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All Nippon Airways widens LCC gap over Japan Airlines
ANA HOLDINGS INC (ANAHD) confirmed industry expectations in March when it announced the two low-cost carriers (LCC) in its portfolio would be merged into Japan’s biggest LCC by March 31, 2020. Read More » The process of integrating the carriers will start in the second half of fiscal year 2018 and be completed by March 2020.
The two ANA-related LCCs hold second and third places in Japan’s budget carrier rankings. Their combined sales in the current financial year to March 31, 2018 are 76 billion yen (US$716 million) overtaking Japan’s low-cost market leader, Jetstar Japan, a joint venture of Australia’s Qantas and Japan Airlines. AirAsia Japan is in fourth place.
“We have been considering combining the companies for some time,” said ANAHD president, Shinya Katanozaka. “Now is a good time because both companies’ business performance is healthy and inbound traffic to Japan is on a strong upward trend,” he said.
Peach Aviation, a consolidated subsidiary of ANAHD, is based at Osaka’s Kansai International Airport and was the first low-cost carrier to be launched in Japan – in March 2012. It operates 20 A320s on 15 domestic and 14 international routes. After the merger, the shareholders in the carriers will be ANA HOLDINGS (77.9%), First Eastern Holdings (7%) and Innovation Network (15.1%). For the 12 months to March 31 this year, Peach sales were 51.7 billion yen and net income was 4.9 billion yen.
Vanilla is fully owned by the ANA parent group. It rose from the ashes of an All Nippon Airways/AirAsia joint venture and has struggled to earn consistent profits. For the fiscal year to March 31, it reported an operating loss of 600 million yen. Its headquarters is at Greater Tokyo Narita Airport where it operates 14 A320s on seven domestic and seven international routes.
Plans for the integrated carrier include entry into the medium distance routes of seven to nine hours by 2020. Peach also has expressed interest in acquiring 13 new airplanes by 2020, which could include A321LRs.
ANAHD had previously announced plans to strengthen cooperation between the two carriers in the “2018-2022 fiscal year ANA Group Medium-Term Management Strategy” that was released in February. Rather than a merger, the strategy suggested the group was looking to launch a medium-haul low-cost carrier with a greater focus on the airline budget market.
However, signs of a merger of the two ANA LCCs have long been apparent. In February 2017, ANAHD reached agreement with the other two Peach Aviation shareholders to increase its shareholding to 67%, from 33.3%. The other joint venture partners, First Eastern Aviation Holdings and Innovation Network, reduced their equity to 17.9% and 15.1%, respectively.
In October last year there was another hint of change at Peach and Vanilla when ANA CEO, Yuji Hirako, revealed a plan to use ANA’s B767 aircraft on medium haul routes in Asia of up to eight hours as part of Peach and Vanilla’s networks. At the time, ANA operated 36 B767s.
At the March 23 press conference, the airline group made it clear that successful Peach would continue as a brand, which may not be the case for Vanilla.
Regional LCCs groups such as AirAsia and Jetstar are reporting annual sales ranging from US$1.8 billion to US$2.7 billion in the last 12 months. Consolidating Peach and Vanilla into one LCC will put ANAHD in a more competitive position in the region’s budget sector.
At present, international destinations served by Japanese LCCs are largely to South Korea and Taiwan with a few routes to Southeast Asia. By 2020, the group wants to include destinations on the Indian sub-continent in its network.
ANA aims to double its low-cost sales by 2022 and intends to widen its lead over arch rival, Japan Airlines (JAL), through the merger. JAL owns 30% of Jetstar Japan, but it has not fully immersed itself in the low-cost business.
“The possibility of a Peach/Vanilla merger was not a surprise at all because it appeared to be an established strategy ever since ANA launched Vanilla four years ago. ANA cannot have two similar LCCs within its portfolio,” said Japan Aviation Management Research’s chief analyst and director, Haruo Ushiba.
“My big concern is that JAL’s non-LCC minded attitude will put them far behind ANA’s aggressive LCC strategy. According to ANA’s new medium-term plan, the total ANA LCC fleet, including Peach Aviation and Vanilla, will increase to 55 by 2022. Sooner or later, the Japanese international LCC market, particularly Asian routes and even Hawaii, will grow to a nearly 50% of total market share, thanks to the new narrow body jets such as A321LRs. Flight length extensions and new airport capacity, especially at Narita, could make JAL’s present indecisiveness fatal.”
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