Japanese airlines eye low-cost services to operate a vehicle post-pandemic growth

While uncertainty remains over when -- or if -- travel demand can make a full-fledged recovery from the coronavirus pandemic, Japan's two major airlines are positioning themselves to take benefit of any upturn with a punt on low-cost services.

With leisure demand likely to recover considerably faster than business travel, ANA Holdings Inc and Japan Airlines Co are both strengthening ties with low-cost carriers.

But the move by both airlines, which have established themselves as full-service carriers, is actually a double-edged sword, aviation professionals say.

ANA Holdings, the parent company of most Nippon Airways Co, is likely to launch a fresh LCC brand in the entire year to March 2023 with flights connecting Japan with Southeast Asia and Oceania.

Its domestic rival JAL, meanwhile, said Friday it will make Spring Airlines Japan Co a consolidated subsidiary in June. The machine of China's major LCC Spring Airlines Co will need its place in the JAL group alongside wholly-owned budget airline Zipair Tokyo Inc, which started businesses last year in the midst of the pandemic.

Both budget carriers reflect JAL's strategic shift away from what used to be observed as japan airline's cautious stance on LCCs.

"The coronavirus pandemic is greatly changing the structure of air travel demand and consumer behavior, together with the market environment. We will promote reform to create a sustainable business structure," JAL President Yuji Akasaka said.

"We will seriously cultivate the LCC market with growth potential," he said as JAL also unveiled a medium-term business plan.

The proceed to rethink both short-term and long-term strategies comes as both carriers continue steadily to burn through cash and spend less to stay afloat.

Available year ended March 31, ANA Holdings reported an archive net loss of 404.62 billion yen ($3.7 billion). While JAL posted a smaller net loss of 286.69 billion yen, it had been its first red ink since its 2012 relisting.

But Shinya Hanaoka, a professor of aviation policy at the Tokyo Institute of Technology, warned that LCCs may only give a stopgap solution.

"As a safe business technique for the immediate future, they apparently choose LCC services. But such LCCs will not be sufficient to become strong earnings source for the respective groups," Hanaoka said.

LCCs typically give attention to short-haul flights and high flight frequency each day or path to raise fleet utilization efficiency. They offer non-frill services to keep costs at a bare minimum. But competition has been fierce available in the market, which commenced in Japan when Peach Aviation Ltd, now an ANA subsidiary, started out operations in 2012.

Prior to the pandemic, Japan's flights demand have been on a rising trend helped by a surge in foreign visitors, mainly from China, South Korea, Taiwan, Hong Kong as well as Southeast Asia, beneath the government's initiatives to spur tourism as a pillar of its growth strategy.

Against this backdrop, JAL and ANA were able to coexist with LCCs without either losing a sizable chunk of business as the marketplace itself became bigger, industry observers say.

In pre-pandemic 2019, LCCs held a 10 percent share of the marketplace for domestic flights in Japan and about a quarter of that for international flights, according to Japanese government data.

But it continues to be uncertain whether such momentum will return.

ANA President and CEO Shinya Katanozaka said ANA is now "smaller" to overcome the current crisis but should come from it resilient.

"When the major banks extended subordinated loans (worth 400 billion yen this past year) to us, they did so because that they had confidence in our profit outlook for the next five to seven years," Katanozaka said.

ANA has seen Peach flourish in capturing demand from travelers from Taiwan, which likely served as a catalyst for launching its new LCC brand to serve an evergrowing Southeast Asian market, according to Hanaoka, a specialist in the LCC business.

This past year, AirAsia Japan Co, a unit of Malaysian budget airline AirAsia Group, made a decision to abolish all its routes, effectively closing down its Japan operations. As JAL is set to improve its investment in Spring Airlines Japan, major LCCs in Japan will now participate in either the JAL or ANA camp.

Hajime Tozaki, a professor well-versed in the airline industry at J.F. Oberlin University, said this may lead to a "proxy war" between the two groups.

"JAL and ANA are anxiously looking at what the other side is looking to do. The next step (from the original COVID-19 shock) could be expanding (services for the charter of) business jets that contain met robust demand. But whether it should be the LCC business is a question mark," Tozaki said.

The yearlong delay in the Tokyo Olympics and Paralympics has put into the woes of domestic airlines, which anticipated a windfall from the events. Japan continues to be scrambling to rein in infections with only 90 days to the major sporting event, which international spectators will not be allowed to attend.

The number of foreign travelers to Japan hit an archive 31.88 million in 2019 but plunged to 4.12 million this past year. In 2030, the Japanese government plans to bring the number up to 60 million.

JAL's latest business plan within the five-year period through March 2026 shows the carrier aims to draw clear business boundaries among the LCCs. Zipair will target Asia, the West Coast of america and Hawaii, a favorite tourist destination for Japanese travelers. Spring Airlines Japan will seek to launch direct flights to major Chinese cities while Jetstar Japan Co, jointly invested with Australia's Qantas group, will mainly concentrate on domestic flights from Narita airport near Tokyo.

Riding waves of inbound tourists in recent years, Japanese airlines faced little difficulty in turning profits but a long-term growth strategy is necessary, according to Tozaki at J.F. Oberlin University.

Air travel is likely to see a recovery nonetheless it will probably take years to fully go back to pre-pandemic levels. The International Air Transport Association forecasts global air traffic to attain 43 percent of 2019 levels in 2021, down from the 51 percent expected earlier.