Chikage Miyoshi Analysis Of The Effects Of Air Transport Liberalisation On The Domestic Market In Japan COLLEGE OF AERONAUTICS PhD Thesis COLLEGE OF AERONAUTICS PhD Thesis Academic year 2006-2007 Chikage Miyoshi Analysis of the effects of air transport liberalisation on the domestic market in Japan Supervisor: Dr. G. Williams May 2007 This thesis is submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy © Cranfield University 2007. All rights reserved. No part of this publication may be reproduced without the written permission of the copyright owner Abstract This study aims to demonstrate the different experiences in the Japanese domestic air transport market compared to those of the intra-EU market as a result of liberalisation along with the Slot allocations from 1997 to 2005 at Haneda (Tokyo international) airport and to identify the constraints for air transport liberalisation in Japan. The main contribution of this study is the identification of the structure of deregulated air transport market during the process of liberalisation using qualitative and quantitative techniques and the provision of an analytical approach to explain the constraints for liberalisation. Moreover, this research is considered original because the results of air transport liberalisation in Japan are verified and confirmed by Structural Equation Modelling, demonstrating the importance of each factor which affects the market. The Tokyo domestic routes were investigated as a major market in Japan in order to analyse the effects of liberalisation of air transport. The Tokyo routes market has seven prominent characteristics as follows: (1) high volume of demand, (2) influence of slots, (3) different features of each market category, (4) relatively low load factors, (5) significant market seasonality, (6) competition with high speed rail, and (7) high fares in the market. These characteristics particularly stand out when comparing to routes serving the UK, including UK domestics. Moreover, the outcomes of the analysis demonstrated the three significant different experiences compared to the intra-EU market serving the UK as a result of liberalisation: (1) decreased demand, (2) increased fares and (3) new entrants’ failures. Although competition among airlines seemed to be experienced in the beginning of the process of liberalisation, most of new entrants are governed by the control of network carriers, and this has affected the market, which resulted in fares to increase and demand to drop, particularly in the low demand markets. However, several markets on the Tokyo routes have been developed by low fares as a result of competition with high speed rail such as the Tokyo-Hiroshima and Okayama routes. Abstract The key objectives of the slot allocation policies were the promotion of competition and the improvement of consumer’s convenience with safety assured. They have not been accomplished yet because of several constraints. The constraints for liberalisation in Japan were discovered by comparing with the virtuous market flow circulation in the EU. The results of liberalisation in Japan have the opposite direction flow because airlines provide “high yield products”, which are caused by high cost structures of air transport in Japan, compared to the “high productivity products” of the EU. It is very difficult to promote a real basis for competition among airlines and HSR in Japan. Governments have been developing the transportation network of both rail and air in line with the growth of the Japanese economy under the name of competition policy since 1960s. The overestimated airport planning and demand by the government based on the bubble economy in Japan caused high cost structures as well. Furthermore, the Japanese Government has been reluctant to implement significant changes and face the impacts of deregulation in order to avoid the bankruptcies of airlines experienced in other liberalised markets. Therefore, the intensity of competition in the Japanese air transport has been interpreted and implemented differently from those of other areas as a result of this protective policy towards Japanese airlines. The standard of competition has not reached the level of other industries like manufacturing, which have been competing in the global market. It seems that Japanese government policy has accomplished its objective which forced two network carriers (JAL and ANA) to change the structure of organisations, labour cost and their companies’ hierarchical cultures, although the intensity of change is not enough compared with other airlines outside Japan as a result of liberalisation. Lower fares and reduced costs are crucial in order to develop demand and switch the direction of the market flow in Japan, as evidenced in the intra-EU market. A real basis for competition is expected when the number of slots will increase at Haneda airport in 2009. In order to prepare for the next step of liberalisation and international competition, fundamental changes and innovation should be implemented by removing constraints in the Japanese air transport system. Acknowledgements I would like to express my appreciation to all people who have kindly supported my research both in academic research and in life in England. Without their encouragement, I could not have accomplished my PhD study at Cranfield. First of all, I would like to state my greatest gratitude to my supervisor Dr. George Williams in great reverence. His thoughtful suggestions and support have guided me throughout the process of this study. Without his direction and encouragement, it would have been difficult to complete this study. Furthermore, my great appreciation is expressed to Professor Graham Braithwaite and Dr. Fariba Alamdari for providing me the opportunity and grant to continue my study with their great encouragement. My gratitude is also extended to Dr. Romano Pagliari, Dr. Keith Mason, Dr. Peter Morrell, Mr. Ian Stockman, Mr. Andy Foster, Mr. Ralf Anker, Mrs. Barbara McGowan and all staff, and many friends of the Department of Air Transport. I would like to express my gratitude to Professor Teruo Takahashi and Mrs. Yaeko Nishihashi at Waseda University in Tokyo, Japan for their encouragement and guidance in this study for a long time. In addition, I would like to sincerely thank the late Mr. Masanori Honjyo, the founder of Itoen Company in Tokyo, Japan for enlightening me to the academic area. I am genuinely grateful to my primary sponsor, Conobbys Consulting in Kobe, Japan, and Mr. Seiji Shirane for providing me the great opportunity and continuous encouragement for this challenge. My sincere thankfulness is expressed to Mr. Stijn Vandermoere for his proofreading, professional suggestions and encouragement. I would like to thank my family, Lin and my parents for all their support, understanding, and encouragement throughout the years of my study. Acknowledgements This page is intentionally left blank Glossary 2SLS: Two-stage Least squares EC: European Commision ABZ: Aberdeen ECAA: European Common Aviation Area AEA: Association of European Airlines ECAC: European Civil Aviation Conference AGP: Malaga EDI: Edinburgh AIC: Akaike Information Critation EFA: Exploratory Factor Analysis Air Do, HD: Hokkaido International Airlines EFTA: European Free Trade Association AKJ: Asahikawa EU: the European Union AMS: Amsterdam EU-15: Austria, Belgium, Denmark, Finland, ANA, NH: All Nippon Airways France, Germany, Greece, Ireland, Italy, ANC, EL: Air Nippon Luxembourg, AOC: Airline Operating Certificates Portugal, Spain, Sweden, The Netherlands, AOJ: Aomori United Kingdom ASJ: Amamioshima EUR: euro ASK: Available Seat Kilometres FFP: Frequent Flyer Programme ATH: Athens FKJ: Fukui ATI: Air Transport Intelligence FKS: Fukushima AXT: Akita FRA: Frankfurt BA: British Airways FY: Financial Year BC, SKY, Skymark: Skymark Airlines GAJ: Yamagata BCN: Barcelona GBP: Pound sterling BELF: Breakeven Load Factor GDP: Gross Domestic Product BER: Berlin GLA: Glasgow BFS: Belfast GVA: Geneva BRU: Brussels HAC: Hachijyo-jima CAA: Civil Aviation Authority HAM: Hamburg CFA: Confirmatory Factor Analysis HHI: Hirschmann-Herfindahl Index CFI: Comaprative Fit Index HIJ: Hiroshima CGN: Cologne-Bonn HIW: Hiroshima-nishi CIA: Central Intelligence Agency HKD: Hakodate CIS: Commonwealth of Independent States HNA: Hanamaki CPH: Copenhagen HND, TYO: Tokyo International Airport CPI: Consumer Price Index (Haneda) CR: Critical Values HSG: Saga CR: Council Regulation HSR: High Speed Rail CVCA: Customer Value Chain Analysis IATA: International Air Transport Association DF: Degree of Freedom ICAO: International Civil Aviation Organisation DOC: Direct Operating Costs IMF: the International Monetary Fund DUB: Dublin Glossary IRCJ: the Industrical Revitalisation NTQ: Noto Corporation of Japan NYO: Stockholm-Skavsta ISG: Ishigaki OBO: Obihiro ITM, OSA: Osaka International Airport OECD: Organisation for Economic Cooperation IWJ: Iwami & Development IZO: Izumo OIM: Oshima JAL, JL: Japan Airlines OIT: Oita JD, JAS, JS: Japan Air System OKA: Okinawa, Naha JR: Japan Railways OKJ: Okayama JTS, NU: Nippon Trans-ocean Airlines ONJ: Odate-Noshiro JYE: Japanese yen ORK: Cork KCZ: Kochi ORY: Paris-Orly KIJ: Niigata PFI: the Private Finance Initiative KIX: Kansai Internatonal Airport PPP: Purchasing Power Parity KKJ: New Kitakyushu PPS: Purchasing Power Standard km: kilometre Prob.: Probability KMI: Miyazaki PRS: Paris area KMJ: Kumamoto PSA: Pisa and Florence area KOJ: Kagoshima RMSEA: Root-Mean Square Error of KUH: