'WE WILL RETURN' TO JAPAN SAYS AIRASIA'S BOSS

Fernandes refuses to be beaten after AirAsia Japan venture ends in tears

by CHIEF CORRESPONDENT, TOM BALLANTYNE  

July 1st 2013

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The opening of Japan’s skies to local low-cost carriers early last year was hailed as a major development in the country’s aviation market. Read More » Eighteen months later, one partnership has been dissolved and the remainder are facing difficulties not replicated by budget operators elsewhere in the region.

'We have not given up the dream of changing air travel in Japan and look forward to returning to the market'

Tony Fernandes Chief Executive AirAsia Group

The death knell tolled on AirAsia’s joint venture with All Nippon Airways (ANA) budget carrier, AirAsia Japan, in June when the partners signalled major disagreements about management of the airline, which has resulted in them going their separate ways.

The divorce came as no surprise. AirAsia Japan had been losing money from the start and was trailing behind its two competitors, Qantas Airways and Japan Airline’s (JAL) Jetstar Japan and another ANA budget subsidiary, Peach Aviation.

The AirAsia Japan brand will officially fold on October 31, but AirAsia Group chief executive, Tony Fernandes, is refusing to walk away from the market for good. “We have not given up the dream of changing air travel in Japan and look forward to returning to the market,” said the man who has developed successful AirAsia networks in Malaysia, Indonesia, Thailand and the Philippines.

“I have great respect for ANA as the leading legacy airline in Japan, but it is time for us to part ways and focus our attention on what we do best, which is running a true LCC.

“Despite the cost issues, the AirAsia brand has resonated with Japanese customers and the trend we see for July and August is very strong for all of Japan. I remain positive about the Japanese market and believe there is tremendous opportunity for an LCC to succeed, as proven by the success AirAsia X has achieved [the carrier flies from Kuala Lumpur to Tokyo and Osaka].”

The joint venture, created two years ago, faced many challenges after its launch, said Fernandes. “Issues stemmed from a fundamental difference of opinion between its shareholders on how the business should be managed - from cost management to the location of domestic business operations,” he said.

ANA said it would acquire AirAsia’s 49% share of the LCC, but the airline gave no details of rebranding.

“The impact of the dissolution of the joint venture on ANA Holdings is limited,” said the airline.

While no one can question the success of the AirAsia brand as it spreads its networks across the region, its Japan venture turned out to be a disaster.

'The lifestyle of the Japanese may be changing, but it will take a long time for LCCs to get market power'

Masaru Onishi Chairman Japan Airlines

Since its launch last year, AirAsia Japan has failed to track its proposed business plan because of an inability to manage costs. It has cost Fernandes dear. His group posted a fall of 39.23% in its first quarter profit this year, largely due to the loss-making Japan venture.

AirAsia Japan, with a fleet of four A320s, hasn’t been the only Japanese LCC finding the going tough. JAL’s joint venture with Qantas Airways, Jetstar Japan, has learnt that success in the local market is far from guaranteed.

With a fleet of 10 A320s and two more on order, it has also been losing money. Like AirAsia Japan, it suffers from operating from Narita airport, which is a long way from central Tokyo. The carriers are unable to gain access to the more centrally positioned Haneda airport, which would make for sense for an LCC. High airport charges also are a burden for the budget operators.

JAL chairman, Masaru Onishi, told Orient Aviation that Jetstar Japan “is aligned to my expectations”. From his demeanour, it was clear those expectations were not particularly high.

He said there had been little impact on JAL’s mainline operations from LCC competition. After more than a year, their domestic market share remained at a low 3%. Budget carriers have also not as yet launched significant international services.

Onishi said a major issue for LCCs was that the Japanese market differed to other parts of the world. “In North America and Europe people take longer vacations, a week or two weeks. Travellers don’t care about losing a day, but in Japan people take two or three days off so the loss of one day is a big issue for them,” he said.

“They love the punctuality [of the mainline carriers’ regular and frequent schedules] so this makes it a difficult situation for LCCs to attract them. The lifestyle of the Japanese may be changing, but it will take a long time for LCCs to get market power.”

The JAL chairman explained the three tiers that existed in Japanese airlines. The first tier is JAL and ANA with higher priced tickets. The second is the established small airlines such as Skymark, SkyNetAsia and Star Flyer with cheaper tickets. The third tier is the new LCCs Jetstar Japan, AirAsia Japan and Peach. The battle in the market, he said, is not between the major airlines and the LCCs, but between the second and third tier operators.

Ironically, the one LCC that is performing well is Peach, also part-owned by ANA. With a fleet of nine A320s, that will increase to 12 by the end of 2013, the carrier is based at Osaka’s Kansai airport. It will open a new hub at Okinawa to expand domestic operations and add international destinations to Southeast Asia.

Peach chief executive, Shinichi Inoue, told a recent aviation conference the carrier’s load factor averaged above 75%, which was better than expected. It recently carried its two millionth passenger, one month ahead of target. Executives say it is operating profitably.

Fernandes believed AirAsia Japan needed a chief executive who fully understood the low-cost business and not someone with a legacy airline background.

ANA officials said privately the budget carrier had struggled to fill as many seats as its local competitors. In Japan’s recent Golden Week holiday, traditionally a busy period, AirAsia Japan booked 67.6% of seats on its domestic flights. This compared to 91.3% with Peach and 78.8% with Jetstar Japan.