TT-721 -- LCCs - One Down, Two to Go, e-biz news from Japan

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.
(http://www.terrie.com)

General Edition Sunday, Aug 04, 2013, Issue No. 721

+++ INDEX

- What's New -- LCCs -- One Down, Two to Go
- News -- Severity of Fukushima situation becoming clearer
- Upcoming Events
- Corrections/Feedback -- Softbank, not Yahoo JP has Alibaba shares
- Travel Picks -- Kushiro, Hokkaido and Todoroki Valley, Tokyo
- News Credits

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+++ WHAT'S NEW

At the end of June, All Nippon Airlines (ANA) announced a net loss of JPY6.6bn for the first quarter of the year -- even as demand for international and foreign travel increased. Part of the loss was attributable to the 787 Dreamliner groundings, part due to rising fuel costs on the weaker yen, and part because of losses booked from its failed joint venture with AirAsia.

The AirAsia failure has been interesting. The parting was reasonably amicable, but apparently the two companies have been fighting for a while about how to run the Japan business and this finally came to a head in April-May (the joint venture dissolution was announced in June). During April, seat occupancy fell to around 56%, an unsustainable level, and the partners knew that something had to be done quickly. ANA wound up buying out AirAsia's share.

According to the ANA side of the story, the partners fell out over management differences, which in the Japanese media translated to AirAsia's unwillingness to sell tickets through middlemen (tour agencies, convenience stores, etc.) and the poor quality of the company's Japanese website. Given that ANA had 67% of the j/v, though, this is not necessarily a good reflection on ANA. On the AirAsia side, three factors were cited: ANA's over-influence of AirAsia Japan management (they only have 38.7% of Peach, which is much more successful), failure to follow proper cost-cutting strategies, and poor marketing. No doubt, being stuck out at Narita airport had a big role to play as well.

An excellent analysis of the break-up and what went wrong can be found at: http://bit.ly/12oWZH3.

So it seems that while the AirAsia Japan operation suffered mainly from human factors such as ANA's bureaucratic mindset and unwillingness to implement workable marketing ideas, and from AirAsia's heavy-handed management attitude, it also suffered from simple business failure -- high costs versus low income. The cost-cutting side of things is a critical contributor to success in the LCC business and as measured by Cost per Available Seat Kilometer (CASK) flown, AirAsia is an expert in this area. They had set Japan a CASK target of JPY5.3/km -- about half of what ANA achieves -- and that expertise is now lost to ANA. What a waste for both companies.

[Continued below...]

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[...Article continues]

Costs for an LCC seem to roughly fall under the following categories: aircraft, fuel, maintenance, pilots, marketing and sales, and management overheads. There isn't much that any LCC operating in Japan can do about aircraft (which need to be relatively new or flyers won't fly in them) and fuel costs, and so the AirAsia-ANA tussle would have mostly been about maintenance, pilots, marketing, and management costs.

Maintenance costs are not only hard to contain in cost-heavy Japan, but there is also a severe shortage of qualified staff in the labor market. We wrote some time ago about airlines planning to send their aircraft abroad for maintenance to get around this problem, but for pre-flight checks, having local staff is unavoidable. Certain LCCs have tried to bring in mechanics from abroad and get them to work alongside lesser experienced locals, but this can backfire. JetStar got admonished late last year for having two locally licenced engineers doing work that they wouldn't have been qualified for per the airline's own internal rules.

Pilot and cabin crew costs can be somewhat contained through careful business management and outsourcing. On the cabin crew side of things, willing amateurs can be recruited and will be accepted by Japanese consumers so long as they are given enough training to know how to smile at the right time and generally be helpful. JetStar has proven that this is possible, and while their crew don't get paid much, they seem happy enough to be doing the job. Maybe some of them see it as a backdoor to crewing for larger brands in the future.

The pilots on the other hand are a much more difficult proposition. Some airlines are using foreign pilots since Japanese ones are in short supply. We don't know if those pilots are resident in Japan, but the impression we get from various recruiting and online discussion sites, that they are most likely outsourced from a labor supplier and brought in for short periods under a grey zone rule about foreign pilots working in Japan. If this is the case, then it would help the airlines avoid training costs, cumulative leave, and retirement benefits, as well as lowering salaries. This all adds up and it must be tempting to keep using such services.

Outsourcing of pilots is not something new, and airlines all over the world have been moving steadily towards third-party suppliers -- although in Japan until the arrival of the LCCs it was an activity reserved for the smaller operators like Skymark and Air Japan (ANA's charter flight subsidiary). But now that we have a full-fledged domestic LCC movement going on, pilot outsourcing and whether the practice is safe and legal is going to hit the news again.

For example, one of the more controversial aspects of outsourcing pilots involves basing them in another country, then flying them in for short duties before flying them out again.

While this is an acceptable practice for international flights where you have a pilot "working" cross-border by virtue of their job, they are at least delivering the bulk of their services outside Japan. But with LCCs making domestic flights only, suddenly the issues of residence, tax, and social insurance become relevant. This is a prime area of conflict between cost-cutters and those who want to follow the rule book. From what we can see, this is a grey area that the immigration and aviation authorities seem ready to overlook, but which the labor authorities are wanting reigned in. We don't know if this became an issue for AirAsia Japan, though.

ANA's inexperience in domestic LCC operations may have doomed their relationship with AirAsia, but they don't lack vision. At the same time as they announced that they would relaunch AirAsia Japan in December (new brand to be disclosed later this month) they also announced that they had just bought a major US pilot training company called Pan Am Holdings. Given that most pilot outsourcing companies start their personnel pipeline with training of new pilots, our guess is that ANA is going to take this route as well. This would allow them to place graduates with their various LCC subsidiaries, then graduate them later to the main airline. Aer Lingus did something similar with a company that is today one of the biggest suppliers of pilot training and outsourcing -- CAE Parc Aviation.

Then there are the marketing costs. JetStar Japan has decided to go with local wisdom, and do its marketing/selling through third parties, such as convenience stores, as well as being online. Doing this no doubt causes them to drop a significant amount of margin across the resellers, but we imagine that JetStar sees this more as a start-up cost, and that once it has educated a consumer as to the value it is offering, then the consumer will be more likely to buy directly from the website after that. Web incentives can help to further lock in loyalty. So it's strange to us that AirAsia couldn't see its way to a similar strategy, especially since it has such a close relationship with Expedia, one of the world's largest travel websites. We can only guess that the other pressures in the Japan operation were great enough that they just simply had had enough.

*****************

Food for thought -- Stagflation

What happens when you get inflation but no growth in the economy? It's called Stagflation, and we believe it could be one possible outcome of Abe's economic policies as they stand today. The Wikipedia definition of Stagflation gives two likely causes and of the second, it says, "...both stagflation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply,[9] and the government can cause stagnation by excessive regulation of goods markets and labour markets.[10]" In our humble opinion, Abe's failure to restructure the regulatory environment -- his so-called third arrow -- qualifies amply as a probable root cause of Stagflation in the future.

...The information janitors/

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+++ NEWS

- Rakuten numbers suggest Abenomics is working...
- ...Or is it smoke and mirrors?
- Health premiums may double for 70-year olds
- Severity of Fukushima situation becoming clearer
- Government wheat prices up 19% in last 12 months

=> Rakuten numbers suggest Abenomics is working...

Rakuten's first half consolidated operating profit soared 26% according to the company, to JPY47.5bn. The firm says that it had outstanding performances for its brokerage and credit cards units. Online mall sales were also up substantially. Rakuten's CEO said that the company was enjoying substantial sales of products priced over JPY100,000, and commented that, "We're feeling the benefits of Abenomics." (Source: TT commentary from e.nikkei.com, Aug 03, 2013)

http://e.nikkei.com/e/ac/TNKS/Nni20130802D0208N01.htm

=> ...Or is it smoke and mirrors?

Before anyone starts singing the praises of Abenomics, a Nikkei-Macromill survey has found that consumers may simply be buying big-ticket items before the Consumption Tax rate goes up. The survey found that 59% of respondents want to buy high-end consumer electronics, 28% want cars and motorcycles, 24% want travel, and 19% want high-end apparel (such as kimono), before the tax goes up to 8%. At the same time, people are off-setting their spending by cutting back on entertainment, food, and low-end apparel. ***Ed: In other words spending increases are being "borrowed" from future spending. Sounds like a recipe for failure to us." (Source: TT commentary from e.nikkei.com, Jul 30, 2013)

http://e.nikkei.com/e/ac/tnks/Nni20130731D30HH423.htm

=> Health premiums may double for 70-year olds

The National Council on Social Security System Reform has issued a recommendation that the government increase health care levies from the current 10% to 20%, bringing the wealthiest part of Japanese society more in line with the 30% levies made by those under 70. The paper also suggests hitting old high-income earners with a tax on retirement income and introducing health insurance premiums. Currently, neither exists for oldies. Lastly, the paper brings up the need for raising the pension age beyond the current target of 65 (to occur by 2025). ***Ed: Our take is that within 12 years, the age for getting the national pension will no longer be 65 -- more likely around 70 or so.** (Source: TT commentary from mainichi.jp, Aug 02, 2013)

http://bit.ly/1cAAszN

=> Severity of Fukushima situation becoming clearer

Tokyo Electric Power Co. (TEPCO) has admitted in a report to the Nuclear Regulation Agency (NRA) that at least 20trn-40trn Becquerels of Tritium have leaked from the damaged Fukushima nuclear plant into the Pacific Ocean. The utility is only just starting to come clean with the leakage, and still hasn't said anything about Strontium levels, which have a much longer half-life (28.78 years) than Tritium's 12 years. ***Ed: As we said two weeks ago in TT-719, we think the core of at least one of the reactors has partially or fully melted through its steel and concrete encasement, and is emitting radiation in direct contact with the groundwater. It is high time the government brings in outside experts to take over the monitoring and strategizing for the plant. They need to do this without delay.** (Source: TT commentary from japantimes.co.jp, Aug 03, 2013)

http://bit.ly/1combYz

=> Government wheat prices up 19% in last 12 months

The government-set wholesale price of foreign wheat is about to go up 5% in October, the third price rise in 12 months, and collectively, an overall price increase of 19% over the rate set October 2012. Japan imports about 90% of its wheat, with 58% coming from the USA. Although the yen has risen about 25% over the same 12-month period, global wheat prices overseas are actually down 15% due to a supply glut. ***Ed: So WHO is making the money here and why? Is the government expecting the yen to fall further and getting the price rises done early..?** (Source: TT commentary from bloomberg.com, Aug 02, 2013)

http://bloom.bg/15zt8Rf

NOTE: Broken links
Some online news sources remove their articles after just a few days of posting them, thus breaking our links -- we apologize for the inconvenience.

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+++ CANDIDATE ROUND UP/VACANCIES

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Remuneration is JPY3.6m - JPY4.5m plus commission, depending on your experience and skill level.

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- Bilingual IT Support Engineer, Japanese IT firm, JPY3.5M - JPY4.5M
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+++ UPCOMING EVENTS/ANNOUNCEMENTS

=> No events announcements this week.

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+++ CORRECTIONS/FEEDBACK

In this section we run comments and corrections submitted by readers. We encourage you to spot our mistakes and amplify our points, by email, to editors@terrie.com.

=> In Terrie's Take 719, when commenting on Masayoshi Son's bid for Sprint and the assets he could muster, we incorrectly stated that Yahoo Japan owns a 20% (36.7% on a voting rights basis) stake in Alibaba. In fact, Softbank itself owns a 31.9% stake in the Chinese firm. Thanks to the reader who pointed this out.

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+++ TRAVEL DESTINATIONS PICKS

=> Kushiro's Fisherman's Wharf, Hokkaido

The cold marine air that moves in and around the port city of Kushiro and mixes with warmer spring temperatures can create unpredictable weather patterns. I awoke, climbed out of bed and pulled back the curtains on my ninth floor hotel room overlooking the harbor to see, well, nothing. The fog had rolled in and enveloped the city reducing visibility to less than 20 meters.

Lucky for me, my hotel (ANA Crowne Plaza Hotel Kushiro) is just a two minute walk from a large fish market and shopping center -- the Marine-Our-Oasis building (commonly referred to as MOO). It seemed appropriate that I visit Kushiro?s version of fisherman's wharf on a foggy morning. The weather pattern itself reminded me a lot of San Francisco, a city known for its similar wharf-side tourist attractions and infamous cool and foggy weather even in the middle of summer.

http://en.japantourist.jp/view/kushiro-s-fisherman-s-wharf

=> Todoroki Valley in Setagaya Ward, Tokyo
Get some relief from the heat!

Tokyo is very hot and humid during summer, mostly because of the large numbers of skyscrapers and paved roads which absorb the heat. However, you can escape with a visit to Todoroki Valley. Descending down towards the river, you will notice a big drop in temperature. Todoroki Valley is located near Todoroki Station on the Tokyu Oimachi Line in Setagaya ward.

In the middle of July, we hiked down the stairs located at Golf Bridge (there used to be golf course here back in the 1930s), and it was so much cooler at the bottom. This is largely due to the tall trees on both sides of the Yazawa river blocking out the sky and the hot sun. I only felt sunbeams streaming through leaves instead of strong direct sunlight. I've heard that the temperature at the bottom is generally lower by 3-4 degrees. It was like another world: I was surrounded by deep green trees, and was able to breathe fresh and cool air. I enjoyed walking along the river and listening to birds singing. Hard to believe it's in the middle of Tokyo...

http://en.japantourist.jp/view/todoroki-valley-in-setagaya-ward

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