Wednesday, February 5, 2014

Skymark posts loss but optimistic with strategy tweaks.

Skymark Airlines (BC/SKY) posted results for the first nine months (April to December) of fiscal year 2013; net income was 230 million JPY (94.4% decrease from the same period in 2012), total revenue was 65.3 billion JPY (0.8% decrease), and an operating loss of 181 million JPY (same period in 2012 saw a 6.29 billion JPY operating profit). It is expected to post the first full-year loss in five years for FY2013.

As majors All Nippon Airways (NH/ANA) and JAL continue to cut costs and come up with more aggressive measures, and LCCs now establishing a firm foothold in the core domestic markets, Skymark has been tweaking its strategy to avoid being caught in between the two. 
Boeing 737-8HX(WL) JA73NP at Haneda. (Photo: Ryosuke Yano)

In 2013, both ANA and JAL started offering tickets up to six months in advance with discounts around 70 to 80%. Skymark still offered less-expensive fares, but were only available from two months in advance, so with early-bookers going to the majors, these promotional fares didn't sell out as quickly as it used to, eventually hurting yields. 2014 will see them offer more advance tickets. Capacity has also been dumped in the 'bread-and-butter' Tokyo - Fukuoka market; Tokyo/Haneda (HND/RJTT) - Fukuoka (FUK/RJFF) sees JAL flying 17 round-trips, ANA flying 18, Skymark providing 11, and Star Flyer (7G/SFJ) with 10, while the Tokyo/Narita (NRT/RJAA) - Fukuoka route also sees three times daily each with ANA and JAL, and five daily with Jetstar Japan (GK/JJP). Again, these hurt yields. Skymark's answer is the Airbus A330 (Skymark to introduce the Airbus A330 on April 18th.) with affordable all-premium seating, akin to JAL's Class J domestic business class product, which often sells out quickly.

The Narita and Ishigaki (ISG/ROIG) markets have been disastrous, with all seven routes from the former bleeding red ink. Narita sees competition from LCCs Jetstar Japan, Vanilla Air (JW/VNL), and soon-to-launch Spring Airlines Japan, but numbers haven't been good for the rivals as well. Skymark's President and CEO Shinichi Nishikubo notes that for domestic services, Narita is "still immature and performing more like a Chiba Airport (and not a Tokyo Airport)", only attracting those who live in the prefecture where Narita is located. As for Ishigaki, it has become a new battleground of a fare war, with Peach Aviation's (MM/APJ) entry and JAL-subsidiary Japan Transocean Air (NU/JTA) lowering fares. In 2014, Skymark will consolidate its Narita network to only Okinawa/Naha (OKA/ROAH), Sapporo/New Chitose (CTS/RJCC), and Yonago (YGJ/RJOH), while the Ishigaki network will be simplified to just Naha.

On the other hand, the rapid devaluation of the JPY resulting from 'Abenomics' increased fuel costs. As for the fleet, the 31-strong Boeing 737 fleet will gradually be reduced to around 24 or 25 by the time its 10th A330 arrives. A previously announced plan to reconfigure its Boeing narrow-bodies with 20 premium seats have been shelved, and Skymark stated that freeing-up its B737s will instead enable them to pursue the charter market, which is relatively under-served, more aggressively. Group tours as well as high school graduation trips are on their minds. Some of their B737s are certified for ETOPS (Extended Twin-engined OPerationS), so charter flights to nearby international destinations such as Guam (GUM/PGUM), which they operated in 2010, are also possible.

Meanwhile, a large hangar Skymark rented at Haneda to open an A330 maintenance base will now be returned, as the carrier has signed an agreement with the European manufacturer for a Flight Hour Services (FHS) components contract. Heavy maintenance will be undertaken in Taiwan. The hangar rent cost them 800 million JPY a year.

Skymark is doing all it can to differentiate itself from the competition and carve out its own niche. What may seem like a dangerous bet configuring domestic A330s and planned international A380s with all-premium seating "is logical", according to Mr. Nishikubo, adding "demand for affordable premium seats is big but supply is small, both for domestic and international". While their 36 precious slots at heavily-regulated Haneda generate roughly 80% of their revenue, the carrier is also building-up operations at its focus cities of Ibaraki (IBR/RJAH), Kobe (UKB/RJBE), Sendai (SDJ/RJSS), and Yonago, opening up new point-to-point routes that would be unprofitable at ANA and JAL's high costs, while also avoiding competition with LCCs (Skymark releases Summer 2014, expects FY2013 loss.). He adds "some LCCs don't seem to care if they make money or not, and we don't want to get into a fare war with them", possibly referring to Jetstar Japan, which was saved from further injections in October 2013 from shareholders JAL and Qantas Airways (QF/QFA) after hefty losses and running low on cash reserves.

As the first child of Japan's deregulation, and the only airline still truly independent from the heavyweights of ANA and JAL (excluding some commuter carriers), Skymark is definitely the most interesting Japanese carrier to watch. After all, Skymark has managed to break into the duopolistic domestic market, and its growth is what forced the majors to bring in LCCs, which otherwise probably still wouldn't have existed in Japan.

Source: Aviation Wire (in Japanese)

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