Skymark's total debts skyrocket to 300 billion JPY.

Skymark Airlines' [BC/SKY] total liabilities grew to nearly 300 billion JPY, after all creditors filed claims by the March 18th deadline specified by the Tokyo District Court, where Japan's third largest carrier sought for bankruptcy protection (Skymark to file for bankruptcy.) in January. Airbus is demanding 700 million USD (84 billion JPY) in compensation for the canceled Airbus A380 order (Skymark hopes to settle Airbus A380 penalty in October.), while aircraft lessor Intrepid Aviation is seeking 900 million USD (108 billion JPY) for scrapping seven A330 lease contracts (Skymark terminates all Airbus A330 leases.).

Two of Skymark's Airbus A330-300Es are seen grounded at Tokyo International Airport at Haneda. All five could be heading out to the desert for long-term storage, now that the leases have been terminated. (Photo: Ryosuke Yano)

Other major creditors include ANA Trading, Boeing, Central Japan International Airport (operator of Nagoya/Chubu Centrair [NGO/RJGG]), Japan Airlines [JL/JAL], Japan Airport Terminal (operator of Terminals 1 & 2 at Tokyo/Haneda [HND/RJTT]), and Shinichi Nishikubo (Skymark's former CEO). The embattled carrier had earlier estimated its liabilities at 71 billion JPY, excluding claims from Airbus and leasing firms. A 300 billion JPY debt would push Skymark into insolvency, as their total assets stood at 74 billion JPY as of December 2014. The airline is expected to perform a 100% capital reduction. 

By April 15th, Skymark will issue a statement of approval or disapproval for the submitted claims, and the cash-strapped airline and creditors have between April 22nd and May 8th to negotiate final figures. 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. Skymark is likely to decide whether to accept an airline sponsorship, either from AirAsia [AK/AXM] or All Nippon Airways' [NH/ANA] parent ANA Holdings (ANA and AirAsia bid to save Skymark.), or go without it and only endorse financial assistance from Integral Corporation plus other investment firms.

Sponsorship proposals from neither AirAsia nor ANA Holdings have been made public. However, the Malaysia-based pan-Asian LCC group is reportedly calling for a re-branding of Skymark under AirAsia, launching a new joint-venture (JV) long-haul subsidiary (a hint at AirAsia X Japan?), and a potential future merger with AirAsia Japan (Mk II), which is currently preparing to launch operations from Chubu Centrair by the end of this year (New AirAsia Japan's first Airbus A320 due in July.). It would also mediate talks with Airbus to reduce Skymark's debt. Meanwhile, ANA Holdings' plan reportedly calls for 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 Japan's largest carrier.

Source: Nikkei Shimbun, March 20th. (in Japanese)

Skymark decides to close Yonago, keep Ibaraki.

Skymark Airlines [BC/SKY] confirmed that its Yonago [YGJ/RJOH] focus city would be closed down after operating its last flights on August 31st. The bankrupt carrier (Skymark to file for bankruptcy.) notified the Japan Civil Aviation Bureau (JCAB) on February 27th that they would suspend its single daily services to Kobe [UKB/RJBE] and Okinawa/Naha [OKA/ROAH], its last two remaining destinations from the airport in Tottori prefecture.

Boeing 737-8HX JA737P is being prepared for its next flight at Ibaraki. Being the sole domestic carrier at the airport, Skymark has confirmed it will stay. Ibaraki is Japan's first LCC-tailored airport, boasting operating fees 40% lower than the other two main airports serving the Greater Tokyo region. (Photo: Ryosuke Yano)

Yonago was a new destination only launched on December 20th, 2013 as a focus city, boasting five routes covering Kobe, Naha, Sapporo/New Chitose [CTS/RJCC], Tokyo/Haneda [HND/RJTT], and Tokyo/Narita [NRT/RJAA] at peak time last summer. However, as Skymark's financial situation quickly deteriorated (Skymark braces for 13.7 billion JPY loss in FY2014.), New Chitose along with both airports serving Tokyo were axed effective October 27th, 2014. Load factor for January was 42.9% for Yonago – Kobe and 39.3% for Yonago – Naha.

Japan's third largest carrier is also considering closing down its Sendai [SDJ/RJSS] focus city as well (Skymark mulls Yonago pull-out and Sendai cuts.). All flights to Fukuoka [FUK/RJFF] and New Chitose will be dropped effective March 30th, after it reduced flights on February 1st (Skymark to cut 15% of flights, ground all Airbus A330s.), relegating it to a spoke city. Kobe will remain the only destination, but load factors for that route have also hovered around 30-40%, so an entire withdrawal is probably only a matter of time.

Meanwhile, they confirmed that it would keep flying from Ibaraki [IBR/RJAH], citing low operating costs. "We will continue to use it as one our main focus cities; we may even add more flights," said Representative Chairman Takashi Ide. Skymark is the only domestic carrier serving the airport originally designed with LCCs in mind. It is also the third airport in the Kanto (Greater Tokyo) region after Haneda and Narita, mainly catering to those living in the north and northeast of Japan's largest metropolitan area.

The cash-strapped airline is currently running on financial aid provided by investment fund Integral Corporation, and they together are in the process of selecting an airline sponsor as well as a few non-airline partners. AirAsia [AK/AXM] and ANA Holdings, parent of All Nippon Airways [NH/ANA], are the only two airline firms that have submitted comprehensive proposals (ANA and AirAsia bid to save Skymark.), however, Integral's Director Nobuo Sayama recently interestingly said "We will examine all proposals, but we don't necessarily need to make a selection," adding "We may choose to do it 100% ourselves."

Skymark's shares were de-listed on March 1st, and it will perform a 100% capital reduction, turning all stocks into scrap pieces of paper. Former President and CEO Shinichi Nishikubo, who owned 30% of Skymark when he was at helm, had decreased its shareholding to 9.78% by February 6th, and that figure was down to zero by February 19th.

Source: Nikkei Shimbun, February 26th. (in Japanese)
Source: Skymark Airlines, February 27th. (in Japanese)
Source: NHK, February 27th. (in Japanese)
Source: Mainichi Shimbun, February 28th. (in Japanese)
Source: Nihonkai Shimbun, February 28th. (in Japanese)

Skymark likely to accept ANA sponsorship.

Skymark Airlines [BC/SKY] is bankrupt (Skymark to file for bankruptcy.). But the biggest question does not change: who will come to save them? ANA Holdings, parent of Japan's largest carrier All Nippon Airways [NH/ANA], financial services group Orix, travel agency H.I.S., Shinsei Bank, and major trading firm Sojitz seem to be some of the high-profile names that have shown interest so far. At the center of the picture is the cash-strapped airline's 36 slot-pairs at Tokyo/Haneda [HND/RJTT], the preferred but heavily-regulated downtown airport serving the capital.

ANA, JAL, and Skymark aircraft at Haneda. The flagship all-premium A330s were grounded only three days after announcing its bankruptcy filing. An ANA/Skymark tie-up is appearing likely, which is the last thing JAL wants to see. (Photo: Aviation Wire)

Last spring, a few months before Skymark's Airbus A380 issue (Skymark's Airbus A380 order in jeopardy.) came into light, Japan Civil Aviation Bureau (JCAB) was already aware of the troubled airline's deteriorating financial health and had approached Delta Air Lines [DL/DAL] to assist. ANA and Japan Airlines [JL/JAL] furiously lobbied the government not to allow an airline holding Haneda's domestic slots to slip into foreign hands. 

When JAL filed for bankruptcy in 2010, JCAB succeeded in bringing Delta to the table to discuss a plan to save JAL together with Japanese investment firms. JAL eventually chose government bailout and remained aligned with Oneworld partner American Airlines [AA/AAL]. However, this time with Skymark, the Skyteam carrier concluded to keep its hands off, probably considering the embattled carrier's growing debt and Airbus A380 problem (Skymark hopes to settle Airbus A380 penalty in October.), along with the uncertainty of their 36 slot-pairs at Haneda, which would need to be relinquished if ownership change exceeds 20%.

Boeing 757-2Q8(WL) N624AG taxies at New York's JFK Airport. Although Delta fought fiercely to lure then-bankrupt JAL, it has apparently decided to keep its hands off of Skymark. With ANA/United and JAL/American joint-ventures now well established, Delta is at a disadvantage in the Japan market. (Photo: Ryosuke Yano)

Meanwhile, knowing that accepting financial aid from ANA would "deny Skymark's meaning of existence as Japan's third force," former President and CEO Shinichi Nishikubo had looked overseas for investors from early 2014. Reportedly, Mr. Nishikubo talked with the AirAsia Group the most. Actually, AirAsia Japan (Mk I) [JW/WAJ] (CoachFlyer JW8541: NRT - FUK on AirAsia Japan's Airbus A320.), the failed joint-venture between the Malaysia-based pan-Asian LCC group and ANA, was originally planned to have Skymark as its partner, until ANA came in fearing the potential of the combination.

Although group CEO Tony Fernandes denied rumors then (Is AirAsia considering a Skymark takeover?), a three-way deal was discussed where Airbus would significantly reduce the A380 cancellation penalty if AirAsia [AK/AXM] took over Skymark. "We seriously thought we could hand over management to Tony," current Representative Chairman Takashi Ide revealed. But Skymark was in the middle of transforming themselves into a low-fare premium airline (Skymark Airlines inaugurates Airbus A330 service.), and after JCAB officially quoted that ownership change exceeding 20% would necessitate giving all Haneda slots back to the regulator (Skymark's fate: MLIT discourages foreign investment.), talks ended in November.

Airbus A320-216 HS-ABB of Thai AirAsia taxies at Khon Kaen. Asia's largest LCC group has discussed a potential tie-up with Skymark several times to gain access to the preferred but heavily-regulated airport in Japan's by far most important market. (Photo: Ryosuke Yano)

However, discussions with Mr. Fernandes quietly resumed again in early January, this time with Singaporean and different Japanese investment funds. The deal included reconfiguring Skymark's A330s (Skymark Airbus A330 operates last revenue flight.) in a high-density layout and placing them on international routes, hinting an AirAsia X Japan. But the plan was reportedly shelved before February after one of the investment funds withdrew. At the same time, Mr. Nishikubo also approached Spring Airlines [9C/CQH] and its Japanese affiliate Spring Airlines Japan [IJ/SJO] for help. Response from the Chinese LCC group was positive, however, they needed to carry out due diligence, and Skymark ran out of time.

According to an interview on February 16th, Mr. Ide revealed that the proposed three-way code-share with ANA and JAL would likely be scrapped (Skymark seeks investor airline; scraps ANA & JAL dual tie-up.). The planned partnership was aimed at filling seats of Skymark's Airbus A330s, but those aircraft have now been grounded. Probably shocking for former chief Mr. Nishikubo, Mr. Ide said he now prefers sponsorship from a Japanese major airline rather than an overseas airline, adding "Our brand was stuck in the middle (of full-service carriers and LCCs). There are lots of things we can learn from the major carriers, for example in service quality." He said if a Japanese major carrier offered financial assistance, Skymark would accept it.

Airbus A320-214 B-6706 of Spring Airlines at Ibaraki. China's first and largest LCC group, which already flies 13 routes to Japan covering six destinations, also showed interest in aiding Skymark. Its Japanese unit currently operates domestic routes, with Chinese destinations to be launched later this year, with an all-Boeing 737 fleet. (Photo: Aviation Wire)

After the bankruptcy filing, a JAL spokesperson said "We have never considered an investment in Skymark, and have no plans to." Also, the controversial 8.10 Paper prohibits JAL, itself saved from bankruptcy by a government bailout in 2010, from making any new investments until FY2017. Meanwhile, on February 13th, ANA Holdings' outgoing President Shinichiro Ito publicly said "We have been very interested in Skymark. We are evaluating how Japan's air industry should be shaped, and how we could do that." Shinya Katanozaka, incoming President effective April 1st, added "Air Do, Skynet Asia, Star Flyer all have important roles to play under the ANA umbrella. I could see Skymark's role there too as a community-focused airline. We don't really see a need for a third force."

Delta and JAL are out, and AirAsia and Spring may be considering. But ANA is surely creeping towards putting Skymark's lucrative 36 Haneda slot-pairs into their hands, with a roadmap reportedly already in place since last year to transform it into a feeder carrier for ANA, replicating what it did with AIRDO [HD/ADO] (d.b.a. Air Do), Skynet Asia Airways [6J/SNJ] (d.b.a. Solaseed Air), and Star Flyer [7G/SFJ]. And Skymark is likely to accept that offer, now that charismatic Mr. Nishikubo is no longer at helm (Running out of time: Will Skymark join ANA?). For sponsorship contenders, deadline for application by non-airline firms is February 19th, while for airlines is 23rd, according to Skymark's financial advisor GCA Savvian.

JAL controls 40.0% of domestic slot-pairs (184.5) at Haneda with ANA holding 37.4% (172.5), however, the latter virtually controls 52.2% when combining those of Air Do, Solaseed Air, and Star Flyer, in which ANA owns minority stakes and implements extensive code-sharing and schedule coordinating. Placing Skymark, which controls 7.8% (36), under the umbrella of Japan's largest airline would virtually have ANA dominate 60.0% of slots at Haneda, which is the last thing JAL wants to see. And needless to say, a return to the ANA/JAL duopoly era would be detrimental to the flying public. 

Source: Aviation Wire, February 2nd. (in Japanese)
Source: Nikkei Shimbun, February 13th. (in Japanese)
Source: Mainichi Shimbun, February 13th. (in Japanese)
Source: Nikkei Shimbun, February 14th. (in Japanese)
Source: Mainichi Shimbun, February 16th. (in Japanese) 
Source: Sankei Shimbun, February 17th. (in Japanese) 
Source: Nikkei Shimbun, February 20th. (in Japanese) 
Source: Toyo Keizai, February 20th. (in Japanese)

*Edited/updated on February 20th.

Integral: Keeping Skymark the third force not priority.

On February 5th, Skymark Airlines [BC/SKY] announced that they had reached an agreement with Integral Corporation to restructure Japan's bankrupt third largest carrier (Skymark to file for bankruptcy.). The investment fund will finance 9 billion JPY under a debt-equity swap scheme, where Integral would become a shareholder once Skymark, which will be de-listed on March 1st, makes it to a listed airline again. 3 billion JPY will be used immediately to pay for overdue landing fees at Tokyo/Haneda [HND/RJTT].

Boeing 737-8HX(WL) JA73NH taxies at Fukuoka. The aircraft was returned to lessor Aviation Capital Group as N381AG in January. Skymark's fleet was standardized on 27 737s effective February 1st. (Photo: Ryosuke Yano)

"It's not a short-term investment; we're fully committed," said Integral's Director Nobuo Sayama, who revealed that four staff have already been dispatched to Skymark to help come up with a company rehabilitation plan that needs to be submitted to the Tokyo District Court by May 29th. Regarding sponsors (Skymark seeks investor airline; scraps ANA & JAL dual tie-up.), Mr. Sayama said "We're looking from a broad range."

Asked whether Skymark was still committed to retaining its position as Japan's third force, with no financial affiliation with All Nippon Airways [NH/ANA] nor Japan Airlines [JL/JAL], Mr. Sayama replied "That is not necessarily our priority," adding that restructuring the airline and putting it on a road to profitability within a year is. This virtually confirms that likelihood of an ANA investment is getting higher (Running out of time: Will Skymark join ANA?), as JAL remains prohibited from making any major investments until April 2017.

Code-sharing with other domestic carriers such as ANA and JAL (Skymark takes ANA & JAL dual tie-up, axes Sendai – Sapporo.) "has merits, and we are evaluating it in a positive way," Mr. Sayama added. Skymark quickly grounded their entire Airbus A330 fleet (Skymark Airbus A330 operates last revenue flight.) on January 31st, and President and Representative Director Masakazu Arimori revealed that load factor for the Haneda – Fukuoka [FUK/RJFF] route is back to exceeding 90% for February so far. Frequencies were also cut on a number of secondary routes (Skymark to cut 15% of flights, ground all Airbus A330s.).

Meanwhile, former President and CEO Shinichi Nishikubo's control of Skymark's shares has decreased to 9.78%, according to an ownership change report submitted by the airline to Japan's Ministry of Finance. The charismatic ex-leader had been the biggest shareholder holding 30.57%, however, 18.98 million stocks are believed to have been sold off between February 2nd and 4th for approximately 400 million JPY total.

Source: Skymark Airlines, February 5th. (in Japanese)
Source: Aviation Wire, February 6th. (in Japanese)
Source: Nikkei Shimbun, February 6th. (in Japanese)

*Edited/updated on February 7th.

Skymark to file for bankruptcy.

Skymark Airlines [BC/SKY] has reportedly decided to file for bankruptcy protection with the Tokyo District Court, after an emergency board meeting was held on the night of January 28th. Investment fund Integral Corporation has been named by officials close to the matter, which will finance and help Japan's third largest carrier continue operations as normal. This becomes the second airline bankruptcy in Japan in five years, after Japan Airlines [JL/JAL] sought for bankruptcy protection in 2010.

Boeing 737-86N(WL) JA737R thunders out of Tokyo International Airport at Haneda, where Skymark controls 36 slot-pairs. This aircraft is leased from Avolon Aerospace. (Photo: Ryosuke Yano)

Charismatic and hands-on President and CEO Shinichi Nishikubo, who is also the airline's biggest shareholder controlling over 30%, is expected to step down. Managing Director Masakazu Arimori will assume leadership. Total debt is estimated to amount to over 100 billion JPY, including the 700 million USD in penalties Airbus is seeking for the cancellation of the Airbus A380 order (Skymark hopes to settle Airbus A380 penalty in October.).

Although predicting a 354 million JPY net profit for FY2014 only a year ago, its financial health quickly deteriorated from 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, high fuel costs (until a few months ago), and intensified competition with the LCCs as well as full-service carriers, which have become more aggressive.

The cash-strapped airline 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 after then they were probably bleeding at an even faster rate. Skymark's continued negative media coverage has apparently kept passengers from choosing to fly with them. They also enjoy 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. Its predicted record loss for FY2014 (Skymark braces for 13.7 billion JPY loss in FY2014.) is expected to be even greater.

A number of aircraft lessors as well as airlines are reportedly already showing interest in sponsoring Skymark's restructuring. Intrepid Aviation, which owns five of Skymark's six A330s (the other is owned by CIT Aerospace), as well as AWAS, GECAS, among others, along with Airbus are the biggest creditors, which probably will have a say in the decision. However, concerning financial assistance from airlines, unless the controversial 8.10 Paper, which prohibits JAL from making any new investments until FY2017, is reviewed, All Nippon Airways [NH/ANA] is virtually the only carrier able to give a hand. 

Mr. Nishikubo had said an investment from ANA would be the last thing they would be looking into, however, their reported consideration of it (Running out of time: Will Skymark join ANA?) and rejection probably illustrated their dire financial health. A dual partnership with ANA and JAL (Skymark takes ANA & JAL dual tie-up, axes Sendai – Sapporo.) was being orchestrated by Japan's Ministry of Land, Infrastructure, Transport, and Tourism (MLIT) after the regulator was hesitant to accept Skymark's tie-up with JAL (Skymark in talks with JAL for broad tie-up.) and tried to keep Skymark afloat as Japan's third force and the last child of deregulation that remains independent.

Skymark currently operates 23 non-stop routes covering only domestic destinations using a fleet of five A330-300s and 27 Boeing 737-800s, and employs approximately 2,200 staff. Its 3Q FY2014 results will be released tomorrow on January 29th.

But the biggest question remains; how will they restructure?

Source: Nikkei Shimbun, January 28th. (in Japanese)

*Edited/updated on February 12th.

Skymark takes ANA & JAL dual tie-up, axes Sendai – Sapporo.

Skymark Airlines [BC/SKY] is preparing to submit a code-share pact with both All Nippon Airways [NH/ANA] and Japan Airlines [JL/JAL] to the Japan Civil Aviation Bureau (JCAB), hopefully in time for March 29th, the beginning of the Summer 2015 timetable. The deadline for applying for domestic routes for this summer was January 21st, but the three carriers put off submitting the dual partnership as "preparations couldn't make it in time," according to both ANA and JAL.

Airbus A330-343E JA330B is pushed back at Haneda. What was a product to better compete with ANA and JAL became part of their cost burden, decreased load factors, and is now calling for its two archrivals to help fill its seats. (Photo: Aviation Wire)

"We need to understand the details of Skymark's policies," said an ANA spokesperson, while its counterpart at JAL also said "We are currently evaluating the proposal to make it in time for March 29th." Under the scheme, ANA would place its code on all five of Skymark's five routes from Tokyo/Haneda [HND/RJTT]; Fukuoka [FUK/RJFF], Kagoshima [KOJ/RJFK], Kobe [UKB/RJBE], Okinawa/Naha [OKA/ROAH], and Sapporo/New Chitose [CTS/RJCC]. JAL will place its code on all but to Kobe, where it no longer has a presence. There's no deadline for code-sharing, however, the more it is delayed, the shorter the time they have to sell the seats.

The code-share pact is vital for Japan's third largest carrier to stay afloat, as selling 20% of its seats on routes from Haneda is expected to generate an annual 8 billion JPY in increased revenue. Skymark is also negotiating with four financial institutions for capital injection through third-party allocation of new shares. The number of shares is expected to be increased by up to 25%, and to receive approval they have called for an extraordinary (emergency) shareholders' meeting, though the February 18th date has been postponed to a later date.

Rumors circulated in early January that Skymark was evaluating an investment from ANA (Running out of time: Will Skymark join ANA?), however, that seems to have been shelved. ANA's reported acquisition of just 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 most significantly, current senior executives are replaced by those from ANA, was probably unacceptable to the troubled carrier, whose President and CEO Shinichi Nishikubo has reiterated "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."

Meanwhile, the cash-strapped airline also announced they would be suspending its three-times daily Sendai [SDJ/RJSS] – New Chitose service on March 28th. Its load factor has been hovering around 30-40% in recent months. The route sees competition from AIRDO [HD/ADO] (d.b.a. Air Do), ANA, IBEX Airlines [FW/IBX], and JAL. Its until recently focus city of Yonago [YGJ/RJOH] (Skymark mulls Yonago pull-out and Sendai cuts.) will continue to see nonstop service to Kobe and Naha, however, if load factors do not improve during Summer 2015, they are probably the next in line for the axe.

In other news, Skymark's all-premium 271-seat Airbus A330 (Skymark Airlines inaugurates Airbus A330 service.) will be deployed on the Haneda – Naha route starting on June 1st, when the southern beach resorts become popular in the summer months. It becomes the third A330 route after Fukuoka and New Chitose.

Source: Skymark Airlines, January 21st. (in Japanese) 
Source: Nikkei Shimbun, January 21st. (in Japanese)

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)

Is the new AirAsia Japan delaying launch?

It was July 1st when the reincarnation of AirAsia Japan (Mk II) was boldly announced (AirAsia Japan is officially reborn; first flight June 2015.) with non-airline partners Octave Japan Infrastructure Fund owning 19%, Rakuten 18%, Noevir Holdings 9%, and Alpen 5% with an initial capital totaling 7 billion JPY, together with AirAsia's [AK/AXM] 49%. First flight was told to take place as early as July 2015 from Nagoya/Chubu Centrair [NGO/RJGG] (AirAsia Japan selects Nagoya Chubu Centrair.) initially with domestic routes. But nothing has been heard from them since.

However, in their Third Quarter 2014 report, the AirAsia Group announced plans to take only five Airbus A320s in 2015, with four earmarked for Thai AirAsia [FD/AIQ] and a single aircraft for AirAsia (Malaysia). The southeast Asia market is now suffering from overcapacity and most of AirAsia Group's airlines are incurring losses or significantly reduced profits, though still performing better than most competitors. In the previous version of its 2015 fleet plan, which was released in August as Second Quarter 2014 earnings were reported, the LCC group had additionally earmarked three A320s each for AirAsia India [I5/IAD] and Japan. Does this  mean AirAsia Japan (Mk II) will not take delivery of any aircraft, and thus not launch operations next year? Or are some of the Malaysian unit's surplus A320s coming over?

Airbus A320-216 HS-ABO of Thai AirAsia taxies at Bangkok's Don Mueang. All of AirAsia's affiliates are incurring losses or significantly reduced profits. With aircraft for AirAsia Japan no longer in the orderbooks for 2015, has the launch been delayed? (Photo: Ryosuke Yano)

And on November 22nd, Skymark Airlines' [BC/SKY] President and CEO Shinichi Nishikubo disclosed that AirAsia Group was indeed one of a handful of carriers they were negotiating with for a partnership. Japan's third largest carrier looked for new tie-ups as their profitability rapidly deteriorated (Skymark posts 5.7 billion JPY loss for 1Q FY2014.) amid a depreciated JPY, heavy competition with LCCs as well as full-service carriers, and costs related to the introduction of the A330 (Skymark Airlines inaugurates Airbus A330 service.) and now-canceled A380 (Skymark's Airbus A380 order in jeopardy.). But Mr. Nishikubo has narrowed down its potential partner to Japan Airlines [JL/JAL] (Skymark in talks with JAL for broad tie-up.), and told that talks with AirAsia Group started in August and only ended earlier this month.

Actually, it is now known that Hiroshi Mikitani, President of AirAsia Japan's (Mk II) key partner Rakuten, was on the verge of acquiring a majority stake in Skymark earlier this spring. However, the deal fell through when Mr. Mikitani found out about Skymark's troubles regarding the A380 order, a few months before that news came to light. So, AirAsia Japan (Mk II) probably had some inside knowledge about Skymark's financial state and outlook. "We will start from a non-Tokyo city, but Tokyo is a very big market that cannot be omitted," told Yoshinori Odagiri, CEO of AirAsia Japan (Mk I & II), who has seemed confident in obtaining slots at heavily-regulated Tokyo/Haneda [HND/RJTT]. Or had they drawn a picture of taking over Skymark from the first place (Is AirAsia considering a Skymark takeover?)? 

With the government's target to bring 20 million visitors to Japan by 2020 when the Tokyo Olympics/Paralympics take place, opening up airspace over metropolitan Tokyo, which could potentially create 50 or so more slot-pairs at Haneda, is seriously being discussed. But the Japan Civil Aviation Bureau (JCAB) along with the government so far seem unwilling to distribute the slots to LCCs, calling it "prized properties that belong to the Japanese public." AirAsia is counting on Mr. Mikitani, who is a member of the government's Economic Revitalization Committee and has personal relationships with Prime Minister Shinzo Abe, to receive slots at the preferred Tokyo airport near downtown.

Nagoya is a huge metropolitan area that could potentially become a home for an LCC. However, the market is underdeveloped and with people too used to the super-efficient Shinkansen and hometown carrier All Nippon Airways [NH/ANA], it will take a few years for locals to accept AirAsia Japan (Mk II). Further, the battle has actually already begun, with Jetstar Japan [GK/JJP] having entered the market and expanding (Jetstar Japan starts three routes from Kumamoto.), and ANA retaliating by slashing fares to match them on competing routes. AirAsia Japan (Mk II) probably knows more than anyone else that domestic low-fare is difficult to make it work without a hub in Tokyo, so if prospects of getting Haneda slots diminish, there may not be an incentive to relaunch the Japanese unit after all. Let's wait and see...

Reference: Business Journal, September 10th. (in Japanese)
Reference: Sankei Shimbun, November 23rd. (in Japanese)
Reference: Centre for Aviation, November 24th. (in English)

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.

Skymark hopes to settle Airbus A380 penalty in October.

On October 2nd, Skymark Airlines (BC/SKY) admitted a report by Nikkei Shimbun which said Japan's third largest carrier and Airbus have started talks for a settlement for the canceled Airbus A380 order (Skymark's Airbus A380 order in jeopardy.). Representatives from both sides, including Skymark's President and CEO Shinichi Nishikubo and senior officials of the European planemaker, met in France on September 29th for the first time after the termination of the order.

Airbus A380-841 F-WWSL/JA380A takes off from Toulouse. Rumors have it that Airbus has found a buyer for the first two A380s that had been destined for Skymark, leading to eased talks. Who's buying them? (Photo: Airbus)

On July 29th, Airbus unilaterally axed the contract for six A380s worth more than 2 billion USD at list prices after Skymark stopped making installment payments from April. It subsequently demanded the Japanese carrier pay a penalty estimated at 700 million USD (76 billion JPY), or come under the umbrella of a major carrier. In turn, Skymark said that Airbus was demanding an unreasonable cancellation fee.

During the new talks, the two agreed to reach a settlement by the end of October. According to Skymark, Airbus would consider the financial state of the troubled airline in discussing the penalty so that it can remain a listed company on the Tokyo Stock Exchange. It currently operates four A330s (Skymark Airlines inaugurates Airbus A330 service.) with another six to be delivered by September 2015, and though these are leased from Intrepid Aviation and not purchased from Airbus, the European planemaker confirmed that Skymark would continue to be a valued customer. News of possible settlement sent Skymark's shares up 11% on October 2nd, after the stock had lost nearly a third since the issue came to light in July.

Meanwhile, Skymark denied an Asahi Shimbun report that claimed both parties had reached a deal in principle, with the cancellation fee limited to somewhere between 20 to 23 billion JPY and that it would be paid from the already-made prepayments amounting to 26.5 billion JPY. Contractually, Airbus does not need to refund this, and penalties would come on top of this figure. The article claims that Airbus has found a buyer for the first two A380s (Skymark's first Airbus A380 completes maiden flight.) which were earmarked for Skymark, leading to easing the penalties. Skymark vehemently denied this, and stressed that talks have just commenced and no details of the settlement have been agreed on yet.

In July, Skymark had posted a staggering 5.7 billion JPY net loss for just the first quarter of FY2014, more than triple the amount they lost for the whole year of FY2013 (Skymark posts 5.7 billion JPY loss for 1Q FY2014.). Their cash reserves and near-term assets had declined to 7.2 billion JPY as of June, and the A380 penalty, depending on the figure, could force them into insolvency. However, if the above report turns out to be true, that could be avoided. Meanwhile, talks are well underway with various firms for potential investment and capital injection, but none will go ahead without knowing how big (or small) the penalty is. In any case, the industry is moving on and competition will only get more fierce, and Skymark's settlement with Airbus would only be their first step to get themselves back on track.

Reference: Aviation Wire, October 2nd. (in Japanese)
Reference: Asahi Shimbun, October 3rd. (in Japanese)
Reference: Nikkei Shimbun, October 3rd. (in Japanese)