Japan's All Nippon Airways (ANA) Is Set To Launch A New Budget Airline in 2011

Late last week, All Nippon Airways Co. announced that it has teamed with a Hong Kong investment group to launch a budget airline aiming at tapping the growing but competitive Asian market. The airline, which will fly both international and domestic routes, is expected to start operations in the second half of fiscal 2011. To complete the deal, domestic investors will be given a 66.7 percent stake in the low-cost carrier, with ANA remaining the top shareholder. Hong Kong-based First Eastern Investment Group, an active investor in the Asian transportation arena, will hold the remaining 33.3 percent. In addition to this investment, First Eastern will continue to hold significant investments in infrastructure, real estate and other projects across Asia, although most of its operations will remain concentrated in in China. While the creation of a new, discount airline within Asia holds promise, many questions remain unanswered. According to ANA officials, the still-unnamed carrier will operate separately from the ANA brand, under a new name that has yet to be determined. Whether customers will perceive this positively, or negatively, is uncertain. Additionally, while there appears to be room for growth within the Asia market, route saturation, particularly on Asia's most profitable routes, is a concern. According to ANA leadership, "the purpose of this new corporation is to create a new airline network in the East Asian region including Japan by entering segments that the ANA brand could not cover." They plan to build an overwhelmingly low-cost operation, offer airfares that will defy the status quo" to cultivate new demand in the growing market. While this premise sound promising, the lack of clarity regarding how this will be operationalized, as well as the lack of clarity regarding route selection, create further questions. Other concerns surround long term profitability. The discount airline is expected to offer airfares that are 50 to 70 percent of the regular fares of the domestic carriers, including ANA and Japan Airlines, and will be based at Kansai International Airport in Osaka Prefecture. According to corporate spokespersons, the new airline will follow the approach taken by other budget carriers to cut costs, such as using only one type of aircraft and asking employees to handle a range of tasks to improve productivity. Will this type of aggressive pricing lead to a sustainable bottom line?

From an environmental perspective, ANA's move comes on the heels of similar actions taken by its Asian rivals. For example, Spring Airlines, a Shanghai-based budget carrier that began flying out of Ibaraki Airport, recently surprised the public when it announced it was offering ¥4,000 ($50 USD) one-way tickets between Ibaraki and Shanghai. Moreover, five budget airlines already operate flights to other parts of Asia out of Kansai airport; a fact, that continues to increase concerns regarding route saturation. Additionally, Japanese budget carrier Skymark Airlines Inc., which focuses primarily on domestic routes, has been continuously expanding its network, and poses a direct threat to ANA's new formed budget brand. With this competition, it is important to recognize the inherent risks that ANA's decision to enter this segment entail. Moreover, it is important to recognize the financial risks of the new partnership; risks that are attributed primarily to the cost structure. Currently, the cost structure of the large domestic airlines is drastically different from those of other carriers located elsewhere in Asia. For instance, other Asian carriers are not burdened by the high aviation-related taxes and airport fees that exist in Japan. These fees will materially influence the new airlines overall profitability, and must be analyzed further before investment decisions are made.