Japan's budget airlines hit rough air

TOKYO (AFP) - Japan's budget airlines have flown into turbulence with AirAsia's local carrier in danger of being grounded, but analysts say the popularity of discount flying should keep the fledgling sector in the sky.

Earlier this month, Malaysia-based AirAsia warned it might pull the plug on its partnership with All Nippon Airways (ANA), citing management tensions.

While details of the dispute remain unclear, AirAsia, the region's dominant budget carrier, said its Japanese business was "facing some challenges attributed to a difference of opinion in management, most critically on the points of how to operate a low cost business and operating from Narita" airport.

It added that AirAsia Japan was suffering from an "inability to manage costs".

A key constraint on the country's budget carriers is that they have been shut out of Haneda airport, just a short train ride from downtown Tokyo and the staging point for the most profitable domestic routes, which are controlled by ANA and rival Japan Airlines (JAL).

Flying out of Narita requires a one-hour train ride from the city centre, a long-standing headache for travellers including passengers with AirAsia Japan and Jetstar Japan, a joint venture between JAL and Australia's Qantas.

The Japanese aviation industry has long been notorious for sky-high landing fees and fuel taxes, in a market that was controlled for decades by JAL and ANA, the country's two dominant carriers.

Japanese travellers have become used to paying high fares, unlike flyers in other markets such as North America and Europe who could opt for heavily discounted rates on low-cost carriers such as Southwest Airlines or Ryanair.

A Japanese no-frills carrier, Skymark Airlines, has struggled to offer the kind of heavily discounted fares seen overseas due to high operating costs.

But a trio of new entrants have jumped into the market over the past couple of years, hoping to cash in on increases in airport capacity and steal away customers from both regional rivals and the dominant carriers, as well as another popular travel option in Japan: bullet trains.

A third new entrant, Peach Aviation - jointly owned by First Eastern Aviation of Hong Kong, ANA, and a Japanese investment fund - announced its two-millionth passenger in May.

AirAsia Japan, however, is in trouble less than two years after it got off the ground.

The budget giant said it wanted to stay in the Japanese market and "would not rule out any options to make this happen, including dissolution of the joint venture".

A report in Japan's leading Nikkei business daily said AirAsia chief executive Tony Fernandes reached an agreement on the dissolution after discussions with senior ANA officials.

For its part, ANA said that "nothing has been decided", but vowed to continue flying a low-cost carrier out of Narita no matter what happens.

Some observers see AirAsia partnering with another firm, possibly outside the aviation industry, with ANA merging its discount carrier service into its other venture Peach, which flies out of the smaller city of Osaka.

"AirAsia will definitely come back to the Japanese market," said Makiko Nakagawa, analyst with Fukoku Capital Management.

"And when it does, it could be a big threat as its presence is quite significant across the region." She added that the clash underscored how Japan's budget carriers have more growing pains ahead.

"This case shows that Japan's low-cost carrier sector is only part way through its growth process," she said.

"But the market has potential. No countries have failed to succeed in this business. Japan is no exception." Even so, the upstart carriers face more rough air ahead as diplomatic tensions between Tokyo and neighbours China and South Korea weigh on travel demand between the regional rivals.

"The low-cost carriers cannot operate just with domestic flights alone.

They must expand their revenue by mixing operations with international flights," said Osuke Itazaki, senior analyst at SMBC Nikko Securities in Tokyo.

"It is the survival of the fittest and so many players cannot co-exist in the market."