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Toward A New Era of Competition in Japan - the JAL/JAS merger Japan's much-anticipated airline merger between Japan Airlines (JAL) and Japan Air Systems (JAS), the first in three decades, is poised for take off this autumn, subject to the clearance of the Fair Trade Commission. The JAL/JAS combination will challenge the dominant position of All Nippon Airways (ANA) in the domestic market, where landing slots are a precious commodity. Tougher competition should result in better fares and improved service for customers at home, a market that boasts the world's busiest air route in the world linking Tokyo in Honshu to Sapporo to the north in Hokkaido. Overall, Japan's domestic market boasts around 90 million passengers per annum. Tokyo-Sapporo alone accounts for more than eight million travellers a year, a very large slice of the pie. JAL and JAS each now hold about a 25% share of the domestic market against ANA's 50 percent cut of the local business. Two Key Issues The merger involves two key industry issues At the top of the list is correcting the contradictions in the regulatory environment. In theory, the domestic competitive environment has been deregulated. Practically, largely because of shortages in capacity at key airports, it is hide-bound and restricted, leaving little choice for passengers on many domestic routes. The other concerns international operations: The wildcard is whether this historic consolidation also will put Japan's carriers in a better position to vie for a greater share of the international passenger market. Foreign carriers hold the majority 60% share. JAL and JAS contend that the merger will boost the competitiveness of Japanese airlines against foreign airlines, expand Japan's international network; and increase Japanese airlines' share of the international passenger market out of Japan. The problems facing the industry today are the outcome of the quirky post-war history of civil aviation development in Japan. Integration is the way to resolve these key issues simultaneously and is the logical outcome. First, a little history Civil aviation in Japan, grounded following Japan's defeat in 1945, resumed in October 1951, when the first Japan Air Lines took to the skies. Between 1952 and 1953, eight other domestic airlines appeared. Of these, four were eventually folded into ANA by 1967. The remaining four eventually merged to become, Toa Domestic Airlines (TDA) renamed Japan Air Systems in 1988. Aviation policy development During the 1960's, demand for air travel grew strongly as the Japanese economy surged and annual GNP growth soared, but Japan's airlines struggled to increase capacity, hindered by a shortage of pilots and delays in developing airports. Circumstances demanded a clear aviation policy. Between 1970 and 1972 the Cabinet approved a new model framework for the industry, based on the three major carriers then established, ANA, JAS (then TDA) and JAL. Fundamentally, the 1970/72 policy was aimed at protecting the airlines by giving each one its own area of operation. Competition was not an issue. JAL, the senior company, was permitted to hold a monopoly of scheduled international routes and to fly domestic trunk routes. ANA's mission was the right to fly all domestic trunk and local routes, with permission to operate short-haul international charters. JAS was restricted to the domestic market, serving local routes, with the promise of future approval for serving domestic trunk routes. 1986 - pro-competition policy However, in the early 1980's, as both the domestic economy and the airline business were growing strongly and - influenced to some extent by a new US-Japan aviation agreement in 1985 that permitted multi-designation of Japanese carriers to transpacific service - the government in 1986 adopted a new, pro-competition airline policy. Under this policy ANA and JAS gained international scheduled service. In return JAL got more access to the domestic market through more local routes. At the time, there was already a capacity shortage at the main domestic and international airports of Haneda, Itami and Narita - a shortage that would not go away. The next major policy change came in February 2000, when "total deregulation" was launched. . Restrictions on airfares were completely lifted and airlines were permitted to fly wherever they liked. But the problem was that the persisting lack of capacity at the key airports, Itami and Haneda, prevented airlines from starting new routes or competing on monopoly routes. The ability to offer free and fair competition was fatally flawed under the reality of imperfect market conditions, aggravated by airport capacity shortages. So despite what should have been a great leap forward, ironically the break-down of domestic market shares under the new, "totally deregulated" policy, was almost exactly the same as it had been 30 years before: ANA 50%, JAS 25% and JAL 25%. Domestic deregulation - incomplete From a practical point of view, today JAL and JAS separately can compete with ANA on some routes, but lack sufficient slots to be able to compete effectively with ANA on all routes. ANA has a monopoly on routes from Haneda to the destinations of Toyama, Yamaguchi-Ube, Shonai and Yonago. On some other some routes, such as Tokyo-Matsuyama and Tokyo-Hiroshima, JAL and JAS compete with ANA, but because of slot shortages they can offer fewer flights, sharing less than 50% of the traffic. At present, JAL and JAS could only compete on these routes by reducing service levels on other routes, to the detriment of their own customers' convenience and their own business performance. Because of unequal route networks and the resulting lower profit-generating ability plus the additional burden of being saddled with many unprofitable local routes with weak demand, JAL and JAS cannot compete effectively against ANA in terms of fares and service. Improving international competitiveness of Japan's airlines Strong domestic airlines are best equipped for international competition. In the United States, airlines like American, United and Delta, which all started as domestic airlines, are now major players in the international market, the result of their successes following the 1978 deregulation of US air transport, in a market virtually free of airport slot restrictions. They were able to build up extensive domestic networks, with domestic revenue accounting for 70-80% of all three airlines' passenger business revenue. Among Japanese airlines, the ratio of domestic to international passenger revenue is 3:7 in the case of JAL, 8:2 for ANA and 9:1 for JAS, ratios which have remained little changed since the days when the industry was regulated. It follows that if Japanese airlines are to be world-class airlines capable of meeting the competition, they must, like their American and European counterparts, have an adequate domestic business base providing a broad and politically and economically stable network compared to the more volatile international market. ANA entered the scheduled international passenger transport business in March 1986, followed by JAS in July 1988. However, together, the three Japanese carriers continue to have only a 40% share of the international market in and out of Japan, broken down with JAL 30%, ANA 9%, and JAS 1%. Unlike the domestic air market with its airport capacity problems, restrictions in the international market in Japan will disappear with the opening of Narita's second runway. Although demand for international travel is slack at present due to the after-effects of the September 11 2001 terrorist attacks, strong growth is expected over the medium to long term. ANA will have the opportunity to further expand its international share by obtaining more slots at Narita and at Kansai, where there are plenty of opportunities to be taken. The challenges facing Japanese airlines in the international arena are (1) the need to become more competitive (2) to build international route networks necessary for business and economic growth while succeeding in the competition with foreign airlines, and (3) expand their market share. Tackling the issues The two key issues - (1) creating a truly competitive domestic aviation environment and (2) boosting the competitiveness of Japanese carriers in the international marketplace - are interrelated. Measures that could be taken for correcting the imperfect competition in the Japanese domestic air market are: the creation of more slots, giving the government slot control management or merging JAL and JAS to combine their resources. Slot creation through airport expansion is feasible at Haneda, if a proposed fourth runway is built, but not at Itami, because noise restrictions limit flight frequency. A long debate on government slot control has failed to reach consensus. The only practical solution is a JAL/JAS merger. Integration impact of JAL/JAS With integration, JAL/JAS and ANA will have roughly equal shares of slots at Haneda and Itami. Furthermore, JAL/JAS will have a broad, nation-wide network thanks to mutually complementary facilities and systems, so that there will be real competition in the market for the first time since the 1986 introduction of regulatory reform and the pro-competition policy. JAL and JAS intend to make big improvements in customer convenience by offering more competitive fares and services and by taking the following steps: 1) Starting flights on high-demand routes currently monopolised by ANA (Toyama, Yamaguchi-Ube etc.) 2) Scheduling more flights on high-demand competitive routes where ANA currently have a larger number of flights (Matsuyama, Hiroshima) 3) Eliminating over-concentration of flights at peak periods on multiple flight trunk routes and setting user-friendlier timetables (system-wide) 4) Contributing to the stimulation of local economies by maintaining and expanding their local route networks Conclusion In the new post-merger market, airlines will benefit from the keener competition, as will their customers, shareholders, employees and other stakeholders. In the international route market, where foreign airlines now have a 60% share compared to the 40% share of Japanese airlines, Japanese carriers will be stronger and more able to compete more effectively. What we have to do now is to eliminate the contradiction of a theoretically deregulated domestic system that is practically handicapped by the shortage of airport capacity that has continued since 1986. The JAL/JAS integration is intended to resolve this contradiction by establishing a new operational framework for Japanese airlines more appropriate to the new era of competition. At the same time, the integration will present air travellers in Japan with greater choices in price and service than are possible under the present system. |
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