share deal, to which the former flag carrier responded favorably.
But the Minister of Land, Infrastructure, Transport and Tourism (MLIT) was not comfortable with a JAL-only deal. In 2010, JAL had been saved by the previous government and backed by public funds. It would give JAL an unfair advantage, said the minister, Akihiro Ota.
How Skymark’s situation, which bears similarities to JAL’s position in 2010, will affect the proposed code-shares is yet to be played out.
The ministry went on to engineer a three-way deal, including ANA. A key element of the discussions was the MLIT’s guarantee that it would maintain Skymark’s Haneda slots indefinitely.
Slot allocations are usually reviewed every five years and a review was due in January. At press time, no change had been made about these assets, which allow Skymark to operate 36 services daily from the preferred downtown airport.
Haneda slots are a passport to profitability. Each one is worth between two billion and three billion yen in revenue. Not exactly licenses to print money, but close.
The three way code-share deal was being written to apply to five of Skymark’s Haneda routes: Sapporo (New Chitose), Fukuoka, Kobe, Kagoshima and Naha. Three of these routes, Fukuoka, Sapporo and Naha are in the top 12 busiest city pair routes in the world.
Starting with the 2015 summer season, ANA and JAL planned to put their codes on these five routes, selling just less than 20% of the seat capacity. More than 20% would mean a change of slot ownership.
Skymark’s triple code-share was planned to last five years. Industry sources estimated the deal will bring in eight billion yen annually to Skymark.
The carrier’s load factor in December was 54.5%, its worst performance since 2010. Load factors on the five Haneda routes had fallen below 70%, compared with the early 80s in more recent times.
Skymark saw the code-share deal as a way to maintain its independence. It had resisted investment from ANA, which would have turned it into another feeder carrier for Japan’s biggest airline. This has been the fate of other ‘new’ entrants in Japan since the mid-1990s, such as Solaseed, Starflyer and Air Do.
If joining ANA had happened, there would be the risk of higher domestic fares, which would be ironic, as Skymark launched into business on the crest of a wave calling for deregulation and cheaper fares in Japan.
| Skymark appoints insider as president Mazakazu Arimori, the 58-year-old successor to Shinichi Nishikubo as Skymark Airlines’ president, has come to his job in unusual circumstances. But he knows what is ahead of him. Until January 29, finance trained Arimori was managing director and a director of Skymark, positions he has held since 2010. He joined Skymark in 2004 as general manager accounting, after 25 years at leading Japanese finance sector firms, including Nikko Securities Co. Ltd, now SMBC Nikko Securities Inc. He was made a director and manager of the business planning office in 2005 before his promotion to managing director almost five years ago. |
