Low-Cost Carrier (LCC) market share in Japan to triple by 2027

ANA Holdings (9202:JP) Fair Value: JPY4500

Japan Airlines (9201:JP) Fair Value: JPY4222

21 November 2017, Japan – With Scoot’s impending launch of long-haul international flights between Osaka Kansai Airport and Honolulu from 19th December 2017, following the footsteps of AirAsia X’s Osaka-Honolulu services which began on 28th June 2017 and AirAsia Japan’s Nagoya-Sapporo domestic flights launch from 29th October 2017, we assess the outlook of the low-cost carrier market in Japan.

MORE DOMESTIC AND INTERNATIONAL ROUTES UNDER ATTACK BY NEW LOW-COST CARRIER (LCC) ENTRANTS

Presently, the low-cost carrier (LCC) market penetration remains low in Japan compared to South & South East Asia, United States and Europe. In the next 10 years, we forecast the low-cost carriers’ market share to triple to 30% on international routes (from 11% currently) and to 25% on domestic routes (from 8%) by 2027.

The international route expansion will not only be driven by the Japan-based low-cost carriers but more importantly by the low-cost carriers (LCC) from China, South Korea, Taiwan, Hong Kong as well as South East Asia which are carrying more inbound tourists into Japan, particularly during the 2020 Tokyo Olympics.

Low-cost carrier competition is not a zero-sum game as the low-cost carriers tend to stimulate new travel demand with their attractive fares that drive passengers to travel more frequently and by operating flights to destinations that were not previously served by the incumbent carriers. Moreover, the three largest low-cost carriers (LCC) based in Japan are all partially or wholly owned by the incumbents Japan Airlines and ANA Holdings. Jetstar Japan, Peach and Vanilla Air will become the new growth drivers for Japan Airlines and ANA Holdings. Nevertheless, the entry of AirAsia Japan and expansion of long-haul low-cost carriers such as AirAsia X, Scoot, could raise competitive pressure in the Japanese airline industry going forward. This could put pressure on yields.

JETSTAR JAPAN, PEACH AND VANILLA AIR ARE THE LARGEST LOW-COST CARRIERS BASED IN JAPAN – ALL PARTIALLY OR WHOLLY-OWNED BY INCUMBENTS JAPAN AIRLINES AND ANA HOLDINGS

Among the Japan-based low-cost carriers, Jetstar Japan (whose major shareholders are Japan Airlines 9201:JP and Qantas QAN:AU) has the largest fleet size with 21 aircraft and an average age of 4.2 years. This is followed by Peach which has 19 aircraft averaging 3.8 years old and Vanilla Air which has 13 aircraft averaging 2.6 years old – both of which are majority/wholly owned by ANA Holdings (9202:JP).

In terms of network reach, Peach operates flights to the most number of destinations (19) and countries (6). This is followed by Jetstar Japan (15 destinations in 5 countries) and Vanilla Air (13 destinations in 5 countries).

Chart: Aircraft fleet size and age of low-cost carriers based in Japan (2017)

Chart: Aircraft fleet size and age of low-cost carriers based in Japan (2017)

Chart: Network reach of low-cost carriers based in Japan (2017)

Chart: Network reach of low-cost carriers based in Japan (2017)

DOMESTIC MARKET HAS BEEN THE STRONGHOLD FOR ANA HOLDINGS, JAPAN AIRLINES & THEIR ASSOCIATES

Although there are 17 carriers operating in Japan’s domestic market, it is largely dominated by ANA Holdings and Japan Airlines and their associate airlines.

ANA Holdings alone has 44% market share on domestic routes which increases to 65% if we include the airlines which it has stakes in or partnerships with. Japan Airlines has 26% market share on domestic routes which increases to 34% including associate or partnership airlines. If we add these two airline groups together, they effectively control 98% of the domestic market in Japan.

Chart: Airline market share on domestic routes (2017)

Chart: Airline market share on domestic routes (2017)

LOW-COST CARRIER MARKET SHARE COULD TRIPLE TO 25% ON DOMESTIC ROUTES IN JAPAN BY 2027 BUT UNLIKELY TO REACH 50% IN THE LONG TERM

We forecast low-cost carriers market share on domestic routes in Japan to triple to 25% (from 8.4% currently) by 2027. Unlike the domestic aviation markets in South East Asia and India, we do not expect Japan’s low-cost carrier market share on domestic routes to reach 50% or higher in the next 10 years. In addition, the prevalence of reliable alternative modes of transport such as the shinkansen hi-speed rail and bus services imply greater competition for the Japanese low-cost carriers (LCC).

Chart: Forecast airline market share on domestic routes (2027)

IMPORTANT FOR ANA HOLDINGS AND JAPAN AIRLINES TO DEFEND THEIR DOMESTIC MARKET POSITION

ANA Holdings (9202:JP) and Japan Airlines (9201:JP) derive 41% and 39% of their total revenue from domestic routes. It is therefore important for them to defend their market position aggressively and as part of this strategy, both have invested in low-cost carriers (LCC).

Peach and Jetstar Japan are profitable and their growth will contribute to ANA Holdings and Japan Airlines’ earnings, which will help to offset the impact of market cannibalization and be the incumbents’ new growth drivers.

ANA Holdings owns a 67% stake in Peach Aviation which has delivered operating income and profit growth for four consecutive years. In FY17 (year to March). Peach Aviation reported an operating income of JPY51.7B and net profit of JPY4.9B, implying a net profit margin of 9.6%. ANA Holdings also owns a 100% stake in low-cost carrier Vanilla Air.

Jetstar Japan (whose major shareholders are Japan Airlines and Qantas) reported an operating income of JPY52.8B and net profit of JPY498m, implying a net profit margin of 0.9% in FY17 (year to June) – its second consecutive year of profit.

REGIONAL AIRPORTS PROVIDE MORE OPPORTUNITIES FOR FOREIGN LOW-COST CARRIERS (LCC) TO GROW THEIR INTERNATIONAL ROUTES TO/FROM JAPAN – WE FORECAST LCC MARKET SHARE ON INTERNATIONAL ROUTES TO RISE TO 30% (FROM 11% CURRENTLY) BY 2027

Given the more conservative expansion plans of ANA Holdings and Japan Airlines averaging only 3% per annum, this could encourage the regional airports in Japan to offer more incentives to attract more international low-cost carriers to launch and increase flights to their airports to boost growth. International passengers tend to contribute to more non-aeronautical revenue as well which is positive for the airports.

Low-cost carriers (LCC) from China, South Korea, Taiwan, Hong Kong as well as South East Asia, which are carrying more inbound tourists into Japan, will be the key drivers of this growth. We forecast low-cost carriers market share on international routes to/from Japan to triple to 30% (from 11% currently) by 2027.

Chart: Airline market share on international routes (2017)

Chart: Airline market share on international routes (2017)

Chart: Forecast airline market share on international routes (2027)

 

OSAKA KANSAI AND TOKYO NARITA INTERNATIONAL AIRPORTS HAVE THE HIGHEST SHARE OF LOW-COST CARRIER CAPACITY BUT THE OTHER JAPANESE AIRPORTS WILL ALSO INCREASE INCENTIVES TO ATTRACT MORE LCCS

Low-cost carriers account for 37% of Osaka Kansai International Airport’s total seat capacity and 26% for Tokyo Narita International Airport. This has helped to drive both airports’ passenger throughput growth in recent years.

We expect the other Japanese airports to increase incentives to attract more low-cost carriers (LCC) to launch and increase flight services as well, where there are no infrastructure constraints.

Chart: Low-cost carriers market share at top 12 airports in Japan (2017)

Chart: Low-cost carrier market share at top 12 airports in Japan (2017)

 

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