Friday, November 21, 2014

Skymark in talks with JAL for broad tie-up.

Skymark Airlines [BC/SKY] has entered into partnership talks with Japan Airlines [JL/JAL] to help save the troubled third largest domestic carrier, according to a Nikkei report. Both sides confirmed the news, though adding nothing has been finalized yet. Under the plan, effective as early as February 2015, JAL would place its code on most, if not all of Skymark's 36 round-trips from Tokyo/Haneda [HND/RJTT] to Fukuoka [FUK/RJFF], Kagoshima [KOJ/RJFK], Kobe [UKB/RJBE], Okinawa/Naha [OKA/ROAH], and Sapporo/New Chitose [CTS/RJCC] and sell roughly 20% of their seats, generating an estimated annual 8 billion JPY for the cash-strapped airline.

Boeing 737-86N(WL) JA73NX arrives into Narita in the final days at the airport. Skymark closed all operations at Narita on October 25th (Skymark announces Narita closure and Yonago cuts.) in a bid to cut unprofitable routes and concentrate on Haneda. (Photo: Ryosuke Yano)

However, JAL would not acquire any stakes in Skymark (at least for now), which would allow them to retain a certain degree of independence. "We take great pride that we have been independent without the help of any major carriers, which has enabled us to change the industry significantly," is a phrase that could often be heard from Shinichi Nishikubo, Skymark's President and CEO. But for JAL too, this is a clever compromise.

Firstly, any new investment by JAL would come under heavy scrutiny of the government, according to the notorious (at least to JAL) document issued by the Japan Civil Aviation Bureau (JCAB) on August 10th, 2012 (the 8-10 Paper), which is effective through FY2016. The government's favor of All Nippon Airways [NH/ANA] over JAL is partly due to the current Liberal Democratic Party (LDP)-controlled regime wanting to portrait the then-Democratic Party of Japan (DPJ)-led government's massive bailout of JAL from their 2010 bankruptcy, one of the nation's most spectacular corporate failures, a misuse of taxpayer's money. Secondly, JAL wouldn't want to take the risk of investing in a company that could bring on a hefty debt; Airbus is seeking up to 700 million USD in penalties for Skymark's termination of the A380 order (Skymark's Airbus A380 order in jeopardy.).

And lastly, JAL does not want to see ANA increasing the share of Haneda slots any more. Slot-count-wise, JAL controls 40.0% at 184.5 slot-pairs and All Nippon Airways [NH/ANA] 37.4% at 172.5 slot-pairs, while Skymark holds 7.8% with 36 slot-pairs. However, if the slots of AIRDO [HD/ADO] (d.b.a. Air Do), Skynet Asia Airways [6J/SNJ] (d.b.a. Solaseed Air), and Star Flyer [7G/SFJ], all of which code-share with ANA throughout their networks and are de facto controlled by Japan's largest carrier (New Star Flyer President is from ANA.), are combined, ANA's share rises to 52.2%. Skymark teaming up with ANA, an idea which the current government favors, would have Japan's largest airline control 60% and JAL 40%. If the JAL/Skymark partnership goes through, JAL could increase the share to 47.8%, which would maintain close competition.

A flock of JAL's Boeings at Haneda. How much competition will remain after the JAL/Skymark partnership? Are we be going back to the ANA/JAL duopoly era? (Photo: Aviation Wire)

After the report, Skymark's stocks soared 50 JPY, over 25%, to 245 JPY on November 21st. But reportedly, the JCAB is already reluctant to approve the cooperation. Although no transaction of cash would be involved, it seems that the regulator sees the partnership as a bailed-out airline still under government supervision virtually aiding another Haneda-based carrier to strengthen its competitiveness. If there's an ownership change exceeding 20% of an airline that controls slots at Haneda, those would need to be relinquished and JCAB would redistribute them. Even just starting a code-share at the heavily-regulated airport requires various approvals. Mr. Nishikubo said "We don't see a reason for them (JCAB) to say no."

Skymark is predicting its worst ever financial record for FY2014 (Skymark braces for 13.7 billion JPY loss in FY2014.), reversing a previous forecast for a 354 million JPY net profit. Total assets stood at 77.5 billion JPY, down 1.3 billion JPY from March this year, while capital-to-asset ration decreased from 56.2% in FY2013 to 49.7%. Cash reserves dwindled to 4.5 billion JPY, down 2.5 billion JPY from just six months ago. They have cited increased costs due to the introduction of the Airbus A330s (Skymark Airlines inaugurates Airbus A330 service.) and now-canceled A380s, continued depreciation of the JPY, fuel costs remaining high, and intensified competition with the LCCs as the primary reasons. Skymark has found itself caught in between the majors and LCCs.

Termination of the A380 order in July and the European planemaker's subsequent seeking for up to 700 million USD in penalties only made their outlook worse. "We are still negotiating to reduce that figure. But we hope to reach an agreement as early as possible," said Mr. Nishikubo (Skymark hopes to settle Airbus A380 penalty in October.). Talks regarding an investment by Malaysia-based AirAsia Group (Is AirAsia considering a Skymark takeover?) had collapsed by the end of summer. With JCAB keeping a close eye and the current government favoring ANA, the JAL partnership probably would not go through easily. But Skymark is fast running out of cash and needs new sources of revenue as quickly as possible. In any case, Skymark may need to forfeit a lot of their independence as Japan's third force.

Reference: Nikkei Shimbun, November 21st. (in Japanese)
Reference: Nikkei Shimbun, November 21st. (in Japanese)
Reference: Aviation Wire, November 21st. (in Japanese) 

*Edited/updated on November 23rd, 2014.

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