Deregulation of Domestic Air Transport in Japan

1

Deregulation of Domestic Air Transport in
Japan -Study of the Civil Aeronautics Law
Revision in 2000-

May 2006 Aviation Industries Division, Civil
Aviation Bureau, MLIT Yusuke Namikoshi
2
1. Barriers
3
Situation Before Abolition of Supply-demand
Adjustments
Before the supply-demand adjustment was
abolished with the revision of the Civil
Aeronautics Law in 2000, the air transport
business was supplied by 3 major airlines and
their group airlines.
1995
Share of domestic air transport(78.1 million
passengers)
Share of flights in Haneda airport
4
Deregulation of Domestic Air Transport Business
Market access
Fares and charges
Enactment of Civil Aeronautics Law (1952)
License System on a route basis for supply-demand
adjustment
Approval system
? Cost based fare setting
? Strategic route assignment for 3 major
airlines(1970)
Fares are established so that total revenues
could meet the total cost including a moderate
profit, provided sound business management
practices are followed.
JAL International Domestic (Major Routes
only)
Gradual Deregulation
ANA Domestic (Major local routes)
JAS Domestic (Local routes only)
? Abolishment of route assignment systems and
promotion of double/triple tracking(1986)
? Partial introduction of submission system (1994)
2 or 3 airlines operating on the same routes
(Lowering the standard for double/triple tracking
step-by-step)
Introduction of submission system for
promotional fares with up to 50 discount
? Abolishment of the standard for double/triple
tracking(1997)
New entry to Japanese domestic airline
business in 1998 for the first time in the past
35 years.
? Zone Approval System (1996)
Airlines are allowed to freely set price
between the pre-calculated Standard Cost and
25 discount from it.
? Skymark Airlines (HanedaFukuoka), AirDo
(HanedaSapporo)
Amendment of Civil Aeronautics Law (2000)
Permission system on the company basis
Submission system
Current System
Route setting and scheduling
? Advanced submission system
entry
? Advanced submission system
? No supply-demand adjustment
Route, frequency and schedule to be decided at
the discretion of airlines in principle.
Fare and charges to be set at the discretion of
airlines, in principle
? Permission on a company basis
? Approval required when using congested airports
? Ministers order
Minister of Land, Infrastructure and Transport
may order to charge inappropriate and unfair
fares and charges
Permission to be rendered on a company basis
mainly based on the satisfaction of safety
standards
Slot allocation of congested airports to be
reviewed every 5 year from the viewpoint of
promoting competition and enhancing networks
5
Background and Objectives of the Revision
With the revision of the Civil Aeronautics Law,
further deregulations were implemented such as
abolition of supply-demand adjustment.
?Background? ? Various user needs ? Growth of air
transport business ?Objectives? By promoting a
free and competitive market advantages such as
the following can be achieved ? Diversifying and
enhancing services ? Decrease in fares and
charges ? More efficient and invigorated economic
activities
Abolishing supply-demand adjustment
6
2. Process
7
Process leading to abolishment of supply-demand
adjustment
?Deregulation Package Promotion Plan (Three-Year
Plan) decided by the Cabinet in March 1995.
Realizing a free and fair economy based upon
market principles and the rule of
self-responsibility. Change from
prior-regulation to post-check-regulation in
administration ?Abolition of supply-demand
adjustment was decided after preparing
plans for related issues, including how to
maintain air services to remote
islands and the rules for distributing
departure/arrival slots at congested
airports. ?Ideal Methods for Preparing Market
Environment for Abolition of Supply-demand
Adjustment in Domestic Air Transport
Business (Report by Air Transport Subcommittee
of the Council for Transport Policy in April
1998) Council, including members from
government, academia, and airlines held 9
meetings to discuss preparation of market
environment. ?Revision of Civil Aeronautics
Law(Enforced 1 Feb. 2000) Incorporating the
ideas from the Council, The Civil Aeronautics Law
was revised including abolition of supply-demand
adjustment and advanced submission system in
fares and charges.
8
Reaction from Airlines Regarding Deregulation
Regarding the abolition of supply-demand
adjustments, Council for Transport Policy heard
opinions from airlines. The opinions from
airlines were, principally, in favor of abolition
of supply-demand adjustments, with the
expectation of being able to run business freely
and actively. ?Opinion (requirement) from
airlines? ?Maintaining regulations and
inspections to guarantee safety. ?Assistance for
maintaining regional air services such as air
services to/from islands. ?Making objective and
clear rules for distributing departure/arrival
slots at congested airports
9
3. Results
10
Deregulation of Domestic Air Transport Business
Market access
Fares and charges
Enactment of Civil Aeronautics Law (1952)
License System on a route basis for
supply-demand adjustment
Approval system
? Cost based fare setting
? Strategic route assignment to 3 major
airline(1970)
Fares are established so that total revenues
could meet the total cost including a moderate
profit, provided sound business management
practices are followed.
JAL International Domestic (Major Routes
only)
Gradual Deregulation
ANA Domestic (Major local routes)
JAS Domestic (Local routes only)
? Abolishment of route assignment systems and
promotion of double/triple tracking(1986)
? Partial introduction of submission system (1994)
2 or 3 airlines operating in the same routes
(Lowering the standard for double/triple tracking
step-by-step)
Introduction of submission system for
promotional fares with up to 50 discount
? Abolishment of the standard for double/triple
tracking(1997)
New entry to Japanese domestic airline
business in 1997 for the first time in the past
35 years.
? Zone Approval System (1996)
Airlines are allowed to freely set price
between the pre-calculated Standard Cost and
25 discount from it.
? Skymark Airlines (HanedaFukuoka), AirDo
(HanedaSapporo)
Amendment of Civil Aeronautics Law (2000)
Permission system on the company basis
Submission system
Current System
Route setting and scheduling
? Advanced submission system
entry
? Advanced submission system
? No supply-demand adjustment
Route, frequency and schedule to be decided at
the discretion of airlines in principle.
Fare and charges to be set at the discretion of
airlines, in principle
? Permission on the company basis
? Approval required when using congested airports
? Ministers order
Minister of Land, Infrastructure and Transport
may order to charge inappropriate and unfair
fares and charges
Permission to be rendered on the company
basis mainly based on the satisfaction of safety
standards
Slot allocation of congested airports to be
reviewed every 5 year from the viewpoint of
promoting competition and enhancing networks
11
Application Process under Civil Aeronautics Law
Application
(Article 100)
Examination of Business Plan

• The planned operation meets established safety
  standards
• The planned operation is appropriate and feasible
• The applicant (company) has the ability to
  actually execute the business plan
• In case that the company plans to provide
  international air services, the planned operation
  is allowed under the existing bilateral and
  multilateral international agreements
• The applicant is controlled by Japanese citizens
• The applicant does not have any criminal record

(Article 100)
Permission
Manuals (Operational Manual, Maintenance Manual)
Routes and Schedules
Conditions of Carriage
Inspection of Facilities
Fares and Charges

• Operational Control Facilities
• Maintenance Facilities
• Training Facilities etc

(Article 104)
(Article 107-2,107-3)
(Article 106)
(Article 105)
(Article 102)
Approval
Submission
Operation
)Routes and schedule setting for domestic air
services to/from congested airports and
international services and international fares
and charges are required to obtain the approval
of the Minister of Land, Infrastructure and
Transport
12
Assistance to Regional Air Services
While route and schedule settings are basically
decided at the discretion of airlines under Civil
Aeronautics Law, various measures are established
to make it easier for airlines to maintain and
enhance regional services.
Air services to/from islands
Air services to/from small cities

• Subsidy for purchase of aircrafts
• Subsidize the cost of purchasing aircraft to be
  used for the route to/from islands

• Reduction of landing fee
• Reduce the landing fee at Haneda Airport to
  1/2-9/10

• Allocation of slots at Haneda Airport
• Give benefits in allocating landing slots to
  those airlines that contribute to enhancing and
  maintaining services to/from small cities.

• Subsidy for the cost of operations
• Subsidize the cost of operations incurred for
  such air services to/from islands as is necessary
  to maintain the common welfare of island residents

• Reduction of taxes and fees
• Reduce fuel tax by 25
• Reduce landing fee to 1/6-1/8
• Reduce fixed property tax on aircraft to ½-1/3

13
New Entry
New market entry and routes are steadily
increasing
Haneda routes operated by new entrants
Number of domestic scheduled airlines

Air Shenpix
Star Flyer
Skynet Asia Airways
Skymark Airlines AirDo
(as of 1/4/2006)
Asahikawa
Air Next
Iki International Airlines
Orange Cargo
Sapporo
Memanbetu
Fairlink
Amakusa Airlines
-Orange Cargo?
Tokushima
Hakodate
Fukuoka
Kobe
Kita-Kyusyu
26
Nagasaki
23
25
25
20
22
19
Miyazaki
18
16
Kumamoto
Kagoshima
AirDo
Skymark Airlines
Skynet Asia Airways
Star Flyer
Outline of new entrants
Skymark Airlines
Air Do
Skynet Asia Airways
Star Flyer
Entry Oct. 1998
Entry July 1998
Entry May 2002
Entry Jan. 2005
Fleets B767(3), B737(2)
Fleets B767(6),B737(2)
Fleets B737(6)
Fleets A320(3)
Routes
Routes
HanedaShin-Chitose(9) HanedaAsahikawa(3) Haneda
Hakodate(2) HanedaMemanbetu(3)
Routes
HanedaMiyazaki(6) HanedaKumamoto(6) HanedaNagas
aki(6)
Routes
HanedaKita-Kyusyu(12)
HanedaFukuoka(9 ) HanedaKagoshima(4) HanedaToku
shima(4) HanedaKoube(7)
6?
As of 1 April 2006
14
4. Benefits
15
Impact on Fare Levels
Deregulation has promoted a decrease and
diversity of airfares. It has also contributed to
competition in areas other than airfares.
Diversity of Fares
2004
2001
1994
2000
1995
Normal Fares Round-trip Fares Coupon
Ticket Advanced Purchase Fare Flight Specific
Discount Bargain Fare Web Discount Shuttle
Fare Ticket-less Discount Birthday
Discount Marriage Anniversary Discount One-day
Pass Last Minutes Discount
Normal Fares Coupon Ticket Advanced Purchase
Fare Flight Specific Discount Bargain Fare Web
Discount Shuttle Fare Ticket-less
Discount Birthday Discount Last Minutes
Discount Mileage Discount Special Seats Discount
Normal Fares Round-trip Fare Coupon
tickets Advanced Purchase Tickets Flight Specific
Discount Bargain Fare Web Discount Shuttle Fare
Normal Fare Coupon Tickets Advanced Purchase
Discount Flight Specific Discount
Normal Fare Round-trip Fare Coupon Ticket
Competition in air-fares
Examples of competition other than air-fares
New entrants have set cheaper fares than those of
existing major airlines.
While the diversity and competition of air-fares
progress, difference can also be seen in other
areas of service such as seats and mileage cards
(As of April 2006)
Purchase limit of normal-fare tickets varies from
within 3 days from reservations (JAL,ANA) to 20
minutes before departure (SKY).
16
Stimulation of Demand for Air Services
Number of passengers has increased highly on
routes with new entrants compared to others.
Rate of increase in number of passengers of the
routes with new entry compared with other routes.
Passenger increase at routes with new entry
Number of passengers has increased by 8 million
at routes with new entrant for the past six years
since new entry occurred.
Increase in number of passengers (when passengers
in 1997 is put as 1)
HanedaFukuoka
(million)
1.11 million in 6 years
Fukuoka
SKY
Kagoshima
Sapporo
(FY)
HanedaSapporo
(million)
0.82 million in 6 years
All Routes
MIyazaki
Entry of SKY Entry of ADO
Entry of SKY Entry of SNA
ADO
(FY)
(FY)
(Note) Number of passengers decreased from 2002
to 2003. Same trend (decrease) can be seen in the
rate of all routes.
(Source) Information from Civil Aviation Bureau
17
THANK YOU !!