Monday, September 8, 2014

Skymark's fate: MLIT discourages foreign investment.

Follow-up from Skymark's fate: AirAsia, ANA, Delta, or...?

Seeing reports of an investment in Skymark Airlines (BC/SKY) by the AirAsia Group circulating (Is AirAsia considering a Skymark takeover?), a senior official of the Ministry of Land, Infrastructure, Transport, and Tourism (MLIT) has told that if there is a significant ownership structure change, their precious slots at Tokyo/Haneda (HND/RJTT) would have to be returned to the MLIT for redistribution over all carriers.

"Haneda slots are prized properties that belong to the Japanese public. We gave Skymark slots as part of a scheme to promote young airlines. But if they declare bankruptcy, the MLIT will collect all of their slots. If there is a significant ownership structure change, we would view the airline as a different company, so the slots would also have to be returned to us and we would consider a reallocation process," the source said.
Airbus A330-343E JA330B. Skymark currently has three, with seven more to arrive by September 2015. All will be deployed on their lucrative Haneda domestic routes. They are also pushing the MLIT to grant night-time international slots at Haneda for flights to Hawaii, Singapore, and Thailand using the A330. (Photo: Ryosuke Yano)

The MLIT rule says that if a carrier owns more than 20% of another airline that holds Haneda slots, those slots must be relinquished and redistributed, but the above statement in response to the AirAsia rumor tells that overseas airlines are no exception. This almost rules out foreign investment; AirAsia Group would probably want managerial control (and a re-brand as well) and now that would be impossible, and it would also be a questionable use of cash for Delta Air Lines (DL/DAL), which is currently concentrating on raising its investor value.

So who now? Under the so-called '8-10 Paper' (released on August 10th, 2013), Japan Airlines (JL/JAL) is still required to submit all investment and route plans to the government for monitoring and evaluation before they go ahead, so that leaves All Nippon Airways (NH/ANA) as the only cash-rich option. Some internet-based travel firms have also been named as possible contenders as well, but nothing more has come out yet, and many believe the MLIT currently favors an ANA investment in Skymark. Wanting to portrait JAL's bailout by the previous government (Democratic Party of Japan) as a failure, the current (Liberal Democratic Party) has been putting ANA first.

When domestic slot-pairs at Haneda were increased by 25 in March 2013, ANA received eight, Air Do (HD/ADO) two, Skynet Asia Airways (d.b.a. Solaseed Air) (LQ/SNJ) three, Star Flyer (7G/SFJ) five, while Skymark was awarded four and JAL only three. But with ANA virtually controlling Air Do, Solaseed, and Star Flyer and code-sharing and coordinating schedules, they essentially got 18 slot-pairs. For international slot-pairs that were awarded in March 2014, ANA received 11 (ANA's Summer 2014 international expansion.) while JAL only five.
Boeing 777-281 JA8968 arrives at Okinawa's Naha Airport. (Photo: Ryosuke Yano)

On the other hand, after JAL placed its historical first Airbus order for up to 56 A350 XWBs, the government is said to have asked ANA to order the Boeing 777X (ANA selects Boeing 777-9X and Airbus A321neo.) to save the U.S. ally's face. This was probably one of the reasons for the order, though obviously not the only one, along with Boeing offering much more aggressive discounts and the Japanese aerospace industry pressing to order Boeing products. Initially, ANA was also leaning towards the A350. The government has since ordered a pair of 777-300ERs to replace the nation's aging two 747-400s used to transport government VIPs and the imperial family, and they will switch its maintenance contract from JAL to ANA in 2019 when the aircraft are delivered.

But, we all know that a Skymark investment by ANA would give Japan's now largest carrier too much power. It would be detrimental to the flying public as there would be no 'third force' at Haneda, Japan's largest and most important market, to challenge the ANA/JAL duopoly. And we could potentially be going back to an age of high ticket prices. Narita has a growing portfolio of LCCs, but most of the public still prefer convenient Haneda for domestic travel.

On the other hand, on September 5th, Skymark's President and CEO Shinichi Nishikubo promised the Governor of Tottori Prefecture that Haneda – Yonago (YGJ/RJOH) would be resumed from the Summer 2015 schedule. They only recently announced the axing of the unprofitable route as part of their restructuring (Skymark announces Narita closure and Yonago cuts.), so this is peculiar. Is there a prospect for a potential major investor willing to respect Skymark's independence and Mr. Nishikubo's leadership?

Anyway, backroom politicking is probably already well underway, but everyone will likely keep their mouths closed, at least until Skymark settles on a penalty price with Airbus for the A380 cancellation (Skymark's Airbus A380 order in jeopardy.), which is expected by October. The European planemaker is reportedly calling for 70 billion JPY, in addition to the 26.5 billion JPY of prepaid deposits that will not be refunded. Stay tuned.

Reference: Jiji Press, September 5th. (in Japanese)
Reference: J-Cast, September 6th. (in Japanese)

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