Skymark Airlines (BC/SKY) is facing the most difficult point in their 16-year history that saw itself become the only child of deregulation to successfully crack the ANA/JAL duopoly of Japanese skies.
Increased competition with LCCs as well as the majors lowering prices, coupled with a depreciated JPY, high fuel bills, and costs from introducing the A330 (Skymark Airlines inaugurates Airbus A330 service.) and A380, it tumbled to a full-year loss for the first time in five years for FY2013, posting a 1.8 billion JPY loss. Serious cash flow issues surfaced when Airbus canceled Skymark's A380 order (Skymark's Airbus A380 order in jeopardy.) in July after pre-payments had not been made since April. The European planemaker is said to be seeking 70 billion JPY in penalties, in addition to already-paid deposits amounting to 26.5 billion JPY, which is unlikely to be refunded. The figure is only expected to grow, as Rolls-Royce and interior makers also prepare to seek compensation from Skymark.
As if that weren't enough, they posted a whopping 5.7 billion JPY loss only in the first quarter of FY2014 (Skymark posts 5.7 billion JPY loss for 1Q FY2014.), prompting accountants to report "doubts about its ability to continue as a going concern." As of June, Skymark's cash and near-term assets stood at 7.2 billion JPY. Although officials at Japan's third largest carrier say "Negotiations with Airbus are still continuing," with cash reserves dwindling, it is widely expected that when Airbus decides on the final amount would be when Skymark could declare insolvency.
Skymark is quickly implementing a turnaround plan; increasing utilization of its A330s, axing unprofitable routes (Skymark announces Narita closure and Yonago cuts.), and raising fares. However, those will take some time to help their balance sheet. Their hands-on and charismatic President and CEO Shinichi Nishikubo has continued to say "We'll try to survive on our own," but it is probably most obvious to him that that is very difficult in this situation, if not impossible.
So what are their choices? There are three; (1) receive loans from banks, (2) get bailed out by a government-managed fund, or (3) receive investment from other airlines.
(1) is what Skymark is hoping for, but unfortunately, unlikely. The airline took pride in not borrowing any cash from financial institutions in their history, but that is a double-edged sword. It also means they don't have any rapport with banks. Will any financial firms be willing to take the risk now? Probably not.
(2) is unlikely as well. The current Liberal Democrat Party (LDP)-controlled government wants to portrait the bailout of Japan Airlines (JL/JAL) by then Democrat Party of Japan (DPJ) regime a failure and misuse of taxpayers' money. Hence the government's favor of ANA in allocating precious slots at Haneda, while JAL continues to be monitored by the government and any significant financial moves by the airline would come under scrutiny. So a government-funded restructuring is out of the picture.
That leaves (3) as the only choice. But who? Without question, Skymark's most valuable assets are the 36 slot-pairs at heavily-regulated Tokyo/Haneda (HND/RJTT), the preferred airport serving the nation's capital. AirAsia Group, ANA Holdings, and Delta Air Lines (DL/DAL) have been reported as contenders, or at least companies considering the investment.
AirAsia is amidst setting up their new Japan venture (AirAsia Japan is officially reborn; first flight June 2015.) with a base at Nagoya/Chubu Centrair (NGO/RJGG) (AirAsia Japan selects Nagoya Chubu Centrair.), but they want to set up a hub in the Kanto (Greater Tokyo) region as well, and Haneda slots are being sought for. Although AirAsia Group's CEO Tony Fernandes quickly denied rumors (Is AirAsia considering a Skymark takeover?), they are reportedly carrying out due diligence. Rakuten, 18% owner of AirAsia Japan (Mk II), has President Hiroshi Mikitani, who is a member of the government's Economic Revitalization Committee and also has personal relationships with Prime Minister Shinzo Abe. However, it is still unclear whether the Ministry of Land, Infrastructure, Transport, and Tourism (MLIT), who manages the slots, would allow Skymark to retain the 36 slot-pairs even after a major ownership structure change. Furthermore, the current government does not seem to be comfortable enough to give out Haneda slots to LCCs, let alone a foreign-born LCC.
Not much has been talked about an investment by Delta. The expanding international network at Haneda and the government's dual-hub strategy for Tokyo has hurt Delta's Tokyo/Narita (NRT/RJAA) hub, as the SkyTeam member does not have the partnership rivals American Airlines (AA/AAL) and United Airlines (UA/UAL) enjoy with their joint-venture (JV) counterparts JAL and ANA. Delta does have a very limited agreement with Skymark, where Delta's Skymiles could be redeemed for Skymark tickets. Haneda has nine unallocated daytime international slot-pairs (Haneda's expanded International Terminal.), which are thought to be for U.S. flights, but the authorities have yet to reach a deal. Delta is said to be behind the lobbying, as opening up more trans-Pacific flights at Haneda would further put stand-alone Delta at a disadvantage. A comprehensive partnership with Skymark could change the picture. But again, even though foreign ownership is capped at 33%, the government may still not favor a foreign airline having some control over domestic slots at Haneda.
ANA is probably the government's favorite, and informal talks are already said to be taking place between them. ANA is rich with cash reserves, but investment would be capped at 20%. The MLIT rule says that if a major carrier owns more than 20% of another airline that holds Haneda slots, those slots must be relinquished and redistributed. However, this has become a law only on paper, as ANA has cleverly kept its investments in Air Do (HD/ADO), Skynet Asia Airways (LQ/SNJ) (d.b.a. Solaseed Air), and Star Flyer (7G/SFJ) under 20% but effectively de facto controls them by installing ANA veterans in the management (New Star Flyer President is from ANA.). Relegating Skymark to a feeder carrier for ANA would virtually eliminate the 'third force', which would result in Japan going back to the ANA/JAL duopoly era (at least at Haneda) and the return of overpriced tickets. Foreign investment, whether from AirAsia or Delta, would assure competition and benefit consumers.
Mr. Nishikubo reiterates "Skymark's meaning of existence lies in that we are independent," and that is very, very true. Skymark brought airfares down, stimulated demand, and radically changed the market. But their independence is now in serious doubt. Cash is running low and a decision would probably need to be made by autumn. So essentially, the ball is not in AirAsia, ANA, or Delta's hands, but in the government's. Stay tuned.
Follow-up at Skymark's fate: MLIT discourages foreign investment.
*Edited/updated on 2014/Sep/8.
Increased competition with LCCs as well as the majors lowering prices, coupled with a depreciated JPY, high fuel bills, and costs from introducing the A330 (Skymark Airlines inaugurates Airbus A330 service.) and A380, it tumbled to a full-year loss for the first time in five years for FY2013, posting a 1.8 billion JPY loss. Serious cash flow issues surfaced when Airbus canceled Skymark's A380 order (Skymark's Airbus A380 order in jeopardy.) in July after pre-payments had not been made since April. The European planemaker is said to be seeking 70 billion JPY in penalties, in addition to already-paid deposits amounting to 26.5 billion JPY, which is unlikely to be refunded. The figure is only expected to grow, as Rolls-Royce and interior makers also prepare to seek compensation from Skymark.
 |
| Skymark Airlines Boeing 737-8HX(WL) JA73NH taxiing at Fukuoka. (Photo: Ryosuke Yano) |
As if that weren't enough, they posted a whopping 5.7 billion JPY loss only in the first quarter of FY2014 (Skymark posts 5.7 billion JPY loss for 1Q FY2014.), prompting accountants to report "doubts about its ability to continue as a going concern." As of June, Skymark's cash and near-term assets stood at 7.2 billion JPY. Although officials at Japan's third largest carrier say "Negotiations with Airbus are still continuing," with cash reserves dwindling, it is widely expected that when Airbus decides on the final amount would be when Skymark could declare insolvency.
Skymark is quickly implementing a turnaround plan; increasing utilization of its A330s, axing unprofitable routes (Skymark announces Narita closure and Yonago cuts.), and raising fares. However, those will take some time to help their balance sheet. Their hands-on and charismatic President and CEO Shinichi Nishikubo has continued to say "We'll try to survive on our own," but it is probably most obvious to him that that is very difficult in this situation, if not impossible.
So what are their choices? There are three; (1) receive loans from banks, (2) get bailed out by a government-managed fund, or (3) receive investment from other airlines.
 |
| Thai AirAsia Airbus A320-216 HS-ABS loads passengers at Trang. (Photo: Ryosuke Yano) |
(1) is what Skymark is hoping for, but unfortunately, unlikely. The airline took pride in not borrowing any cash from financial institutions in their history, but that is a double-edged sword. It also means they don't have any rapport with banks. Will any financial firms be willing to take the risk now? Probably not.
(2) is unlikely as well. The current Liberal Democrat Party (LDP)-controlled government wants to portrait the bailout of Japan Airlines (JL/JAL) by then Democrat Party of Japan (DPJ) regime a failure and misuse of taxpayers' money. Hence the government's favor of ANA in allocating precious slots at Haneda, while JAL continues to be monitored by the government and any significant financial moves by the airline would come under scrutiny. So a government-funded restructuring is out of the picture.
That leaves (3) as the only choice. But who? Without question, Skymark's most valuable assets are the 36 slot-pairs at heavily-regulated Tokyo/Haneda (HND/RJTT), the preferred airport serving the nation's capital. AirAsia Group, ANA Holdings, and Delta Air Lines (DL/DAL) have been reported as contenders, or at least companies considering the investment.
 |
| Delta Air Lines Airbus A330-223 N860NW awaits its next flight at Narita. (Photo: Ryosuke Yano) |
AirAsia is amidst setting up their new Japan venture (AirAsia Japan is officially reborn; first flight June 2015.) with a base at Nagoya/Chubu Centrair (NGO/RJGG) (AirAsia Japan selects Nagoya Chubu Centrair.), but they want to set up a hub in the Kanto (Greater Tokyo) region as well, and Haneda slots are being sought for. Although AirAsia Group's CEO Tony Fernandes quickly denied rumors (Is AirAsia considering a Skymark takeover?), they are reportedly carrying out due diligence. Rakuten, 18% owner of AirAsia Japan (Mk II), has President Hiroshi Mikitani, who is a member of the government's Economic Revitalization Committee and also has personal relationships with Prime Minister Shinzo Abe. However, it is still unclear whether the Ministry of Land, Infrastructure, Transport, and Tourism (MLIT), who manages the slots, would allow Skymark to retain the 36 slot-pairs even after a major ownership structure change. Furthermore, the current government does not seem to be comfortable enough to give out Haneda slots to LCCs, let alone a foreign-born LCC.
Not much has been talked about an investment by Delta. The expanding international network at Haneda and the government's dual-hub strategy for Tokyo has hurt Delta's Tokyo/Narita (NRT/RJAA) hub, as the SkyTeam member does not have the partnership rivals American Airlines (AA/AAL) and United Airlines (UA/UAL) enjoy with their joint-venture (JV) counterparts JAL and ANA. Delta does have a very limited agreement with Skymark, where Delta's Skymiles could be redeemed for Skymark tickets. Haneda has nine unallocated daytime international slot-pairs (Haneda's expanded International Terminal.), which are thought to be for U.S. flights, but the authorities have yet to reach a deal. Delta is said to be behind the lobbying, as opening up more trans-Pacific flights at Haneda would further put stand-alone Delta at a disadvantage. A comprehensive partnership with Skymark could change the picture. But again, even though foreign ownership is capped at 33%, the government may still not favor a foreign airline having some control over domestic slots at Haneda.
 |
| All Nippon Airways Boeing 767-381 JA8324 taxies at Tokyo's Haneda. (Photo: Ryosuke Yano) |
ANA is probably the government's favorite, and informal talks are already said to be taking place between them. ANA is rich with cash reserves, but investment would be capped at 20%. The MLIT rule says that if a major carrier owns more than 20% of another airline that holds Haneda slots, those slots must be relinquished and redistributed. However, this has become a law only on paper, as ANA has cleverly kept its investments in Air Do (HD/ADO), Skynet Asia Airways (LQ/SNJ) (d.b.a. Solaseed Air), and Star Flyer (7G/SFJ) under 20% but effectively de facto controls them by installing ANA veterans in the management (New Star Flyer President is from ANA.). Relegating Skymark to a feeder carrier for ANA would virtually eliminate the 'third force', which would result in Japan going back to the ANA/JAL duopoly era (at least at Haneda) and the return of overpriced tickets. Foreign investment, whether from AirAsia or Delta, would assure competition and benefit consumers.
Mr. Nishikubo reiterates "Skymark's meaning of existence lies in that we are independent," and that is very, very true. Skymark brought airfares down, stimulated demand, and radically changed the market. But their independence is now in serious doubt. Cash is running low and a decision would probably need to be made by autumn. So essentially, the ball is not in AirAsia, ANA, or Delta's hands, but in the government's. Stay tuned.
Follow-up at Skymark's fate: MLIT discourages foreign investment.
*Edited/updated on 2014/Sep/8.
No comments:
Post a Comment