HOKKAIDO INTERNATIONAL AIRLINES (AIR-DO)
AND ITS START-UP TRIBULATIONS
(Update Sept-Dec 2001: Discriminating against "foreign" customers)

HIBA NEWSLETTER FOR MAY 1999
"News You Can Use"

CONTENTS (excerpted):

1) PREVIOUS HIBA MEETING (APRIL) on Hokkaido International Airlines
2) Asahi Evening News article on increased competition between air and sea travel

1) PREVIOUS HIBA MEETING (APRIL) INFO

was Mr Fukuki, Eigyou Buchou, of and on HOKKAIDO INTERNATIONAL AIRLINES (AIR-DO), who released a litany of how hard it is to do business as a start-up (or should I say upstart) airline in Japan.

Background:

If you want to go outside of Hokkaido, you have three ways: planes, trains, and automobiles (via ferry). However, the most popular method of escape is clear--82% of all travel between Hokkaido and wherever is by air. The most-frequently travelled air corridor in the world (with two or three 747 Jumbos departing each way every ninety minutes. Seriously.) is the Tokyo (Haneda) to Sapporo (Chitose), with an average (and climbing) of 8,200,000 souls per annum. This means one air route alone empties out more than the entire population (a bit under six million) of Hokkaido every year!

Servicing all of this have been three airlines: JAL, ANA/ANK, and JAS. Not only is the flight industry an oligopoly (ANA/ANK holds 52% of domestic market share), but also the actors are famous for colluding at the trough (famously, when many airports a couple of years back announced that they were lowering their user-fees and other cost-cutting measures, all three responded by RAISING their prices across the board). None offered the perks common to developed airline systems (frequent-flyer miles, off-season, advance-booking or standby discounts), or even reasonable prices--per kilometer flown the Sapporo-Tokyo corridor was for over a decade also the most expensive in the world!

That is, not until an academic (Wada-sensei, of Sapporo International University) offered up a plan for gathering investors, and a travel agency down in Fukuoka provided funding. Suddenly, amidst Ministry of Transport (MoT) touts of deregulation, two new airlines emerged out of the blue last year: AIR-DO, servicing Sapporo and Tokyo, and SKYMARK, servicing Fukuoka, Osaka, and Tokyo. Mr Fukuki focussed upon the former in his talk.

Despite supposedly sincere wishes from the MoT (Unyushou) for more consumer-responsive domestic transportation, Air-Do has faced nearly insuperable obstacles from the start. First, they had to find an unprecedented amount of venture capital; after canvassing thousands of people for a minimum investment of 50,000 yen, funds eventually came from Kyocera, Sony, Hokuden, Tokyo Kaijou, and 5000 other individual shareholders. Next, they had to get an airplane, of course--used, and bought if not leased. When they approached airlines like Cathay Pacific, CP, fearing retribution from Japan's other carriers, indicated it would provide an airplane if and only if JAL would give a by-your-leave for the deal (not likely); Air-Do got its plane (yes, only one right now, and not a Jumbo) from elsewhere.

Third, they had to decide a route. Air-Do wanted a seat at the highly-lucrative Tokyo-Sapporo trough, but MoT demanded that they offer only intra-Hokkaido service (a flat market with far less potential, since most dosanko habitually drive or rail). Air-Do wouldn't comply, and it would mean rapids later on.

Fourth, Air-Do had to set a price. The Big Three offer regular fares (meaning non-discounted) for Tokyo-Sapporo of around 24,000 yen one-way. Air-Do said one price at all times (like Saturn automobiles does) of 16,000 one-way, with no frills--just 90 minutes of airborne-bus-ride (like Southwest Airlines). Exceptions for students on standby, or groups, who go for half price (8000 yen). Their logic was: cut fares by half and double the occupancies.

MoT, who holds licencing rights, then started meddling with market forces, demanding things including:

• 1) that Air-Do raise its prices to 17,000 yen (they refused)
• 2) that Air-Do compute their break-even prices based upon a minimum plane seat occupancy rate of 65% per flight, and
• 3) that Air-Do even overhire pilots (for what if several of them got sick at once?).

This last demand is particularly galling; Air-Do operates six flights per day (three round trips), which means that even if they switched pilots every time, they need no more than six. Thanks to MoT administrative guidance, Air-Do has had to hire SIXTEEN pilots (with competitive salary scales for pilots over $100K bucks per annum). So much for "deregulation".

Finally, Air-Do had to deal with the competition, and it is pretty nasty.

• 1) Air-Do has no ground maintenance staff of its own, and they have been outsourcing to JAL for routine checkups until now. The cost of servicing one airplane for a year is 16 oku yen, or around 16 million US dollars! Parts not included (I have independently confirmed this figure). At these rates, HIBA Members here said that Air-Do could buy a new used plane every year, or fly to Hong Kong or Singapore for service and save money. For reasons unnoted, Air-Do is looking into outsourcing internationally yet will not open an international flight. JAL, meanwhile, has said that it will discontinue servicing Air-Do's aircraft.
• 2) The Big Three are finally offering perks considered standard in a developed airline market: frequent-flyer mileage for tickets and credit card use, discounts for advance booking (which magically come down to Air-Do levels when made a month in advance), and more: all things that Air-Do, which cannot afford the hardware, software and postage necessary to get their own incentive programs flying, cannot do.
• 3) The Big Three are engaging in dirty pool. For all the times Air-Do is scheduled to fly, JAL, ANA, and JAS now slash their fares by 30% to equal Air-Do's. This discount, by the way, applys ONLY on the flights BEFORE AND AFTER Air-Do's (the rest are regular fare--cf. Hokkaido Shinbun Apr 1, 99). Any free trade commission would have a field day, but this is Japan. Although Air-Do has complained to the government, there has been no action yet.

The result? Air-Do received their licence on December 10, 1998, and started flying shortly after. Although trememdously confined to a niche market, they are still the cheapest airline in the business. With 65% occupancy the break-even point, the breakdowns are for March:

• AIR-DO 83.8%
• JAL 76.2% (up 4.5 percent from the same time last year)
• ANA 73.6% (+0.9%)
• JAS 63.8% (-10.2%)

(Source: Hokkaido Shinbun Apr 2, 1999)

making Air-Do the most flown in terms of filling up a small aircraft. Good start, and the total number of people flying this winter (some for the first time) has increased to unprecedented levels.

Now the commentary, which your HIBA Secretary can't resist: I have to admit that as the talk went on, my emotions (and the beer) began to cloud my notetaking. Frankly, I really felt sorry for Air-Do, which is doing its best to stay airborne despite the odds. I will be going down to Tokyo on business a few times this year, and, goddammit, I will be flying Air-Do. I urge all HIBA Members to do the same. Support our only airline before it gets ijiwarued out of the market by an oligopoly, which taxes internationally-travelling Hokkaidoites (who generally must go via Tokyo), gouges both consumer and competitor, and indirectly by the government, which preaches deregulation yet interferes with market forces, then turns a blind eye to unfair pricing practices. If you don't and Air-Do and Skymark go under, just watch the bad old days of collusion return and all our hard-earned and long-overdue perks dry up.

If you want additional information on the airline industry, see my website. In March 1997, I was a panelist on an HBC TV show when Japanese airline deregulation was nacent; a report is at http://www.voicenet.co.jp/~davald/airlinederegulation.html.

Moreover, what follows is a synergetic article from cyberspace, from the Asahi Evening News (courtesy Tony Laszlo). News you can use:

2) AIRLINE PRICE WAR SPREAD TO OTHER TRAVEL INDUSTRIES
Ferry lines that ply the Hokkaido routes are cutting their fares, too.
By JUN SAITO, Asahi Evening News 3/31/99

Price wars among domestic airlines have prompted other modes of transportation to lower their fares, in particular passenger ships plying the route between Kanto and Hokkaido.

Blue Highway Line, a leading Tokyo-based passenger ship company, will lower its fares by more than 40 percent, starting April 6, for its service connecting Oarai in Ibaraki Prefecture with the Hokkaido port of Tomakomai.

People wanting to visit tourist spots or their hometowns in Hokkaido are using the company because of its relatively low prices over those charged by airlines.

The fare between Oarai and Tomakomai is 14,150 yen for an adult second-class berth, the most popular passenger cabin class. That compares with the 25,000 yen charged by the three main airline companies--Japan Airlines (JAL), All Nippon Airways (ANA) and Japan Air System (JAS)--for a one-way air ticket from Tokyo to Sapporo.

But starting this past December, Hokkaido International Airlines--Air Do--began offering the same route for just 16,000 yen.

Since introducing the reduced air fare, officials at Air Do say the airline has had an occupancy rate of more than 80 percent and carried nearly 10,000 passengers.

In response, the other three airlines earlier this month began offering discount tickets for 17,000 yen. In addition, they also offer a 15,000 yen ticket for both their early morning and late evening flights.

Such moves by the airline industry have pressured passenger ship companies to continue lowering their fares on routes between Kanto and Hokkaido.

"We have been competitive against airlines in terms of the fares for a long time," said an official of a Tokyo-based ferry company.

But with air fares at between 15,000 yen and 17,000 yen, passengers are more likely to fly because of the time factor, the official added.

Amid the heated airline competition, Blue Highway Line decided to drop its second-class berth fare to 8,200 yen from its current 14,150 yen for the one-way route between Oarai and Tomakomai, company officials said.

The new price represents a more than 42 percent discount, the officials said.

The company also plans to reduce the fare for carrying automobiles. Currently, cars with a length below 5 meters are charged 34,650 yen. Starting April 6, the price will drop to 19,800 yen

"We continue to take advantage of our ability to carry cars. Few tourists visiting Hokkaido go (there without) driving their own cars," a company official said.

Blue Highway will also open another route, leaving Oarai at 9 a.m. each day and arriving in Tomakomai at 5:45 a.m. the following morning.

The service aims to give tourists an entire day at their disposal after arriving in Tomakomai, company officials said.

The company will evaluate the popularity of the price cut for the Oarai to Tomakomai route before considering another fare cut for the Tokyo to Tomakomai service.

"Other ferry companies may follow with fare cuts in their routes connecting Tokyo with Hokkaido or Kyushu, where airlines are competing to reduce their fares," said an insider of a Tokyo-based ship company.

ARTICLE ENDS

THE HIBA BOARD IS:

• Chair John Evans (FABTechs Inc. Computers, Scanning Services, and Consulting, email eme@voicenet.co.jp)
• Vice Chair Simon Jackson (Simon Suisan Inc. Antepodian Trading and Building Materials, email suisan@voicenet.co.jp)
• Treasurer Naoko Nagao (Machi Seikatsu Shitsu Inc. Interior Environmental Design, email machi@voicenet.co.jp)
• Secretary Dave Aldwinckle (university prof and jack-of-all-trades freelancer, URL http://www.debito.org, email debito@debito.org)

For previous HIBA NEWSes and member information, visit the HIBA Home Page at: http://www.hiba-hokkaido.or.jp

Please feel free to forward this information to anyone.

Dave Aldwinckle
Sapporo