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Creating New Demand: Development of the LCC Business

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Creating New Demand: Development of the LCC Business Business Strategy Feature Creating New Demand: Development of the LCC Business A Global Look at LCCs In the Japanese market, deregulation since 1998 enabled the entry of new airlines that can charge lower fares than LCCs have established a significant presence in the existing airlines. However, full-fledged LCCs using the global airline market over the past several years, with the business model developed in Europe, North America and number of people using LCCs increasing substantially. elsewhere in Asia did not enter the market. Looking around the world, LCCs have acquired a share of *Source: IATA Schedule Reference Service over 30%* of capacity based on the number of seats in Europe and North America, mainly on domestic and intra- regional routes. In Asia, AirAsia and other LCCs have quickly grown market share since their establishment to about 14%* The Challenge for the ANA Group of capacity based on the number of seats on intra-Asia With this understanding of the status of LCCs by region routes. Moreover, LCCs are forecast to grow faster than the and market, the ANA Group established Strategic Planning- full-service carriers in each of these regions, with a high Asia Pacific in 2008 to benefit from growth in Asia and create potential growth rate in Northeast Asia because of its new demand. It began researching LCC growth potential and currently low LCC share. possibilities in Asian markets, conducting broadly based studies such as surveys of the business models and competitive strategies of full-service carriers after the launch of LCCs. The research included case studies of LCC successes and failures in Europe and North America. Other subjects included the possibility of the ANA Group entering the LCC business in Asia. The results showed that LCCs would come to Japan in full force at some point, making competition with LCCs inevitable. Actually, looking at the market environment in Japan, Kansai International Airport has surplus arrival and departure slots that permit the entry of LCCs at any time, while Overview of Operations at the Two LCCs AirAsia Japan Co., Ltd. Peach Aviation Limited ANA: 38.7%, ANA: 67%, AirAsia Bhd.: 33% Equity ownership First Eastern Aviation Holdings Limited: 33.3%, (Including non-voting shares – ANA: 51%, AirAsia: 49%) Innovation Network Corporation of Japan: 28.0% A&F Aviation Co., Ltd. established in February 2011 Established August 2011 (corporate name changed to Peach Aviation Limited in May 2011) Narita Airport Kansai International Airport Home airport (domestic and international medium- and short-haul routes) (domestic and international short-haul routes) Aircraft Mainly Airbus A320; some Airbus A330 Airbus A320 First fl ight August 1, 2012 (scheduled) March 1, 2012 50 All Nippon Airways Co., Ltd. The ANA Group is implementing a multi-brand strategy that encompasses the ANA brand and two low-cost carriers (LCCs), AirAsia Japan (AirAsia Japan Co., Ltd.) and Peach (Peach Aviation Limited). The ANA Group will consistently take on the challenge of innovative initiatives to create new demand. expansion of arrival and departure slots at Narita Airport is because of considerations including differences in market Boarding also laying the groundwork for the full-scale entry of LCCs. environment and efficient resource deployment. Thus, foreign LCCs are expanding on Japanese routes. In First, we launched an LCC based at Kansai International Asia, LCCs such as AirAsia have been expanding in Airport, which is well suited to the LCC business model of Southeast Asia. In Northeast Asia, LCCs have begun flying maximizing aircraft utilization because it permits flight on certain domestic Korean routes, but compared with operations 24 hours a day. Thus Peach was born, Japan’s Southeast Asia, LCC expansion is yet to come. first LCC and a new brand established using the key concept Takeoff of “Cool Japan.” In establishing the company, we believed that Peach required independence and autonomy because it Toward the Establishment of Two LCCs had to take on the challenge of a new business and sweep away conventional values and ideas. As a result, we limited Based on this research and study of the LCC business our capital participation to less than 40%, but we hold the Climbing and changes in the operating environment such as position of largest shareholder. increases in arrival and departure slots, the ANA Group has Subsequently, encouraged by expansion in Tokyo-area been promoting the creation of strategies and approaches arrival and departure slots and deregulation, we launched an for the full-scale launch of an LCC in the Japanese market. LCC based at Narita Airport. The Tokyo area is home to As a result, we decided to target market share as the first more than 30 million people and therefore features enormous mover by establishing our own LCCs ahead of our latent demand. At the same time, we knew we had to Cruising competitors with a sense of urgency. develop the business even more quickly than with Peach We then compiled studies covering LCC establishment because we assumed that competition would intensify with for the Tokyo-area market, the largest air transportation the entry of other LCCs. Targeting rapid business expansion market in Japan and our number one target, as well as for by leveraging the power of an existing LCC brand, we the promising Kansai-area market centered on Japan’s established AirAsia Japan in collaboration with Asia’s largest In-Flight Service Appr second-largest city, Osaka. Based on our understanding of LCC, AirAsia Bhd., which was seeking an opportunity to the need to build LCC operations attuned to the enter the Japanese market. We structured the company as a characteristics of the markets they serve, we decided to subsidiary to secure high-volume demand in the Tokyo area establish separate LCCs for the Tokyo and Kansai areas and to strengthen our control over management. Routes Served by the Two LCCs (As of the end of June 2012) oach Sapporo Peach Aviation Routes (Chitose)(Chito Osaka (Kansai)–Sapporo (Chitose) Osaka (Kansai)–Fukuoka Landing Osaka (Kansai)–Nagasaki SeouSe l (Incheo( h on) Osaka (Kansai)–Kagoshima Busan Osaka (Kansai)–Okinawa (Naha) (planned) Narita Osaka (Kansai)–Seoul (Incheon) FukuFukuokF kokkuoka Osaka NagasaNkNagasNagasakias (Kansai) Osaka (Kansai)–Hong Kong (planned) KagoshimaK AirAsia Japan Routes (Planned) Osaka (Kansai)–Taipei (Taoyuan) (planned) Narita–Sapporo (Chitose) Narita–Fukuoka Narita–Okinawa (Naha) Okinawa (Naha) Narita–Seoul (Incheon) TTaippei Narita–Busan Hong Kong (TTaoyuan)a Annual Report 2012 51 LCC Business Model Our multi-brand strategy reconciles the full-service carrier and LCC businesses. We will operate our network and We considered the business model as we studied the provide products and services by delineating full-service establishment of LCCs, focusing on totally simplified carrier and LCC operating features, targets and markets. operations in all areas other than safety. Specifically, our Our full-service carrier will concentrate on setting flight model embraced the following characteristics. operations with convenient times in mind, enhancing its • Flight operations primarily using a single type of narrow- network, expanding medium- and long-haul routes to or medium-body aircraft Europe, North America and elsewhere, and providing products and services that target business users and other • Maximum aircraft utilization through point-to-point routes high-yield passengers. On the other hand, our LCCs operate with the absolute minimum turnaround at airports frequent flights on point-to-point routes, enhancing • Simplified sales domestic and short-haul international routes targeting (reservations and sales limited to the Internet) primarily leisure travelers as well as creating new demand • Simplified check-in and boarding procedures among cost-conscious passengers who formerly did not (automated procedures) travel by airplane. • Simplified in-flight service and charges for value-added service (such as baggage fees and charges for in-flight beverages) Issues to Be Addressed • Straightforward fares Peach began operations in March 2012, and has We deployed this simple, low-cost, high-frequency flight performed even better than initially expected. AirAsia Japan business model for the two LCCs to give them autonomous has been busily preparing for its launch in August 2012. Both operations that preclude influence by the parent company to companies are targeting immediate business expansion of the greatest extent possible. domestic and short-haul international routes, and will consistently take on challenges with a strong commitment to developing new business in Japan. From a Full-Service Carrier Strategy to a However, several adjustments in our operating environ- Multi-Brand Strategy ment are necessary for the LCC business to develop and expand in Japan. The ANA Group has launched LCCs while restructuring The first is deregulation, which led to the development of its overall strategy for the future, including its conventional LCCs overseas and their creation in Japan. We expect that business strategy as a full-service carrier. further deregulation would help lighten costs unique to Japan Results of Competing Routes on ANA and Peach ▶Osaka (Kansai)/Osaka (Itami)/Kobe- ▶Osaka (Kansai)/Osaka (Itami)- Sapporo (Chitose) Route in March (Single Month) Fukuoka Route in March (Single Month) ANA Passengers (Left scale) Peach Passengers (Left scale) ANA Passengers (Left scale) Peach Passengers (Left scale) (Passengers) Osaka (Kansai)-Sapporo (Chitose) Osaka (Kansai)-Sapporo (Chitose) (%) (Passengers) Osaka (Kansai)-Fukuoka Osaka (Kansai)-Fukuoka (%) 150,000 Osaka (Itami)-Sapporo (Chitose) 100 100,000 Osaka (Itami)-Fukuoka 100 Kobe-Sapporo (Chitose) 90 80,000 90 100,000 80 80 60,000 70 70 40,000 50,000 60 60 50 20,000 50 0 0 0 0 March 2010 March 2011 March 2012 March 2010 March 2011 March 2012 ANA’s Load Factor for 3 Routes (Right scale) ANA’s Load Factor for 2 Routes (Right scale) 52 All Nippon Airways Co., Ltd. Creating New Demand: Development of the LCC Business and enhance the global competitiveness and evolution not and that we can generate strong growth by increasing only of LCCs, but also of Japanese airline companies.
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