The enthusiasm among passengers was palpable on Peach Aviation’s Flight MM153, as the low-cost carrier made its way from Osaka’s Kansai International Airport (KIX) to Fukuoka early last month.
After the cabin attendant thanked the passengers on one of the first flights for the fledgling airline, spontaneous applause erupted, with one excited customer even calling out, “ganbatte-ya”, or “Good luck,” in the Osaka dialect.
Peach, which began operations on March 1, is the first of three low-cost carriers to arrive this year in Japan, the third-largest domestic air market in the world but virtually virgin territory for budget airlines.
In July it will be joined by Jetstar Japan and in August by AirAsia Japan, providing domestic travelers with greater choice and lower prices in flights between some of the country’s busiest destinations, such as Tokyo and Sapporo in the north.
All three airlines are joint ventures between foreign investors and Japanese airlines, since foreigners can only own up to one-third of a Japanese domestic airline.
The simultaneous arrival of the three low-cost carriers is a direct result of the government’s policy to stimulate the domestic air travel market.
Competition in Japan’s air travel market has long been restricted by a lack of landing slots at major airports, high landing fees and, until deregulation in 2008, restrictions on the amount of discounting allowed.
But the government under the ruling Democratic party decided to stimulate the market by increasing landing slots and working towards lowering landing fees.
Furthermore, the bankruptcy of Japan Airlines, the government-owned airline, in 2010 led to the cancellation of 50 unprofitable domestic routes, which freed up landing slots at several airports.
In an effort to drum up business, some airports are providing incentives to low-cost carriers, with Osaka’s KIX offering to waive landing fees in the first year.
One key question is whether the growth of low-cost carriers will come at the expense of the incumbent carriers, particularly JAL and ANA, the Japanese airline, which have tried to defend their positions by taking stakes in low-cost carriers.
Peach is 38.67 percent owned by ANA, 33.33 percent by First Eastern, a Hong Kong investment group, and 28 per cent by Innovation Network of Japan, a quasi-public investor.
ANA also has a 67 percent stake in AirAsia Japan, with the other 33 percent held by AirAsia, the Malaysian low-cost airline.
Meanwhile, Jetstar, the Australian low-cost carrier, has tied up with JAL, which emerged from bankruptcy last year, to set up Jetstar Japan in which each airline has a 33.3 percent stake with the remainder evenly owned by Mitsubishi Corp and Tokyo Century Lease.
Low-cost carriers, such as Jetstar and Air Busan of South Korea, have been flying international routes to Japan and the domestic market does have lower-cost carriers: Skymark, which flies 23 routes, and StarFlyer, a smaller airline, which has three domestic routes.
But neither Skymark nor StarFlyer considers itself to be a low-cost carrier, as they offer services, such as in-flight non-alcoholic beverages and one free baggage check-in, and their rates are not uniformly as low as true low-cost airlines.
“Japan presents a significant low cost carrier opportunity,” Nicholas Cunningham, analyst at Macquarie in Tokyo, says in a report. Macquarie expects total Japanese carrier passenger volumes to grow 15.9 percent by 2016, compared with 2008, with the majority of this growth coming from low-cost carriers.
Mr. Cunningham expects some of the growth to come at the expense of the established airlines. But the low-cost carriers are optimistic that they can unearth new demand and grow the pie.
Masashi Hamade, head of planning and network planning at AirAsia Japan, says: “I think there will be cannibalization to a certain extent, but even if there is, we believe low-cost carriers will spur new demand for air travel.”
The critical question for the low-cost carriers is whether they can generate sufficient profits in Japan’s costly market, where landing fees are four times those of Hong Kong, South Korea and Singapore and the fuel tax is 20 times higher than in the U.S., according to Macquarie.
Low-cost carriers must also meet the test of Japanese consumers’ notoriously high standards of service. So far, consumers appear happy with what they are getting.
Although Peach was forced to cancel several flights last month due to an error by a cabin attendant, that has not stopped consumers from flocking to its planes.
Peach enjoyed an average load factor in its first month of operation of 83 percent, exceeding its own 75 percent forecast for how much capacity it could fill and far higher than JAL and ANA’s 55.5 percent in January, the last month for which figures are available.
As one Peach representative explains, “People who have never taken a plane are flying with us.”