Air Transport World

Domestic bliss?

Japanese new entrants Skymark, Air Do struggle against the Big Three for domestic market share while the government ponders its next move

The Japanese government last year opened the door to deregulating its domestic airline industry by granting operating authority to the first new airlines in 35 years: Skymark Airlines and Hokkaido International Airlines, also known as Air Do. Offering themselves as a welcome alternative to the country's three established carriers--Japan Airlines, All Nippon Airways, and Japan Air System--rather than targeting regional markets, the upstarts offered discounts of 35-50% on two of the busiest and most-profitable routes worldwide: Tokyo-Sapporo and Tokyo-Fukuoka.

In September 1998, Skymark, a subsidiary of one of Japan's largest travel agencies, HIS Travel, began flying from Tokyo to Fukuoka for a one-way fare of [yen]13,700 ($115) with two 767-300ERs. Passengers flocked aboard.

In December, Air Do, controlled by a leading poultry company on Japan's northern island of Hokkaido, began operations with one 767-300ER, charging a one-way fare of [yen]16,000 between Tokyo and Sapporo, the world's busiest route with more than 8 million passengers carried in 1998.

Predictably, loads for both carriers rocketed into the high 90% range during the early days. The established airlines, whose yields already were suffering from the Japanese recession, offered similar fares. Domestic passengers were ecstatic. So was Japan's Ministry of Transport, relieved to have found a way to placate air travelers and improve its image at the same time.

But by this past summer the novelty had worn off and the new airlines were in trouble. Many domestic passengers returned to the Big Three, who not only continue to offer affordable fares on trunk routes but are luring travelers back with more frequency and enhanced frequent-flier programs. Domestic loads at the three during this year's peak summer season were slightly better than last year, although revenues were down.

Meanwhile, Skymark and Air Do have yet to make a profit and their load factors have dropped precipitously, between 40% and 60%, causing competitors to speculate that the new entrants soon will exit permanently.

The Ministry of Transport has the power to prohibit the larger carriers from cutting fares to a point that perceivably could drive Skymark and Air Do Out of business, but it has not acted. Such intervention is unlikely for two reasons, according to knowledgeable observers of Japan's domestic airline scene.

First, the Ministry's Fair Trade Commission theoretically will not intervene until existing carriers cut fares by more than 50%, which hasn't happened. …

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