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"Low-Cost Carriers in Japan: Challenges and Paths to Success -Using a corporate simulation model for empirical analysis" By Sayaka Shiotani Ph.D. International Studies, Waseda University, 2007 Master of Business Administration, Waseda University, 2002 BA. International Business, Fordham University, 2000 SUBMITTED TO THE MIT SLOAN SCHOOL OF MANAGEMENT IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN MANAGEMENT OF TECHNOLOGY AKI1iMVE AT THE MASSACHUSETTS INSTITUTE OF TECHNOLOGY IMASSACHUSETTS IN E JUNE 2013 C 2013 Sayaka Shiotani. All Rights Reserved. 012 0)?23 The author hereby grants to MIT permission to reproduce and to - R E distribute publicly paper and electronic copies of this thesis document in whole or in part in any medium now known or hereafter created. Signature of Author: lTMT Sloan School IOf Management May 10, 2013 Certified By: Arnold I. Barnett George Eastman Professor of Management Science Thesis Supervisor Accepted By: Stephen J. Sacca Director, MIT Sloan Fellows Program in Innovation and Global Leadership MIT Sloan School of Management [Page intentionally left blank] "Low Cost Carriers in Japan: Challenges and Paths to Success Using a corporate simulation model for empirical analysis" By Sayaka Shiotani Submitted to the MIT Sloan School of Management on May 10, 2013 in partial fulfillment of the requirements for the degree of Master of Science in Management of Technology ABSTRACT This paper analyzes the causes behind the sluggishness of new airlines, low cost carriers (LCCs), in Japan. The object is to identify and to recommend innovative policy changes and ideas for the industry, by analyzing the condition and the development of management policy for the establishment of new airline companies and regulatory reforms. The traditional airline companies all over the world have been struggling with the changes in current market. With the global deregulation movement on the airline industry in the 1980s, LCCs have established their business very rapidly. Following this global trend, two new airlines started in Japan in the late 1990s, but the market had not been active for a long time. It is only recently that other new LCCs started servicing the Japanese market, while the deployment of LCCs has become very active and successful in North America, Europe, and Asian countries except Japan. First, this thesis focuses on the analysis of critical successful factors in the foreign market. Then this thesis examines the condition and business environmental issues that make the foreign LCC business model not so effective in the Japanese market. Second, with the consideration of the previous section, the successful LCC business model is introduced and is verified using a variety of simulations including the financial simulation using the corporate model and risk analysis using the Monte Carlo Method. These two sets of analytical results are put together for applying to other areas such as policy making, regulations, and market structural changes. Furthermore, the paper comes up with six critical points for the management policies of new airline companies: 1) Promotion of higher productivity and lower cost; 2) Appropriate airfare and the fare structures; 3) Appropriate routes selections and the number of flights; 4) Proactive utilization of secondary airports; 5) Penetration to the air cargo market; and 6) Availability of sufficient fund for supporting the preparation and establishment of a new entity. Traditionally, the government has tightly regulated the aviation industry in Japan. In order to consider and to deploy the LCC business establishment conditions, the analysis of government policies is becoming the key element. Integrating the results of the policy analysis and simulations analysis, this research recommends the following criteria. Elimination and changes of regulations and management structures, that may restrict the free competition and the management freedom of the new entities, are essential. From the perspective of aviation policy and the promotion of competition, the following requirements must be fulfilled in order to achieve these goals: 1) Converting the form of the market intervention methods on market structural restriction from proactive to reactive; 2) Elimination of the government control of the airports demands adjustment of both domestic and international routes, the foreign funds, and the cabotage restriction; and 3) Establishment of new airport policies for promoting more active use of secondary airports. These findings will help promoting the healthy growth of the airline industry in Japan. Activities of consumers, airline companies, and the government will be revitalized and be benefited as a result. Thesis Supervisor: Arnold I. Barnett Title: George Eastman Professor of Management Science Biography Sayaka SHIOTANI, Ph.D. Associate Professor of Business Management at J.F. Oberlin University in Japan Dr. Shiotani is a recognized authority on the research in Low-Cost Carriers (LCCs) business. During her career at Japan Airlines Co., Ltd (JAL), she received a bachelor's degree from Fordham University in New York, the United States, and an MBA and a doctor's degree from Waseda University in Tokyo, Japan. She currently continues to pursue her academic goals at the Massachusetts Institute of Technology Sloan School of Management Sloan Fellows Program, Class of 2013. She is also a visiting scholar at Harvard University Asia Center. Her first book, Key Factorsfor the Success of Low-cost Carriers In Japan: Innovation in Business Models and Aviation Policy (2008, Chuokeizai-sha, Inc.) won many award:; the Academic Award from the Japan Society of Information and Management (2009) and the Japan Society of Public Unity Economy (2009), and the Japan Society of Logistics and Shipping Economics (2008), and the Sumita Air Award (2009). Dr. Shiotani analyzes the LCCs and airport management through her academic viewpoint and her business experience as an international flight attendant at Japan Airlines, and presents policy proposals to revitalize aviation industry. Her focus includes tourism, aviation, service management, information and communication both from the economic and management perspectives. As a certified hospitality advisor she offers lectures and conducts training on hospitality at schools and companies. During her free time she uses her expertise as a sommelier and enjoys wine. Major works: As a single author: Key Factorsfor the Success of Low-cost CarriersIn Japan: Innovation in Business Models and Aviation Policy (2008, Chuokeizai-sha, Inc.). As a joint author: Managing Airports (2010, Chuokeizai-sha, Inc.), Business Administration for Air Transportation Business (2011, Doyukan, Inc.), Dictionary of Management Education (2006, Gakubunsha, Inc.), Tourism Dictionary (2007, Kirakusha, Inc.), Contemporary Air TransportationBusiness (2007, Doyukan, Inc.). Acknowledgement Acknowledgement The goal of this thesis is defining the requirements for establishing low-cost carriers (LCCs) in Japan both from management and aviation policy point of view. This study discusses factors related to the success of LCCs outside of Japan, and analyzes the factors for sluggishness of LCCs in Japan. Analytical tools such as financial simulation for profitability analysis and the Monte Carlo Methods for risk analysis are applied to corporate model. Based on the results of the simulations, successful establishment factors for LCCs in Japan from management point of view as well as proposals on reform on issues related to aviation policies, which are restricting management policies, will be presented. The world aviation industry has been experiencing harsh business circumstance provoked by intensified competition due to deregulation as well as by sudden events including the international terrorist attacks, steep rise in oil prices, and the epidemic. In such circumstances, the aviation market in the world sees the following trend. While the Legacy Carriers (LCs) are falling in financial trouble, Low-Cost Carriers (LCCs) are emerging in the market in North America, Europe, and Asia (other than Japan). When I was working as a flight attendant on the international flights of one of the legacy airlines before I decided on an academic career, I have witnessed both the rising of LCCs and the falling of LCs in the international aviation market. It was not until the end of the 1990s that the two airlines entered the domestic aviation market in Japan. In contrast to the LCCs abroad, LCCs in Japan are facing financial troubles. The market does not see a significant increase in new entries. They were favorable competitors for somebody like me who was working at one of the major airlines at that time. When I started my carrier as an academic researcher when I was given an opportunity to study abroad by staying employed by the airline company I was working for, the factors for sluggishness of Japanese LCCs became my strong area of interest. My scholastic interest was further developed by the business engineering approach of analyzing the causes for sluggishness of LCCs, which was introduced by Emeritus Professor Masaki Ohta of Waseda University, who is an expert both in and aeronautics and financial engineering. This has become the major theme for my doctoral thesis. In the pursuit of my academic goal, however, I became aware that businesses in the aviation industry, which is restricted by regulations, cannot solve their issues only by management policies, and that the issues which lie in the aviation