First Flying DHC-6-400 skids off runway at Aguni.

On August 28th, First Flying's [DAK] flight DAK101 operated by Viking Air DHC-6-400 Twin Otter JA201D veered off the runway to the right and crashed into the airport perimeter fence after touching down at Aguni [AGJ/RORA] around 0854 JST. All 14 on board, including three crew, evacuated safely, and some were treated for minor injuries at the island sole clinic. This aircraft was delivered in March this year and had only entered service earlier this month (First Flying bids farewell to Islander, welcomes Twin Otter.).

Viking Air DHC-6-400 Twin Otter JA201D seen after crashing into the perimeter fence after skidding off the runway upon landing at Aguni. (Photo: Aguni Airport)

Visibility was reportedly good at 10 kilometers and winds were mild as well at the time of the accident. "Touch down was like any other, but when I deployed the brakes, I felt something unusual as if the tires got locked. Then the aircraft became uncontrollable and skidded off the runway," according to the first officer who was at the controls. The 62-year-old pilot had logged 16,000 total hours, however, the flight was the final part of a 65-hour training on the new DHC-6-400 which would have promoted him to captain. A 57-year-old pilot served as captain on the flight. Crew training on revenue flights are not uncommon.

The right landing gear was torn off and the forward section seems to have significant damage. The aircraft is only six months old. (Photo: Aguni Airport)

Officials of Japan Transport Safety Board (JCAB), a division of the Ministry of Land, Infrastructure, Transport, and Tourism (MLIT), arrived at the scene on the following day today on August 29th and designated it an accident. The nose and forward section of the fuselage have been significantly damaged, along with engine number two, while the right landing has been torn off. "It appears the aircraft still had speed when it crashed into the fence. We will tow the aircraft out of the area to examine it, while checking the flight records to investigate how and why it happened," said a JTSB official.

Aguni, which has a single 800-meter runway, will be closed until further notice. First Flying is the only airline serving the island with three-times-daily service connecting it with Okinawa/Naha [OKA/ROAH], the prefecture's capital located 60 kilometers southeast. The remote airport opened for flights in 1978. For the 750 inhabitants, a daily 130-minute ferry ride would become the only means of transport to and from Naha for the time being. First Flying will suspend the 20-minute route until the cause is identified, while it has also confirmed that the launch of new routes from Ishigaki [ISG/ROIG] to Hateruma [HTR/RORH] and Tarama [TRA/RORT], planned for December 1st, would be postponed.

Source: NHK, 2015 August 28th. (in Japanese)
Source: NHK, 2015 August 29th. (in Japanese)
Source: Okinawa Times, 2015 August 29th. (in Japanese)

Bye-bye Skymark, hello ANA Airbus A380?

ANA Holdings, parent of All Nippon Airways [NH/ANA], has won the bid to lead bankrupt Skymark Airlines' [BC/SKY] rehabilitation process (Creditors choose ANA/Skymark proposal over Delta/Intrepid.). It was a landslide victory for Japan's already largest carrier, garnering 78% votes in terms of the number of creditors and 60.25% in terms of the amount of Skymark's liabilities, fulfilling both conditions.

But at least the latter was widely speculated to be a Delta/Intrepid victory (Intrepid picks Delta to sponsor Skymark.), as creditors Airbus, Rolls-Royce, and CIT Aerospace, accounting for 29%, 16%, and 14%, respectively (Skymark's total debts skyrocket to 300 billion JPY.), were all opposed to ANA involvement at least until very recently (Airbus and Intrepid to reject ANA/Skymark tie-up.). With Intrepid claiming 38%, just one of the three creditors supporting the Delta Air Lines [DL/DAL]-led scheme would have given them a win in terms of proportions of liabilities, prompting another round of vote within two-months. So how did ANA win the support of the three key players in the last few days?

Airbus A380-841 F-WWSL/JA380A at Toulouse. Two of Skymark's have been completed while the third has partially been built. ANA's taking up of the A380s was necessary for them to win support from Airbus and Rolls-Royce, and keep true competition out of bread-and-butter Haneda for as long as possible by keeping Skymark under its control. ANA has deep pockets, but can they fly the A380 profitably? How long can protectionism prevail? (Photo: Airbus)

During the last days of July, "ANA made a promise with Airbus to place a significant future order, carefully couched so as not to trigger a disclosure requirement," said an ANA official close to the matter who asked not to be named. That order includes acquiring three displaced A380s initially ordered by Japan's embattled third largest airline (Skymark's Airbus A380 order in jeopardy.), and taking options for two more. Two aircraft have been completed and are currently stored at Toulouse/Blagnac [TLS/LFBO], with a third partially finished. Rolls-Royce Trent 900s power the super-jumbos, and hence Rolls-Royce's defect to ANA as well.

Airbus initially supported ANA as they had earlier talked positively about inducting Skymark's A380s, but then sided with Delta/Intrepid after ANA scrapped the talks a few weeks later saying plans had changed. Intrepid also supported ANA in the first place, as a non-binding Letter of Intent (LoI) was signed for ANA to lease Skymark's A330s (Skymark terminates all Airbus A330 leases.). But ANA also canceled it just a few weeks later, causing outrage at Intrepid and prompting the U.S.-based aircraft lessor to come up with their own rehabilitation plan for Skymark that eventually lured Delta as its sponsor. So this time around, ANA couldn't have gained Airbus and Rolls-Royce's support without a binding agreement. According to the same source, ANA will release plans for the A380 "when the time is appropriate."

The next question is why did CIT Aerospace support ANA? Delta is a big customer for CIT, while ANA has no record of having business with them. What is known from multiple sources is that ANA pledged to lease aircraft from them in the near future. Rumors say that Japan's largest carrier talked of an idea to lease some, if not all three of CIT's A330s that were destined for Skymark, and place them in service with ANA's wholly-owned subsidiary LCC Vanilla Air [JW/VNL] for Hawaii services. However, how much reliability this rumor has is unsure, as at least one of CIT's ex-Skymark A330s seems to have found a new operator in Spain with Air Europa [UX/AEA].

Boeing 737-8HX(WL) JA73NA. Now how much independence Skymark would be able to retain is up to Integral. But adopting ANA's reservation system is a double-edged sword. Skymark's stable income would be assured by ANA, but they would forever become a slave of Japan's largest carrier, as with Air Do, Solaseed Air, and Star Flyer. (Photo: Aviation Wire)

For Skymark, it would be a very bitter end to its challenge against the ANA/JAL duopoly (Skymark gives in to ANA; Japan reverts to duopoly.). Paper-wise, ANA will only control 16.5% with Integral Corporation holding 50.1% and UDS Airlines Investment 33.4%. However, UDS is a new investment firm jointly owned by Development Bank of Japan (DBJ) and Sumitomo Mitsui Banking, both loyal ANA partners. Six executives will sit on the board and Integral will select three, but ANA two, and UDS one; Integral's President Nobuo Sayama will take the Chairman's seat but DBJ's former Managing Director Masahiko Ichie, a strong ANA ally, will become President.

And the centerpiece of the ANA/Skymark plan is an extensive code-share. Skymark's current reservations system developed by former hands-on President and CEO Shinichi Nishikubo cannot handle any code-shares, and Skymark will most likely adopt ANA's system. An official of the regulating Ministry of Land, Infrastructure, Transport, and Tourism (MLIT) has quoted it as "an addictive poison," as it allows ANA to access Skymark's entire ticket sales data, including pricing policy and reservation rates. But for Skymark, developing an all-new system would be too costly. ANA's other de facto puppet carriers AIRDO [HD/ADO] (d.b.a. Air Do), Skynet Asia Airways [6J/SNJ] (d.b.a. Solaseed Air), and Star Flyer [7G/SFJ] all share ANA's system. Skymark's network will gradually be aligned to complement that of ANA's, essentially stopping short of a takeover.

Regulator MLIT knows competition is necessary. But for now, the ruling Liberal Democrat Party (LDP) sits on top of them. The LDP is said to have pressured ANA to accept A380s so that Skymark remain in Japanese (ANA) hands. In return, the regime is rumored to have unofficially promised to give ANA the lion's share of new slot-pairs at Haneda when the next expansion comes before the 2020 Olympics/Paralympics. A fifth runway is far-fetched, and the MLIT is currently talking with local authorities to allow aircraft to overfly densely-populated business and residential areas, which could create up to 50 more slot-pairs per day. Conservative LDP supports ANA in order to dilute JAL's remarkable comeback as it was bailed out when the opposing Democratic Party of Japan (DPJ) was at helm. Foreign involvement is out of question, at least at Haneda. The LDP is determined to protect ANA, and to a lesser extent JAL.

Welcome to Japan. Here we go back in time with the two incumbents ANA/JAL and its affiliates controlling 100% of the Haneda market and 97% of the entire domestic market. And at the preferred downtown Tokyo airport, ANA would already command the lion's share of domestic slots, having direct/indirect control over 60% when combined with de facto subsidiaries Air Do, Skymark, Solaseed Air, and Star Flyer, with JAL accounting for the remaining 40%. Sadly for the ordinary flyer, the incumbent government prefers a closed market, benefiting selected powers at the expense of the interest of the flying public and broader industry evolution. The government should stop toying with aviation politics.

Source: Nikkei Shimbun, August 6th. (in Japanese)
Source: Aviation Wire, August 6th. (in Japanese)
Source: Aviation Wire, August 6th. (in Japanese)
Source: Nikkei Shimbun, August 6th. (in Japanese)

Skymark gives in to ANA; Japan reverts to duopoly.

On April 22nd, Skymark Airlines [BC/SKY], Integral Corporation, and ANA Holdings jointly held a press conference at Japan's Ministry of Land, Infrastructure, Transport, and Tourism (MLIT) announcing that an agreement had been reached with the private equity firm and the parent of All Nippon Airways [NH/ANA] to rebuild Japan's bankrupt third largest carrier (Skymark to file for bankruptcy.). It marks the bitter end of a fare war sparked by Skymark against the ANA/JAL duopoly. Founded in 1996, they were Japan's first child of deregulation and also the last to remain independent (Skymark accedes to ANA investment.).

Flying with Skymark until April 2009, Boeing 767-38E/ER JA767F now operates for Jetairfly as OO-JAP. Japan's first child of deregulation launched flights in September 1998 with a pair of 767s which grew to six at peak, but eventually moved to an all-737 fleet in September 2009. (Photo: Ryosuke Yano)

A total of 18 billion JPY will be injected into the cash-strapped airline. After performing a 100% capital reduction, a debt-equity swap will leave Integral controlling 50.1% and ANA Holdings 19.9%, with the remainder to be held by financial institutions that have a close relationship with ANA, including Development Bank of Japan and Sumitomo Mitsui Banking. The entire management including current Chairman Takashi Ide and President Masakazu Arimori would then be replaced. Six members will sit on the board, with three to be appointed by Integral and one by ANA, and the remaining two by ANA's partner banks. Its president will be selected by ANA, while the chairman will be chosen by Integral. All jobs will be retained, and ANA and Integral have agreed to re-list Skymark within five years.

Details of the new partnership and corporate rehabilitation plan, which need to be submitted to the Tokyo District Court by May 29th, will now be worked on. It has between today and May 8th to negotiate with creditors to reduce its 316 billion JPY debt (Skymark's total debts skyrocket to 300 billion JPY.), including 700 million USD (84 billion JPY) from Airbus for the A380 cancellation (Skymark hopes to settle Airbus A380 penalty in October.) and 900 million USD (108 billion JPY) from Intrepid Aviation for scrapping A330 leases (Skymark terminates all Airbus A330 leases.). A brand revamp is also being considered (Skymark hints at new brand: SKY bee?). ANA's original proposal called for Skymark to reduce its fleet to 20 aircraft, implement extensive code-sharing, joint ticket sales, joint fuel purchases, joint crew training, and align its network to complement that of ANA's, virtually transforming them into a feeder carrier, replicating how it controls AIRDO [HD/ADO] (d.b.a. Air Do), Skynet Asia Airways [6J/SNJ] (d.b.a. Solaseed Air), and Star Flyer [7G/SFJ] through minority investments and sending in executives from ANA.

Boeing 787-8 JA816A rotates from Haneda. ANA and its affiliates now dominate 60% of the highly-coveted slots at the downtown Tokyo airport, including the 36 slot-pairs allocated to Skymark. Domestic routes still contribute to almost 70% of the largest Japanese carrier's revenue. (Photo: Ryosuke Yano)

However, all may not go in protectionist ANA's favor, as the agreement is fragile with conflicting interests and differences yet to be solved. Japan's biggest airline together with its partner banks initially demanded a 80% stake in Skymark to keep it under its influence once and for all and leave genuine domestic competition out of bread-and-butter Tokyo/Haneda [HND/RJTT] for as long as possible. But the idea was vehemently opposed by Integral, which wants to rebuild Skymark as an independent carrier. Regulator MLIT has also said it would limit any ANA investment in Skymark to five years to prevent a return to the ANA/JAL duopoly era at Tokyo/Haneda [HND/RJTT], though this may be invalidated by the governing Liberal Democratic Party (LDP), with which ANA enjoys a cozy relationship.

In any case, now all of Japan's mainline carriers are affiliated with either ANA or Japan Airlines [JL/JAL]. Air Do, Skymark, Solaseed Air, and Star Flyer along with LCCs Peach Aviation [MM/APJ] and Vanilla Air [JW/VNL] are all in the ANA flock, while Fuji Dream Airlines [JH/FDA], Japan Transocean Air [NU/JTA], and Jetstar Japan [GK/JJP] have JAL influence, leaving tiny and still highly-unprofitable LCC Spring Airlines Japan [IJ/SJO] as the only non-ANA/JAL carrier, though AirAsia Japan (Mk II) is preparing to challenge the duopoly next year (AirAsia admits Skymark bid defeat, Japan unit delay to 2016.). For Haneda, JAL holds 40% of domestic slot-pairs (184.5) and ANA 37.4% (172.5), however, when the slots of de facto subsidiaries Air Do, Skymark, Solaseed Air, and Star Flyer are combined, that figure jumps to a whopping 60%.

Source: Nikkei Shimbun, April 22nd. (in Japanese)
Source: Skymark Airlines, April 22nd. (in Japanese)

Skymark accedes to ANA investment.

Skymark Airlines [BC/SKY] (Skymark to file for bankruptcy.) has reportedly decided to accept sponsorship from ANA Holdings, parent of Japan's largest carrier All Nippon Airways [NH/ANA]. Over 20 firms, including AirAsia [AK/AXM] and ANA (ANA and AirAsia bid to save Skymark.), had submitted proposals to help Japan's third largest carrier out of bankruptcy. ANA would co-sponsor the embattled carrier with investment fund Integral Corporation, which has already pledged 9 billion JPY to keep Skymark flying while it restructures. Details will be released next week, according to people close to the matter.

Boeing 737-8HX JA737N prepares to depart from Naha while another Skymark 737 arrives into the Okinawa airport. The fleet of 27 narrow-body Boeings could be reduced to 20 if ANA's proposal goes through. (Photo: Ryosuke Yano)

Under the plan, Integral would control 50% or more, while ANA Holdings and its partner financial institutions would together hold the remaining 50% or less (Skymark likely to accept ANA sponsorship.). ANA's actual shareholding would be kept under 20% so that Skymark would not need to relinquish their 36 lucrative slot-pairs at Tokyo/Haneda [HND/RJTT], which is required by Japan's Ministry of Land, Infrastructure, Transport, and Tourism (MLIT) if that figure exceeds 20%. An initial capital of 18 billion JPY is to be injected into the ailing carrier; 9 billion JPY from Integral, 3.5 billion JPY from ANA, and the rest from ANA's partner financial firms.

Skymark also considered remaining independent from other airlines with support from only Integral, and the equity firm mulled being its sole sponsor. However, total liabilities grew to 316 billion JPY (Skymark's total debts skyrocket to 300 billion JPY.) after all creditors filed claims, including 700 million USD (84 billion JPY) from Airbus for the Airbus A380 cancellation (Skymark hopes to settle Airbus A380 penalty in October.) and 900 million USD (108 billion JPY) from aircraft lessor Intrepid Aviation for scrapping A330 contracts (Skymark terminates all Airbus A330 leases.). With Skymark's total assets having dwindled to just 5 billion JPY in February, management apparently deemed it difficult to reduce the charges without the negotiation power of a strong backing airline.

Domestic-configured Boeing 777-281/ER JA742A taxies for departure from Haneda. ANA will start retiring older 777-200s this year, with two to leave the fleet during FY2015. (Photo: Ryosuke Yano)

For ANA, the incentive had always been Skymark's 36 slot-pairs, or 7.8% of all domestic slot-pairs at heavily-regulated Haneda. Their proposal had called for sending in ANA's executives as advisers, reducing Skymark's fleet to around 20 aircraft, implementing extensive code-sharing, joint ticket sales, joint fuel purchases, joint crew training, and aligning its network to complement that of ANA's, virtually transforming Skymark into a feeder carrier for ANA, replicating how it controls AIRDO [HD/ADO] (d.b.a. Air Do), Skynet Asia Airways [6J/SNJ] (d.b.a. Solaseed Air), and Star Flyer [7G/SFJ]. Archrival Japan Airlines [JL/JAL] holds 40% of domestic slot-pairs (184.5) at Haneda with ANA 37.4% (172.5), however, the latter literally dominates 52.2% when combining those of Air Do, Solaseed Air, and Star Flyer. Adding Skymark would put all post-deregulation start-ups at Haneda under de facto ANA control and raise its share of slots to a whopping 60%.

However, ANA and Integral's agreement is reportedly fragile with conflicting interests and differences yet to be solved. ANA together with its partner banks initially demanded a 80% stake in Skymark, in effect taking full control, an idea vehemently opposed by Integral, which wants to rebuild Skymark as an independent carrier. Eventually re-listing the carrier and keeping all jobs are some of the terms that have been agreed on. Regulator MLIT has also said it would limit any ANA investment in Skymark to five years to prevent a return to the ANA/JAL duopoly era at Haneda, though this may be invalidated by the governing Liberal Democratic Party (LDP), with which ANA enjoys a cozy relationship. But if Integral holds majority control, sponsoring Skymark will not fully go in protectionist ANA's favor, which obviously wants to keep Skymark under its influence once and for all and keep genuine domestic competition out of bread-and-butter Haneda for as long as possible.

Time is running out. Skymark has between April 22nd and May 8th to negotiate with creditors to reduce its liabilities. A corporation rehabilitation plan must be handed in to the Tokyo District Court by May 29th, and it would need majority go-ahead at a creditor's meeting that would be held in late June for the plan to be implemented by the end of July. A new brand is also currently under consideration for launch as early as summer (Skymark hints at new brand: SKY bee?). In any case, the interests of the flying public seem to be out of the picture, completely.

Source: Nikkei Shimbun, April 15th. (in Japanese)
Source: Nikkei Shimbun, April 18th. (in Japanese)
Source: NHK, April 18th. (in Japanese)
Source: Asahi Shimbun, April 18th. (in Japanese)
Source: Sankei Shimbun, April 18th. (in Japanese)

Skymark hints at new brand: SKY bee?

Bankrupt Skymark Airlines [BC/SKY] (Skymark to file for bankruptcy.) confirmed that it will change its name and livery, and revamp their product along with staff uniforms. The re-branding could take place as early as late July, which is when their corporation rehabilitation plan would be implemented, provided it wins majority approval from creditors (Skymark's total debts skyrocket to 300 billion JPY.) at a meeting to be held in late June. The plan must be submitted to the Tokyo District Court, where it filed for bankruptcy protection, by May 29th.

Boeing 737-82Y(WL) JA737Z arrives at Ishigaki as flight BC567 from Naha on March 28th as Skymark's last flight to the southern Okinawa airport. Along with Miyako, it was dropped as part of their restructuring. (Photo: Aviation Wire)

"We want to think from zero," said Nobuo Sayama, President of Integral Corporation, in a weekend news program, revealing SKY bee is one of their top candidates for the new identity. Together with advertising agencies Sunny Side Up and TYO, the investment fund, which has pledged 9 billion JPY to keep the cash-strapped airline flying while it reorganizes (Skymark to cut 15% of flights, ground all Airbus A330s.), disclosed a logo that uses a hornet. On April 6th, Skymark's President Masakazu Arimori confirmed "We have come a long way, so we want to renew the airline. We can't tell if it will be SKY bee, but SKY will remain part of it."

Meanwhile, the selection of sponsors to help Skymark out of bankruptcy (Skymark seeks investor airline; scraps ANA & JAL dual tie-up.) is taking much longer than expected. "If there is an airline who is sincerely willing to help rebuild Skymark, we would like to work with them," said Mr. Sayama, implying their view of both bidders AirAsia [AK/AXM] and ANA Holdings, parent of All Nippon Airways [NH/ANA] (ANA and AirAsia bid to save Skymark.), as having no genuine interest in Skymark except for the lucrative 36 slot-pairs Japan's third largest carrier controls at Tokyo/Haneda [HND/RJTT]. "If our employees don't feel comfortable about the sponsor, we won't get along," reiterating that Integral is prepared to become its sole sponsor, taking full control of Skymark's rehabilitation.

On March 30th, ANA Holdings' new President Shinya Katanozaka said "We can't let a competitor slip away with the slots," adding "That would be detrimental to our business." So that Skymark wouldn't need to relinquish its precious slots, ANA would keep its investment under 20%, but "Partnering without shareholding is out of question," said Mr. Katanozaka, adding "We need to be at the center of their restructuring." The Ministry of Land, Infrastructure, Transport, and Tourism (MLIT), which regulates Haneda, has notified they would limit any ANA investment to five years, in an effort to keep Skymark as Japan's third force, but ANA's chief opposes "It took over a decade to get rid of AIRDO's [HD/ADO] (d.b.a. Air Do) and Skynet Asia Airways' [6J/SNJ] (d.b.a. Solaseed Air) debts, so in that event we will urge MLIT to lift that."

AirAsia Group's CEO Tony Fernandes is also expected to visit Tokyo soon to pitch his proposal to the embattled airline. According to people close to the matter, the chief of Asia's largest LCC group will present details of a plan to help Skymark settle penalties charged by Airbus and aircraft lessors for the canceled A380s (Skymark's Airbus A380 order in jeopardy.) and A330s (Skymark terminates all Airbus A330 leases.) as well as cooperate on operations, and discuss a potential future investment. "Our plan guarantees Skymark's independence," said the source. Meanwhile, a Skymark spokesperson said "We haven't talked in detail, so at this point we can't say if AirAsia's plan is acceptable or not." Mr. Fernandes is also busy with AirAsia Japan (Mk II), which is currently preparing to launch operations from Nagoya/Chubu Centrair [NGO/RJGG] by the end of this year (New AirAsia Japan eyes launch by year-end 2015.).

However, with Skymark starting to tweak its product, including overhauling its brand, it may actually decide to go without any airline sponsors after all. Check-in baggage allowance has been increased from 15 to 20 kilograms, while stricter cosmetics and hairstyle rules for flight attendants have been implemented, which at least don't seem to go in the direction of a LCC. But opting not to name any airline sponsors is likely to have a negative effect on their negotiation power with creditors in reducing their huge debt (Skymark's total debts skyrocket to 300 billion JPY.). Stay tuned.

Source: Reuters Japan, March 31st. (in Japanese)
Source: Jiji Press, April 1st. (in Japanese)
Source: Mainichi Shimbun, April 4th. (in Japanese)
Source: Aviation Wire, April 6th. (in Japanese) 
Source: Nikkei Shimbun, April 7th. (in Japanese)

*Edited/updated on April 7th, 2015.

Running out of time: Will Skymark join ANA?

On January 9th and 10th, the Yomiuri Shimbun and Asahi Shimbun reported Skymark Airlines [BC/SKY] had given up on restructuring themselves on their own, and that Japan's struggling third largest carrier is seeking to come under the umbrella of ANA Holdings, parent of All Nippon Airways [NH/ANA].

Boeing 737-8FZ(WL) JA737U awaits its next flight at Haneda. Skymark controls 36 prized slot-pairs at the heavily-regulated downtown Tokyo airport. (Photo: Ryosuke Yano)

Quoting senior ANA officials familiar with the matter, ANA would take control of a few points short of 20% of Skymark's shares on condition that the Airbus A380 cancellation penalty (Skymark hopes to settle Airbus A380 penalty in October.) is settled and current senior executives, including President and CEO Shinichi Nishikubo, are replaced by those from ANA. A 20% or more ownership change of carriers holdings slots at Tokyo/Haneda [HND/RJTT] would require it to relinquish them for redistribution. The plan also calls for Development Bank of Japan and Sumitomo Mitsui Banking (SMBC) to provide financial support. The articles also say the transaction already has government rapport.

However, Skymark quickly denied the reports. According to Aviation Wire, "We have asked them for a code-share pact, but nothing regarding an investment. Nothing about management change either," said a senior official at Skymark. An interview by Kyodo Press also quoted a Skymark spokesperson saying "There is no change in our independent management policy and we have no plan to be an affiliate of ANA," though adding "But we are considering all options." An ANA official was also quoted as saying "It's not something we decide. If they bring it up to us, we will consider it."

Airbus A320-211 JA8394 taxies at Haneda. Only a dozen A320s remain with the carrier, however, phase-out is gradual as ANA now needs more narrow-body aircraft. The first of 30 A321/320neos on order will arrive in FY2016. ANA wants to take advantage of its comfortable relationship with the current government to further widen its market share at Haneda against JAL. (Photo: Ryosuke Yano)

In December, Japan's Ministry of Land, Infrastructure, Transport, and Tourism (MLIT) was orchestrating a Skymark tie-up with both ANA and Japan Airlines [JL/JAL] (Skymark forced to seek ANA & JAL dual tie-up.) in a bid to keep Skymark as Japan's third force, after the troubled airline started non-investment partnership talks with JAL (Skymark in talks with JAL for broad tie-up.). Also, the Liberal Democratic Party (LDP)-controlled government is not comfortable about JAL, bailed out in 2010 by then-Democratic Party of Japan (DPJ)-led regime, expanding through the tie-up. Under the scheme, both ANA and JAL would place their codes on Skymark's five routes from Haneda from the Summer 2015 timetable for five years, together selling about 20% of its seats, generating an estimated annual 8 billion JPY.

Skymark is also negotiating with four financial institutions for capital injection through third-party allocation of new shares. The number of shares will be increased by up to 25%, and they have called for an extraordinary (emergency) shareholders' meeting on February 18th to receive approval.

However, Skymark's financial health seems to be deteriorating faster than even they had estimated themselves; system-wide load factor for December was 54.5%, its worst record since starting to post figures in April 2010. Of their 23 non-stop routes, a dozen turned out less than 50%, and four, Kobe [UKB/RJBE]– Kagoshima [KOJ/RJFK], Sendai [SDJ/RJSS] – Sapporo/New Chitose [CTS/RJCC], Kobe – Sendai, and Yonago [YGJ/RJOH] – Okinawa/Naha [OKA/ROAH] showed less than 40%. Most critically, none of its core Haneda routes exceeded 70%. The five routes from the downtown Tokyo airport have performed in the 70-90% range, generating roughly 80% of their revenue.

Skymark burned 2.5 billion JPY in cash reserves just in the six months to September 2014, bringing down the total on hand to 4.5 billion JPY, but they are probably now bleeding at an even faster rate. Adding to the already fierce competition with legacy carriers as well as the expanding LCCs, the struggling airline's continued negative media coverage is apparently keeping passengers from choosing to fly with them. Skymark has no loyalty program, which was planned but shelved and is now considered one of their biggest mistakes in a country where brand affinity counts significantly.

Boeing 737-846(WL) JA307J lines up for takeoff from New Chitose near Sapporo. The last thing JAL wants to see is a ANA/Skymark tie-up, further widening the gap at Haneda. (Photo: Ryosuke Yano)

In other news, Airbus is preparing to file a lawsuit against Skymark for the A380 cancellation (Skymark's Airbus A380 order in jeopardy.) with a commerce court in the U.K., seeking around 7 million USD (83.9 billion JPY), in addition to already-made deposits amounting to 26.5 billion JPY, which are unlikely to be refunded.

As I have reiterated, Skymark's independence is crucial to keeping prices low at heavily-regulated Haneda. But with that now almost impossible with time and cash running out, the next best scenario would be a ANA/JAL dual or JAL solo partnership. 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, when 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%.

An ANA investment would be detrimental to the flying public. Skymark would become merely a feeder carrier for ANA, joining the likes of three other minority-owned carriers, ANA would virtually control a dominant 60% of slot-pairs at Haneda, higher airfares will come back on some routes, and it would also translate to the failure of aviation deregulation in Japan where the ANA/JAL duopoly persists.

Source: Asahi Shimbun, December 15th. (in Japanese)
Source: Yomiuri Shimbun, January 9th. (in Japanese)
Source: Aviation Wire, January 9th. (in Japanese)
Source: Asahi Shimbun, January 10th. (in Japanese) 
Source: Skymark Airlines, January 10th. (PDF; in Japanese)
Source: Mainichi Shimbun, January 11th. (in English)

Skymark forced to seek ANA & JAL dual tie-up.

Skymark Airlines [BC/SKY] will ask ANA Holdings, parent of All Nippon Airways [NH/ANA] for a partnership as early as next week, according to a Nikkei report. Japan's struggling third largest carrier had only revealed on November 21st that they were seeking help from Japan Airlines [JL/JAL] in the form of a broad code-share pact (Skymark in talks with JAL for broad tie-up.). However, the government's Ministry of Land, Infrastructure, Transport, and Tourism (MLIT) decided to postpone granting permission, and instead has since been pushing Skymark to partner with ANA as well.

Airbus A330-343E JA330A taxies at Haneda. Skymark's introduction of the type (Skymark Airlines inaugurates Airbus A330 service.) reduced load factors, and the recent negative publicity is further hurting figures. (Photo: Ryosuke Yano)

If roughly 20% of its seats are sold to ANA and JAL, respectively, it could generate an estimated annual 16 billion JPY for the cash-strapped airline. However, Skymark's President and CEO Shinichi Nishikubo expressed his displeasure, repeating many times that partnering with both "defied common sense and is divorced from the logic of private-sector enterprise," adding "For this time, we'll be compromising with the authorities," citing the dual-partnership scenario is orchestrated by the MLIT. This would delay code-share launch from February to late March, the beginning of the Summer 2015 timetable, at earliest.

From a consumer's point of view, Skymark's full independence is crucial to keeping prices low at heavily-regulated Tokyo/Haneda [HND/RJTT]. But with that now almost impossible with cash reserves quickly running low, the next best scenario would be a JAL partnership. 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%. A Skymark partnership would increase JAL's share to 47.8% against ANA's, which would maintain close competition.

On the other hand, the other way around would have a detrimental effect, where ANA would control 60% and JAL remaining at only 40%. And despite knowing this, the MLIT has been pushing for a de facto takeover of Skymark by ANA. The biggest reason behind this is that the current Liberal Democratic Party (LDP)-controlled government wants 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. And more, JAL accomplished a remarkable turnaround, and staunch LDP conservatives are willing to do whatever they can to dilute JAL's success.

ANA wants to take advantage of its comfortable relationship with the current government to further widen its domestic share lead against JAL. It wants Skymark to come under ANA's umbrella, joining the likes of Air Do, Solaseed Air, and Star Flyer. (Photo: Aviation Wire)

Hence ANA's awarding of eight slot-pairs when domestic slot-pairs at Haneda were increased by 25 in March 2013. That time, Air Do received two, Solaseed Air three, Star Flyer five, while Skymark was awarded four and JAL only three. But with ANA virtually controlling the former three through minority investments, code-sharing, and coordinating schedules, they virtually received 18 slot-pairs at their disposal. For international slot-pairs that were awarded in March 2014, ANA received 11 (ANA's Summer 2014 international expansion.) while JAL only five. ANA has clearly been the government's favorite.

A JAL spokesperson has said "If it was a request from the MLIT, we won't say anything," adding the second largest domestic carrier is willing to code-share even with ANA joining. However, ANA has been saying "In no way will we let a JAL/Skymark partnership happen," and sources say that ANA is only seeking for a sole-partner scenario where ANA would invest in Skymark to have managerial influence over routes and prices it operates, replicating what it did with Air Do, Solaseed Air, and Star Flyer and how it controls them. However, for Mr. Nishikubo, who has often said out loud "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," joining the likes of the three young carriers under ANA is the last thing they will be looking into.

An MLIT official has been quoted as saying "We want them to do whatever they can to remain the third force." However, after the December 14th snap elections for Lower House seats, where the LDP is still widely expected to win with opposition parties still unorganized and unprepared, political fiddling could get even stronger. Mr. Nishikubo has also confirmed that they are currently talking with four investment funds to sell up to 25% of its shares in January to raise cash, though adding that the money would be used to pay early-return penalties for some of its leased Boeing 737s that will be disposed of, and to stay afloat until the code-share pact comes into effect. It illustrates the rapidly deteriorating financial state of the airline.

Unfortunately for Skymark, with ANA enjoying strong lobbying power with the current government, a deal which could be acceptable to Mr. Nishikubo is unlikely to bear fruit too soon. And the longer it takes, Skymark's financial situation would only become worse. Or maybe some politicians and ANA are hoping for that scenario, where the only way out for Mr. Nishikubo would be a de facto ANA takeover? The government should be regulating, not fiddling with aviation politics. Consumer's should be put first, not the interests of politicians or mega corporations. I certainly do hope they can reach a sensible solution, but I'm afraid Japanese politics is not there yet.

Source: Nikkei Shimbun, December 9th. (in Japanese) 
Source: NHK, December 10th. (in Japanese)
Source: Skymark Airlines, December 10th. (PDF; in Japanese)
Source: Skymark Airlines, December 10th. (PDF; in Japanese)
Source: Nikkei Shimbun, December 10th. (in Japanese)

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)

Mitsubishi mulls launching feeder airline.

On September 4th, Mitsubishi and group company Mitsubishi Heavy Industries, along with Japan Tourism Marketing, a wholly-owned subsidiary of Japan's largest travel agency JTB, University of Tokyo, Development Bank of Japan, Ministry of Land, Infrastructure, Transport, and Tourism (MLIT), and others held the first meeting of a committee aiming at launching a new commuter airline that would fly regional jets to serve rural routes. Officials from All Nippon Airways (NH/ANA) and Japan Airlines (JL/JAL) were invited as well.

Prototype Mitsubishi MRJ90 JA21MJ inside their factory at Nagoya's Komaki. Official roll-out is planned for October 18th with first flight to take place in spring 2015. (Photo: Mitsubishi)

The Committee for Next Generation Community Airline Network calls for the new carrier to fly the Mitsubishi Regional Jet (MRJ) family to connect existing major hubs, rural cities, and regional international destinations in China and South Korea on behalf of major carriers ANA, JAL, and overseas airlines. Members believe that operating the fuel-efficient MRJ on a platform to commonly feed all the major carriers would enable them to cut costs and offer lower fares that would lead to "revitalizing underutilized rural airports," according to Yuichi Hiromoto, the Mitsubishi executive heading the group.

Similar to the model common in the U.S., the new airline would be a feeder carrier for the majors and would not be selling tickets on their own. However, current laws in Japan do not allow the operating airline and the ticket-selling company to be different corporations, so the committee will ask the MLIT to ease the rules. Japan is targeting 20 million annual visitors by the 2020 Tokyo Olympics/Paralympics, and the new airline would offer a cost-effective alternative to Tokyo's congested Haneda (HND/RJTT) and Narita (NRT/RJAA) airports, members say. Operations are targeted as early as 2017, when the first MRJ is delivered to launch customer ANA, which has 25 on order. 

Although plagued by delays, the prototype MRJ will finally be rolled out on October 18th at Mitsubishi's plant at Nagoya/Komaki (NKM/RJNA), with first flight slated for April or May 2015. Along with ANA, JAL also recently became a customer (JAL orders 32 Mitsubishi MRJs and 27 Embraer E-Jets.), ordering 32 for deliveries starting in 2021. Powered by Pratt & Whitney's PurePower PW1200G series geared turbofan engines, the MRJ family consists of the 78-seat MRJ70, which can fly 3,380 kilometers (2,100 miles), and the 92-seat MRJ90, with a 3,310-kilometer (2,050 miles) range. It is Japan's first commercial airliner since the NAMC YS-11 was introduced in 1965.

Reference: Nikkei Shimbun, September 2nd. (in Japanese)
Reference: NHK, September 5th. (in Japanese)

Skymark's fate: AirAsia, ANA, Delta, or...?

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.

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.