The State and Future Trends of the US Aviation Industry - Japan International Transport Institute
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The State and Future Trends of the US
Aviation Industry
- National Market in Transition and Developments in Asia –
July 2007
Japan International Transport InstituteCONTENTS
I. Passenger Companies
1. Is the Demand for Passenger Airline Service Continuously Increasing?....... 4
(1) An Overview of the Passenger Airline Business in the U.S. .............. 4
(2) The Six Major Network Carriers ........................................................ 5
(3) Low Cost Carriers .............................................................................. 9
2. Is the Supply Capacity of the U.S. Passenger Airlines Increasing? ............ 10
(1) An Overview of the Passenger Airline Business in the U.S. ............ 10
(2) The Six Major Network Carriers .......................................................11
(3) Low Cost Carriers ............................................................................ 16
3. Have U.S. Passenger Airline Companies Improved Revenues? ................. 17
(1) The Six Major Network Carriers ...................................................... 17
(2) Low Cost Carriers ............................................................................ 20
4. Efforts by the Six Major Network Carriers to Improve Revenue Structures . 21
(1) Operating Revenue ......................................................................... 21
(2) Operating Costs .............................................................................. 25
5. Has the Cost Structure of the Six Major Network Carriers Changed? ......... 28
(1) Personnel Costs .............................................................................. 28
(2) Fuel Costs ....................................................................................... 32
6. Responses by the Six Major Network Carriers to Revenue Improvement .. 36
(1) Fare Increases ................................................................................ 36
(2) Revenue Expansion by Outsourcing Spoke Routes to Regional Carriers
....................................................................................................... 39
(3) Entering the International Market .................................................... 41
7. Are the Low Cost Carriers Capable of Sustaining Profits? .......................... 44
(1) Cost Trends of Low Cost Carriers ................................................... 44
(2) Comparison Between the Six Major Network Carriers and Southwest
....................................................................................................... 47
8. Conclusion .................................................................................................. 51
2II. Suggestions for Japanese Airlines
1. Are US-Japan Routes Still Functioning as “Gateways to Asia”?.................. 52
(1) Overall Traffic Volume Between the U.S. and Asia .......................... 52
(2) Performance by U.S. Carriers ......................................................... 56
(3) Comparison Between Flights Through Japan and Those Bypassing
Japan ............................................................................................. 58
2. Can Flag Carriers, Including Japan, Survive in the Asian Market? ............. 68
3. Conclusion .................................................................................................. 81
3I. Passenger Companies1
1. Is the Demand for Passenger Airline Services Continuously Increasing?
(1) An Overview of the Passenger Airline Business in the US
・ 2006 saw passenger demand grow, together with the number of passengers
and RPM (revenue passenger miles), passing the peak level of the year 2000.
However, the rate of increase has substantially declined.
1
Data used in Section I of this report regarding operation and business performance are
provided by the US Department of Transportation‟s Form 41, arranged by Morten Beyer & Agnew
and prepared by this Institute.
4(2) The Six Major Network Carriers2
・ The passenger numbers trend of the six major carriers in the domestic market
showed signs of recovery from 2003 to 2005, but declined in 2006.
2
The six major US major carriers consist of American, Continental, Delta, Northwest, United and
the former US Airways. US Airways merged with America West on September 27, 2005, but
integration of the operations of the two companies was scheduled to take place over 24 months,
and they continue to provide data to the DOT as separate entities. As such, they will be referred
to as the former US Airways and the former American West in this report. “Expanded Network
Carriers” means the total of the six major carriers and regional carriers affiliated with the six major
carriers.
5・ The RPM trend of the six major network carriers was in recovery 2003 through
2005, then in decline in 2006.
・ The number of passengers carried by the six major network carriers leveled
off from 2003 through 2005 while the PRM saw an upward trend. The
decreasing rate of the number of passengers(4.9%) in 2006 was larger than
that of RPM (2.7%) as opposed to the number of passengers (4.9%),
indicating that the six major network carriers experienced a declining demand
centering on short-range routes.
6・ In an attempt to observe the impact of the decrease in RPM of the six major
network carriers on other modes, the RPM trend of the six major network
carriers is compared to the trend of VMT (unit mile).3
・ The automobile mode trend remained level during the 2004-2005 period when
the six major network carriers saw an upward trend, while during the period of
2005 through 2006 when the six major network carriers experienced a
declining trend, it exhibited an upward trend.
・ The above facts are interpreted to indicate that a part of the reduction of the
six major network carriers‟ RPM was shifted to the automobile mode.
3
Source: November 2006 issue of Bureau of Transportation Statistics, White House Economic
Statistics Briefing Room, Transportation.
7・ Both the number of passengers and RPM in the international market in the
year 2006 surpassed the levels of the year 2000. Unlike the domestic market,
the trend in the international market has shown a steady increase.
8(3) Low Cost Carriers4
・ Unlike the six major network carriers, low cost carriers have seen a steady
increase in both the number of passengers and RPM since 2000. This trend
continued in the year 2006.
・ As a result, the low cost carriers‟ market share in 2006 increased over one-
fourth from that of 2005, in terms of the number of passengers and close to
one- fourth in terms of RPM.
L ow C os t C arriers : Number of P as s eng ers and
RPM
250,000
200,000
159,027 171,883
148,353
150,000 134,625 146,407
123,745
114,875 118,783
136,144
126,504
100,000 111,271 Number of P as s engers
97,061 (thous ands )
88,617
82,322
50,000 R P M (million pas s enger
miles )
0
2000 2001 2002 2003 2004 2005 2006
Ye a r
4
Defined as the following seven companies: Southwest, JetBlue, Frontier, Spirit, America West,
AirTran and ATA. In the case of those low cost carriers (JetBlue, Frontier, Spirit, American West,
AirTran and ATA), which also operate on international routes (Latin America), some of the data
available is not distinguished statistically from data on domestic operations. Therefore, unless
specified otherwise, the data on these airlines refers to the entire market, both domestic and
international.
92. Is the Supply Capacity of US Passenger Airlines Increasing?
(1) An Overview of the Passenger Airline Business in the US
・ Responding to the demand increase, an upward trend continued through 2005,
overtaking the 2000 level, which marked a peak. However, 2006 saw a
decline in supply in the domestic market by the six major network carriers and
the rate of increase declined dramatically, and then leveled off.
P as s eng er A irline B us ines s Overall View
1,000,000
(A S M, R P M)977,218 978,090
964,303 954,887
950,000
939,499
900,000 897,763
887,005
850,000
800,000
776,453
760,800
750,000
722,507 A S M (million s eat miles )
700,000 697,755
657,528 R P M (million pas s enger
650,000 645,758 652,744
miles )
600,000
550,000
2000 2001 2002 2003 2004 2005 2006
10(2) The Six Major Network Carriers
(Domestic Market)
・ In the domestic market where revenue increases are difficult to realize, load
factor is considered to be extremely important. The carriers again turned to a
reduction in supply capacity, transferring business to regional carriers. On the
other hand, they have continuously increased their supply capacity in the
international market thus availing resource savings for the national market.
・ In the domestic market, they have been reducing the number of flights and
ASM5 since 2005. 2006 saw a trend toward reducing their supply capacity.
・ The fact that the declining rate in the number of flights (the 2006 rate was
10.03% compared to 2005) substantially exceeds that of ASM (the 2006 rate
was 5.4% compared to 2006) shows that reduction in the number of flights
mainly involved short-range flights.
5
ASM stands for Available Seat Miles, obtained by multiplying the number of passenger seats by
operating miles, which serves as an index reflecting the capacity of an airline company.
1112
・ A steady upward trend in an increase in the supply capacity of regional
carriers leveled off in the year 2006, and for the first time, the number of flights
turned downward in the same year.
・ The transfer of short-range flights from the six major network carriers to
regional carriers has almost been completed. The six major network carriers
have changed their flight distribution strategy by further eliminating their own
short-range flights, depending upon their respective regional affiliates.
13(International Market)
・ On the other hand, supply capacity in the international market has been
steadily increasing since 2004 when demand also began to increase.
14・ A comparison between RPM and ASM in international market shows a higher
rate of increase for RPM, indicating that the increase in demand exceeds that
of supply capacity in the international market. This is regarded as one of the
vital factors which have caused the six major network carriers to become more
aggressive in expanding international operations than domestic operations.
Upward and Downward T rends of the 6 Major
300,080
Network C arriers (C ompared to 2000)
250,080
200,080
150,080 A S M (million s eat miles )
R P M (million pas s enger
miles )
100,080
50,080
80
2000 2001 2002 2003 2004 2005 2006
Ye a r
15(3) Low Cost Carriers
・ While the six major network carriers are reducing their supply capacity, the low
cost carriers are constantly increasing their capacity. The domestic market
share held by the low cost carriers rose from 18.1% in 2000 to 27.1% in 2006.
163. Have US Passenger Airline Companies Improved Revenues?
(1) The Six Major Network Carriers
・ The pooled revenue of the six major network carriers turned a profit for the
first time since 2001 due to cost reduction efforts and fare increases, recording
$3,081,500,000 in operating revenue.
・ When calculated on a per-unit basis,67 the six major network carriers made a
per-unit base profit totaling 0.46 cents.
6 Major Network Carriers: Overall View
(Operating Profit and Loss)
6,000,000 1.50
4,649,170
4,000,000 3,081,502 1.00
0.63
2,000,000 0.460.50
0 -0.38 0.00
Operating Profit and Loss
2000 2001 2002 2003 2004 2005 2006
(2,000,000) -0.61 -0.50 (thousand dollars)
(2,588,138)
(4,000,000) -1.41 -0.75 -1.00
-1.36 Unit Base Operating Profit
(4,104,664)
and Loss (cents)
(6,000,000) (4,823,150) -1.50
(8,000,000) -2.00
(10,000,000) (9,592,681)(9,553,678) -2.50
(12,000,000) -3.00
Year
・ Earlier, due to the limited nature of competition in the international market,
fares were set against vigorous demand for further expansion of revenue
which was used to support domestic operations where the competition was
fierce vis-à-vis the low cost carriers.
・ In 2006, due to fuel cost increases, low cost carriers were forced to raise their
6
Regarding the cooperative transportation system that exists between the six major network
carriers and the regional carriers with which they are partnered (domestic market and Latin
American market), because both revenues and costs associated with such contractual ventures
as these are not directly related to the major network carrier, since 2003 they have been required
to be reported as „transportation related revenues,‟ and „transportation related costs.‟ For this
reason, regarding calculations of revenues and/or costs on a per-unit basis, since the ASM
denominator is that proportion of flight operations carried out by each company individually rather
than through partner carriers, the values considered to most accurately represent the actual
revenue and/or costs of the operations of each individual company, and thus are used in
transportation related costs as mentioned above.
7
The value divided by ASM is used as “Per Unit” value in this report.
17fares. As a consequence, the six major network carriers were able to earn
profits in the domestic market for the first time since 2001.
1819
(2) Low Cost Carriers
・ The aggregated operating revenue of the low cost carriers in 2006 was
$975,640,000 and the per unit base profit was 0.50 cents.
・ For the past two years, increased fuel costs led to an increase in total
operating costs, resulting in a drop in operating revenue. In 2006, the low cost
carriers were determined to raise fares, accompanied by a hike in fuel
surcharges, and operating revenues, once again, returned to an upward trend.
204. Efforts by the Six Major Network Carriers to Improve Revenue Structures
(1) Operating Revenue
・ Operating revenue has been increasing continuously since 2002. Total
revenue in 2005 surpassed that of 2000. 2006 revenue totaled
$928,072,226,000.
・ Unit base revenue, excluding transportation related revenue, has been
maintaining an upward trend as well. The revenue in 2006 was 10.82 cents,
passing that of 2005 and that surpassed the 2000 level.
21(Domestic Market)
・ The total operating revenue in 2006 surpassed that of 2005 earning
$63,061,320,000, overtaking the peak recorded in 2000.
・ On per unit basis, revenues rose for two consecutive years, earning 11.02
cents, which equals the level of the year 2000.
22・ In 2006, the rise in passenger revenue, which made up the majority of
revenues, was 5.29% compared to the previous year in which it rose only
2.78% over the previous year. Here, passenger revenue is analyzed by
separating yield8 and RPM.
・ In 2006, RPM decreased by 3% from the previous year, but yield increased by
7% to 12.70 cents. Average fares rose by 9.8% from the previous year,
reaching the 2000 level. On the other hand, RPM increased by 7% in 2005
and average fares9 saw a 2% growth, but yield decreased by 3% compared to
the 2003 level. Therefore, the rise in demand is considered highly significant in
terms of increasing passenger service revenue.
・ Until 2005, the revenue rise for the six major network carriers was aided by
increased demand caused by steady low fares against a backdrop of business
recovery and fierce competition. On the other hand, the rise of passenger
revenue in 2006 was implemented by fare increases which were done as the
same time the low cost carriers do so due to fuel cost increases.
8
Yield refers to the income gained from transporting one passenger for one mile. Here Yield is
the figure obtained by dividing the entire passenger revenue by RPM.
9
Average fare is the figure obtained by dividing the entire passenger revenue by the number of
passengers.
23(International Market)
・ 2006 total operating revenue in the international market saw a further increase
from the previous year, netting $29,745,905,000, which was a substantial
improvement over the 2000 level.
・ On a per-unit basis, 2006 revenues exceeded again those of 2005, netting
10.47 cents per- unit revenue. In the international market, unit revenue has
been showing a steady increase since 2003, in clear contrast to performance
in the domestic market.
・ Unlike in the domestic market, it is easier for the six major network carriers to
set favorable fares due to vigorous demand and absence of competition with
low cost carriers. The six major network carriers were more likely to expand
their revenues by exploiting a situation favorable to them.
24(2) Operating Costs
・ Total operating costs for 2006, while seeing a reduction in domestic market
supply capacity due to an increase in international market capacity and fuel
cost increases, rose further from the 2005 level.
・ On a per-unit basis, operating costs rose for two consecutive years to 10.95
cents, exceeding the 2001 level which was the peak in the past. This is
backed by increased fuel costs.
25・ In the domestic market, in 2006, while per-unit costs rose somewhat, overall
costs dropped, indicating that a drop in supply capacity contributes to cost
reduction as a whole.
26・ A comparison between per-unit costs among the six major network carriers
and the low cost carriers shows that the gap between the two is narrowing
year after year.
275. Has the Cost Structure of the Six Major Network Carriers Changed?
(1) Personnel Costs
・ On a per-unit basis, personnel costs for the six major network carriers
declined 30% from the peak level in 2002. However, personnel cost reduction
measures seem to have ceased and the rate is no longer on a downward
trend due to attempts to emerge from bankruptcy protection.
28・ United and US Airways, which underwent under bankruptcy protection at a
relatively early point,10 saw a drop in personnel costs during the period 2002 to
2005.
・ American was about to apply for bankruptcy protection when its business
deteriorated in 2003. However, in April, the company decided to take a self-
help approach by announcing a restructuring plan called the „Turnaround
Plan,‟11 initiating cost reductions and other approaches.
・ Delta and Northwest,12 both of which underwent bankruptcy protection in 2005,
saw the effects of personnel cost reductions in 2005 and 2006.
・ All these companies gradually worked to reduce personnel costs and through
the period from 2002 to 2005, the per-unit personnel costs of all six major
network carriers moved downward.
・ Yet, in 2006, both United and US Airways, which had been under bankruptcy
protection earlier, turned their personnel cost upward, and American and
Continental, which had embarked on their own cost reduction plans, also saw
their personnel costs move upward.
・ The volume of personnel cost increase by the above four companies canceled
the reduction accomplished by Delta and Northwest, breaking the downward
trend of personnel cost of the six major network carriers in total.
・ For executives, application for bankruptcy protection is a powerful leverage
tool in negotiations with labor unions and has enabled the companies to
reduce personnel costs. Compared to American and Continental, who have
not applied for protection, those companies under protection have shown
more visible personnel cost reductions.
・ However, personnel costs for United and US Airways turned upward after they
emerged from bankruptcy protection in the spring of 2007, a trend that may be
experienced by Delta and Northwest, both of which underwent the same
process later than United and US Airways.
・ For these reasons, the downward trend for personnel costs of the six major
network carriers are somewhat stymied, so this trend may level off in the
future.
10
In February 2006, United emerged from the bankruptcy protection filed in December 2002. In
March 2003, the former US Airways initially emerged from bankruptcy protection filed for in
August 2002. However, they were forced to re-file in September 2004, then emerged in
September 2005 by announcing their intention to merge with America West.
11
The strategic plan consisted of the following measures: 1) Peak equalization at the Miami hub,
a reduction of scale at the St. Louis hub, streamlining domestic routes. 2) Expansion of
international operations. 3) More efficient utilization of machinery and materials. 4) Consolidation
of terminals and gates utilized. The plan also looked to strengthen overall operations by
concentrating on international routes as a source of income.
12
Delta and Northwest applied for bankruptcy protection in September 2005. Delta emerged on
April 30, 2007 and Northwest emerged May 30, 2007.
2930
(Comparison to the Low Cost Carriers)
・ Incidentally, the per-unit personnel cost gap between the six major network
carriers and the low cost carriers is rapidly shrinking, reaching 0.35 cents in
2006, which indicates that the gap in per-unit personnel cost between the two
groups has substantially narrowed.
31(2) Fuel Costs
・ The per-unit base fuel costs for the six major network carriers has been on the
rise for the past few years but turned to a downward trend from the third
quarter of 2006 (3.54 cents) to the fourth quarter (3.31 cents).
32・ Compared to falling per-unit personnel costs, per-unit fuel costs for the six
major network carriers have been increasing to the point that fuel costs have
overtaken personnel costs, resulting in canceling the reduction effect of
personnel costs.
33・ Over the past few years, the fuel consumption levels of the six major network
carriers have been leveling off, thus fuel price increases have pushed per-unit
fuel costs substantially upward. On the other hand, the hedging efforts by the
low cost carriers have been successful in keeping fuel costs low, resulting in a
rather mild increase in per-unit fuel costs. For this reason, the gap between
the increase in fuel costs for the six major network carriers and that of the low
cost carriers has been widening year after year.
34・ In addition to overall energy conservation efforts, fuel hedging strategies and
the application of fuel surcharges are two of the countermeasure that have
been undertaken by the airline industry.
・ Hedging contracts vary widely as the form of these contracts changes
depending upon the situation or conditions, such as the price of crude oil.
Compared to the low cost carriers, the six major network carriers find hedging
clauses in contracts not always advantageous, so it is rather difficult for them
to control fuel prices by hedging.
・ For this reason, the six major network carriers tend to resort to fare increases
in addition to general energy conservation efforts and other cost cutting efforts
to offset soaring fuel prices. Crude oil prices rose again in 2007, and a fuel
cost hike may follow. The possibility of further fare increases is conditioned by
the fare strategy of the low cost carriers and the business climate in the US
(demand-supply situation), which makes it difficult to arrive at an accurate
forecast. At any rate, fare increases will have an immediate impact on demand
on short-range routes, which may cause further reduction of these routes by
the six major network carriers.
356. Responses by the Six Major Network Carriers to Revenue Improvement
(1) Fare Increases
・ A number of carriers have adjusted their fare structures 13 introducing lower
fares and simpler fare structures.
・ Yet, while yield shrunk by 21% during the period of 2000 to 2004, RPM
dropped by 5% at the same time which was reflected in staggering revenue
improvements.
・ The six major network carriers at this time made efforts to reduce costs, with
the main emphasis on personnel costs reduction, which ended further revenue
deterioration of business due to soaring fuel costs in 2005.
・ The six major network carriers then, following the lead of the low cost carriers,
raised their fares, thus improving passenger revenues which considerably
improved the overall revenue structure although was still far from recording
profits.
13
The former US Airways „GoFares‟ (beginning in April 2004) set a one-way fare within a range of
$29~499, lowered fares for purchasing tickets on travel days and removed the „overnight stay on
Saturday‟ requirement for discount. The carrier implemented „GoFares‟ to counter the challenge
made by Southwest, which had started service at one of the major hubs for US Airways. Later the
carrier expanded this to Washington, DC and Fort Lauderdale. „Simplifares‟ introduced by Delta
(beginning August 2004 in Cincinnati, expanding nationwide by January 2005) cut fares as much
as 50%. In practice, Delta set the upper limit on one way fares to $499, consolidated 40 different
fare categories into six, lowered fares for travel day purchasers as well as abolishing the
„Saturday overnight stay requirement‟ that was mandatory to some discount fares.
3637
・ The six major network carriers did not lose passengers while supply capacity
was being reduced. In 2005, when capacity was lowered, the number of
passengers increased through the third quarter. In 2006, the number of
passenger declined 4.7% against a 10% reduction in the number of flights.
Looking quarter by quarter, we find that passenger decline is approximately
half of the decline of the number of flights.
・ This indicates that the six major network carriers manipulated supply capacity
skillfully in order to maintain high load factor operations. Facing soaring fuel
costs in 2005, they considered fare increases, taking decline in demand
caused by fare increases into consideration so as to maintain a high load
factor while saving costs as much as possible.
・ The fare increases at that time were well adjusted to the negative impact on
demand so as to succeed in maintaining a high load factor. However, further
fare increases may be beyond this manipulation, seriously impacting demand.
38(2) Revenue Expansion by Outsourcing Spoke Routes to Regional
Carriers
・ The year 2005 saw for the first time transportation related revenue surpassing
transportation related costs. Cost reductions imposed on regional carriers
restrained an increase in outsourcing fees.14 As a result, while transportation
related costs increased by 2%, transportation related revenue increased by
16%, which further resulted in the three-fold expansion of transportation
related revenue in 2006 compared to that of 2005.
14
United terminated its contract with Air Wisconsin which refused to lower contract fees in April
2005 and then gave it to Skywest. Continental embarked on a cost reduction program by
requesting the reduction of 69 regional jets out of 274 to Express Jet in December 2005. Since
outsourcing fees are set in accordance with the actual operating costs by regional carriers, such
cost reductions are closely related to the fees the six major network carriers have to pay to
regional carriers (SEC report).
39・ Operating profit and loss, excluding transportation related revenue and costs,
for the six major network carriers in 2006 shrunk substantially to
$1,553,429,000 compared to those in 2005, the lowest since 2000. They
would have been unable to post operating revenue if not for outsourcing fees
paid by regional carriers whose contributions are therefore regarded as
considerable in terms revenue improvement.
・ Outsourcing fees are set based upon the operating costs of the regional
carriers, thus it is crucial to encourage regional carriers to reduce their costs in
order to secure outsourcing fees.
40(3) Entering the International Market
・ As competition with the low cost carriers in the domestic market gets tougher,
the six major network carriers are trying harder to compete in the international
market. The portion of their operating revenue in the three international
markets grew from 26.7% in 2000 to 32.1% in 2006, thus their dependency on
the international market is growing.
4142
・ Yield varies from market to market, and after 2000, it has been somewhat
stymied in the domestic market whereas all areas of the international market
have been steadily increasing since 2000.
437. Are the Low Cost Carriers Capable of Sustaining Profits?
(1) Cost trends of low cost carriers
・ The per-unit cost gap between low cost carriers and the six major network
carriers which have been working to reduce costs, centering on personnel
reductions, is shrinking year after year.
44・ Their per-unit personnel costs in 2006 were higher than that in 2005, reaching
3.26 cents. In the past, the level of the per-unit personnel costs for the low
cost carriers has remained somewhat lower, which kept them in a stronger
position in terms of personnel management. However, the per-unit cost gap,
which was 1.89 cents in 2002, has rapidly shrunk thanks to the efforts on the
part of the six major network carriers. The result is the comparative supremacy
maintained by the low cost carriers in personnel costs diminishing, which, in
turn, has also narrowed the overall gap in operating costs between the two
groups of carriers.
45・ While the gap in per-unit fuel costs between the low cost carriers, such as
Southwest, and the six major network carriers had been growing until 2005,
due to an effective hedging strategy by the former, the gap in per-unit
personnel costs has shrunk year by year. In 2006, the gap in fuel costs (0.63
cents) was much greater than that of personnel costs (0.35 cents).
・ The above indicates that for the low cost carriers, it is most vital to maintain a
hedging strategy to hold cost supremacy over the six major network carriers.
46(2) Comparison between the Six Major Network Carriers and Southwest
・ Comparison of airfares between the six major network carriers and Southwest
in terms of yield does not show any significant gap, which may indicate that
Southwest is much different from the six major network carriers from the
consumers‟ point of view.
47・ There is a certain gap in per-unit costs between Southwest and the six major
network carriers, and in looking into the details of fuel costs and personnel
costs, Southwest‟s per-unit personnel costs were higher than that of the six
major network carriers in 2006. On the other hand, the gap in per-unit fuel
costs had been expanding until 2005 but leveled off in 2006.
4849
・ As seen from the preceding information, the cost gap between Southwest and
the six major network carriers is mainly the gap in fuel costs, which for
Southwest, is conditioned by its hedging strategy. Yet even the fuel cost gap
has now leveled off. Yield also shows virtually no gap between them. However,
on the demand side, such as the number of passengers and RPM, Southwest
has demonstrated a steady increase.
・ Presently, there is virtually no cost gap between the low cost carriers as
reflected by Southwest and the six major network carriers. The name „low cost
carrier‟ appears just to be in name only.
508. Conclusion
・ So far, in both the domestic market and the international market, demand and
capacity has remained steady. In the domestic market, the business strategy
of the six major network carriers has been to place heavy emphasis on the
load factor to prevent corruption of the fare structure by controlling capacity
when demand has been recovering. On the other hand, they actively reduced
their personnel costs, lowering overall costs while shifting their resources to
the international market whose demand has remained steady.
・ However, the soaring price of fuel in 2006 canceled the effects of personnel
cost cut efforts that year. Cost reduction efforts in personnel were almost
exhausted while fuel price increases continued, thus, they attempted to
increase fare revenues. At that time, the low cost carriers embarked on a fare
increase program, reflecting the positive business mood in the U.S. Following
suit, the six major network carriers began to raise their fares as well. Demand
in the international market was still bullish, so they accelerated their
competitive position in an attempt to increase their revenues. On the domestic
front, they further attempted to control capacity to prevent fare corruption
centering on short distance routes which is a load factor oriented strategy. On
the international front, as a result of the US-EU Civil Aviation Conference15
concluded last spring and the US-China Agreement, new routes are expected
to be added in the international market.
・ The low cost carriers have virtually lost their advantage in personnel costs
against the six major network carriers. Their remaining card is supremacy in
fuel cost hedging strategy, yet there is no guarantee that their superiority in
this area can continue forever.
・ Their superiority in fare scheduling is diminishing as the business style of the
low cost carriers is now closing in on that of the six major network carriers.
15
Beginning in March 2008, new routes will be freely opened with any number of flights among
locations in EU member nations and locations in the U.S. (EU carriers are free to choose any
location to take off irrespective of the location of company headquarters). Some of the contents of
this agreement are that regulation over Heathrow access is dropped, and European investors are
allowed to own a majority ownership in U.S. airline companies (no single investor is allowed to
have more than 25% voting power). The treaty was concluded on April 30, 2007.
51II. Suggestions for Japanese Airlines
1. Are US-Japan Routes Still Functioning as “Gateways to Asia?”
(1) Overall Traffic Volume between the U.S. and Asia16
・ The number of passengers traveling between the U.S. and Asia, due to the
impact of 9/11 and the spread of SARS, declined from 2001 through 2003.
Other than during this period, growth remained firm.17
16
This section is generated by this Institute with Morten Beyer & Agnew rearranging sections, T-
100 Market Data and Segment Data, from the US Department of Transportation Form 41 Data. T-
100 Market Data is the volume of traffic based on connecting origins and destinations in a
designated area which include those stopping between the origin and the destination where such
traffic volume takes place beyond destinations. Direct flights with stops enroute are taken into
consideration as long as they retain the same flight number all the way whereas so called
connecting flights are excluded. T-100 Segment Data represents the volume of traffic by non stop
flights in designated areas excluding flight that stops via certain point in between where traffic
beyond the destinations are included which makes T-100 Segment Data equal to the traffic
volume of direct flights. Judging from these statistic definitions, traffic volume accumulated by
portions where no direct flights exist, such as US-Vietnam, US- Malaysia. US-Indonesia, is
counted as zero whereas the traffic volume from routes with hub functions, such as US-Japan,
US-Hong Kong, include a portion of volume accumulated from beyond the destinations (for
example, US-Japan- China). Data reflects the actual traffic volume including the volume of
chartered flights.
For example, a China-US flight where passengers who took a US-Japan-China flight are only
counted in Market Data for US-China but not for Segment Data. On the other hand, passengers
who traveled non-stop US-China are counted in Market Data but not Segment Data, The statistics
reflect the actual traffic, including passengers carried by charter flights. At the time this report was
prepared; T-100 data was only available through the third quarter. The 2006 fourth quarter figure
is a projection by Morten Beyer & Agnew.
17
Source:T-100 Segment Data.
52# of Pax (000s Total of U.S. – Asia by T-100 Segment Data)
18000
16745
16000 16265
15392 15038
14000 14013 14072 14073
13450
12636 12915
12450
12000 11615
10000
8000
6000
4000
2000
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
・ When distributed by countries and regions,18 the number of passengers bound
for Japan is over 6,600,000. The number of passengers bound for Japan is by
far the largest figure compared to passengers bound for other countries and
regions, although it is leveling off. The same is the case for passengers bound
for Korea and Taiwan, leveling off at approximately 2,000,000. On the other
hand, the number of passengers bound for China 19 maintains extraordinary
growth, as reflected in a 25.1% increase each year, approaching the level of
the passenger volume bound for Hong Kong, Taiwan, and Korea. The total
number of passengers bound for China, Taiwan, and Hong Kong combined,
grew from 2,920,000 in 1995 to 5,900,000 in 2006, almost equal to the level
bound for Japan.
18
From T-100 Market Data.
19
Hereafter, „China‟ indicates mainland China which does not include Hong Kong and Taiwan.
53Japan 1.6％
Korea 2.6%
Taiwan 2.8%
Hong Kong 4.9%
China 25.1%
54・ Travel on the China route increased substantially from 1% in 1995 to 11% in
2006. The share for Korea, Taiwan, and Hong Kong routes remained at the
same level and the Japan route lost shares. The aggregated share of China,
Taiwan, and Hong Kong combined, which was about the one half of that of
Japan (25% in 1995), increased to 35% in 2006, approaching the level of the
share held by the Japan route.
55(2) Performance by U.S. Carriers
・ U.S. carriers are increasing their number of flights as the market expands,
which is very visible with regard to the China routes where the number of
passengers is growing.20 As a result, U.S. carriers are increasing their China
share and shrinking in other routes such as Hong Kong, Taiwan, and Korea.
20
T-100 data is utilized. Data are itemized by operating carriers, and data for the number of seats
do not reflect the results of code sharing.
56・ In addition to nonstop flights between the U.S. and Asia and connecting flights
via Japan, U.S. carriers are increasing their flights by sharing codes through
corporate alliances. Through their aviation agreements with Japan and other
Asian countries (China, Korea, and some in Southeast Asia), U.S. carriers are
permitted to share codes in the third party countries as follows:21
Code Share Agreement Framework
Countries
The 3rd and 4th freedom Areas The 5th freedom Areas
China No No
Korea Yes Yes
Indonesia Yes Yes
Singapore Yes Yes
Thailand Yes Yes
Philippines Yes No
Brunei Yes Yes
Vietnam Yes Yes
Malaysia Yes Yes
Nepal No No
Myanmar No No
21
Ministry of Land, Infrastructure and Transportation, Civil Aviation Bureau.
57(3) Comparison between Flights through Japan and Those Bypassing
Japan22
(3)-1 Number of Flights and Seats
・ The number of flights between the U.S. and Asia is growing constantly. There
are three times as many direct flights through Japan as through other
countries, making Japan‟s role crucial in offering stops for those connecting to
Asian destinations. Yet, the number of direct flights either via Japan or other
countries is leveling off, whereas direct flights to the destinations other than in
Japan are increasing rapidly since 2003, reaching one and a half times as
many as via Japan and twice as many as via all others.
・ In observing the US-China route, while the number of connecting flights via
Japan has leveled off, the number of direct flights has grown rapidly since
2003 due to the Sino-American Aviation Agreement concluded in 2004. There
had been more flights via Japan between 1995 and 1997, however, in 2006,
the number of direct flights rose to almost five times as connecting flights via
Japan.
22
This Institute has generated these figures; the original OAG (Official Airlines Guide) was
processed by Morten Beyer & Agnew. The number of transit passengers at Narita was provided
by the Narita Airport Company and processed by this Institute; the number of passengers
between the U.S. and the various parts of the Asia region is based on T-100 data.
5859
・ In addition to the increase in the number of direct flights, the number of
passenger seats for China flights is also growing. The number of flights via
Japan remains level and the number of direct flights has been steadily
increasing since 2003. In 1995, the number of direct flights was approximately
one half of the total share, which grew to 60% of all flights.
60・ From 1995 to 1997, the number of direct flights to China was about half that
of the number of flights via Japan, which in 2006 grew to four times as large,
and its growth rate is highly visible in the Asian market. Now the share of the
number of seats occupied by direct flights became the majority, vis-à-vis flights
via Japan.
61(3)– 2 Number of Passengers
・ The number of transit passengers to Asian destinations passing through Narita
in 1995 was approximately 749,000. This number grew to 1,334,000 in 2006.
Transiting passengers en route to China also grew from 124,000 in 1995 to
265,000 in 2006; both figures doubled. The rate surged upward during the
period from 2001 to 2002 when Narita added its second parallel runway.
6263
・ When looking at the number of passengers transported by direct flights and
flights via Narita Airport to Asian destinations from the U.S., we recognize that
the direct flight share has leveled off at two to three times the rate as flights via
Narita. On the other hand, China-bound passengers via direct flights in 2006
tripled in comparison to passengers on flights via Japan in 1995 where the
direct flight share is about half that of flights via Narita.
6465
・ The trend toward direct flights taking a larger share of China-bound
passengers on US-China routes is visible in the role of US-Japan routes,
creating the so-called “Japan bypassing” phenomenon which means
passengers increasingly want direct flights to destinations in Asia.
・ In 2007, the US-China Aviation Agreement was reached 23 and aimed at
substantially increasing the number of flights between the two countries,
taking into consideration the 2008 Olympics which are certain to increase the
number of direct flights, further accelerating the “Japan bypassing” trend.
・ On the other hand, the total volume of flights within the Asian market is larger
then that of those between the U.S. and Asia which will continue to grow,
centering on China in the future. Japan carriers may well have to become
more competitive in the Asian market in addition to the US-Japan routes.24
・ If Japan wants to excel in the travel business, it cannot afford to tolerate the
“Japan bypassing” phenomenon as such. Japan needs to embark on bold and
strategic liberalization in the international aviation business.
23
On May 23, the U.S. and China reached an agreement to double the number of passengers
and substantially increase the volume of cargo by 2011 through the government-to-government
negotiations. By the new agreement, the number of passenger flights that is ten per day to Beijing,
Shanghai and Kwangchow may be increased from 10 to 23 per day, adding an additional 10
flights within five years. At the same time, as many as three new carriers may be added for those
routes.
・ 2007: one flight/day is added and one new carrier may be added
・ 2008: one flight/day is added
・ 2009: four flights/day and two new carriers are added
・ 2010: three flights/day added
・ 2011: two flights/day added
・ 2012: two flights/day added, making additional flights altogether 13 per day by that point.
The two governments are slated to have a conference in 2010 in an attempt to set a timetable
to further liberate the aviation operation.
24
In July 2006, a Sino-Japanese Aviation Agreement was reached to add two more locations (23
locations altogether), increase the capacity by 20%, expand the code sharing operation, and let
additional carriers participate (6 to 13 for both countries) which would enhance the volume of
traffic between Japan and China immeasurably.
66Forecast of # of PAX (in 000s) by IATA
2010
2005 2006 2007 2008 2009 2010
Prospect
US-China 1,813 9.2% 9.3% 8.8% 8.1% 7.6% 2,737
US-Korea 2,005 7.0% 6.6% 6.3% 6.0% 6.0% 2,731
US-Hong Kong 1,808 9.3% 8.4% 7.7% 7.1% 5.1% 2,598
US-Taiwan 2,103 4.9% 4.8% 6.1% 5.6% 7.4% 2,783
US-Japan 7,066 3.0% 3.6% 3.0% 2.7% 2.0% 8,135
Japan-Korea 7,823 4.3% 4.7% 4.5% 4.0% 3.5% 9,609
Japan-Taiwan 4,487 5.4% 4.0% 6.4% 5.3% 5.0% 5,784
Japan-Hong Kong 3,163 5.8% 4.1% 3.6% 4.2% 2.9% 3,870
Japan-China 6,634 7.9% 11.3% 7.4% 7.9% 7.6% 9,936
Japan-Singapore 1,545 3.5% 5.8% 3.9% 3.5% 3.8% 1,888
Japan-Thailand 2,622 8.1% 4.0% 4.1% 3.0% 3.0% 3,256
China-Korea 6,133 8.8% 8.2% 7.6% 7.0% 6.0% 8,812
China-Hong Kong 8,500 12.0% 10.0% 8.0% 7.5% 6.5% 12,948
China-Singapore 2,618 8.2% 7.9% 8.0% 7.3% 7.0% 3,790
China-Thailand 1,961 16.8% 9.2% 8.8% 8.4% 7.6% 3,181
Source: IATA, Passenger Forecast 2006-2010, October 2006
672. Can Flag Carriers, Including Japan, Survive in the Asian Market?
・ Hereafter, unit costs25 are compared and analyzed.
・ This analysis is conducted for the six American major network carriers,
Japanese carriers, Asian flag carriers (average of Air China, Cathay Pacific,
Korean Air, Malaysia Airlines, Philippine Airlines, Thai Airways International,
and Singapore Airline), and Asian LCC (Air Asia).
・ The following analysis used ICAO Data which includes data from all ICAO
members rather than from DOT Form 41 which contains only US carriers‟ data
since this report required data to produce a comparative analysis of all the
carriers enumerated above.
・ The fact that the latest ICAO data is from 2005 and Air Asia began sending its
financial data only after 2003 and Malaysia‟s latest data is only available to
2004, unless specifically noted, the average figure for the seven Asian carriers
is the mean unit costs extracted from the period of 2002 to 2004, and for other
carriers, the mean unit costs from 2003 to 2005 is applied.
25
Unit cost is a per mile cost which puts the six major network carriers of America in an
advantageous position because they operate relatively longer distance routes, whereas there is a
suggestion that it is not necessarily inherently advantageous for a longer distance operation
which has to be taken into consideration (The Development of U.S. Civil Aviation since 2000—
Passenger Companies and Cargo Companies, Ministry of Finance, Institute of International
Affairs, Transportation Policy Study Organization, July 2007, p.135).IATA published a comparative
study between Asian LCC and the six major network carriers, “Aviation Cost Performance” (July
2006), taking a mean operating distance into consideration. The latest ICAO data was released in
2005.
68(Unit Operating Costs)
・ Unit operating costs of Asian flag carriers are lower than those of the six major
network carriers and Japanese flag carriers. Furthermore, those of Air Asia are
much lower than those of other Asian flag carriers.
69(Unit Costs for Flight Crew Members)
・ The difference in unit costs for crews between Japan flag carriers and those
for Asian flag carriers and between Japan flag carriers and Air Asia are 0.38
cent and 0.18 cent respectively which is smaller compared to other costs as
described below.
70(Unit Costs for In-flight Passenger services)
・ Unit costs for in-fight passenger services include the total personnel costs for
flight attendants and food and drink cost supplied to passengers. Compared to
the Asian flag carriers, the six major network carriers, and the Japanese flag
carriers,26 Air Asia‟s cost are very low. Air Asia charges for food and drink, and
the seat price and class are uniform which enhances the efficiency of flight
attendant services.
Passenger Service (=Cabin crew salaries and other costs)
(Unit Cost, Cents)
Air Asia
（2003-05 Average）
0.08
Asian Flag Carriers
（2002-04 Average）
0.90
Thai Intl+Malaysia Air+Phillipine
Air (2002-04 Average）
0.79
Air China
(2003-05 Average）
0.32
Singapore Airlines
(2003-05 Average）
1.16
Cathay Pacific
(2003-05 Average）
1.14
Network Carriers
（2003-05 Average）
1.11
JAL
（2003-05 Average）
1.29
0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40
26
For Japanese carriers, the figure obtained excludes ANA which is extremely high.
71(Unit Fuel Costs27)
・ Only Air Asia28 demonstrated that its fuel costs declined while all six major
network carriers, Japan carriers, and Asian flag carriers increased to more
than 2 cents. Air Asia is switching to the A-320 which has better fuel
consumption, and emulating the business model of the low cost carriers in the
U.S., it has adapted a fuel hedging program beginning in 2005.
27
The sharp rise in fuel prices in 2005 has been taken as the average for 2003 to 2005. For this
reason, Malaysia Air and Korean Air, whose financial data are only available through 2004, were
omitted.
28
Air Asia raised its fares in July of 2005. It has been collecting a fuel surcharge. It must be noted
that fuel costs in its securities report are listed without the surcharge.
72(Unit Costs for User Charges for Landing Fees and Navigation Charges)
・ Air Asia‟s total unit costs for landing fees and navigation charges are
significantly lower than others such as the Asian flag carriers and the
Japanese airlines, except for the six major network carriers. This is due to the
fact that Air Asia uses lower cost terminals. Air Asia‟s use of these low cost
terminals means it enjoys considerable cost benefits, except when compared
to Malaysia Air and Singapore Airlines, which pay lower landing fees due to
governmental policies.
73(Unit Costs for Ticket Sales and Promotion)
・ In general, there are few variables in unit cost for sales and promotion among
carriers in the Asian region. It appears that they are holding a certain
advantage in personnel costs in comparison to the Japanese carriers and the
six major network carriers. Furthermore, an advantage in unit costs for sales
held by Air Asia is remarkable thanks to its efforts to widely utilize the Internet
for reservations and sales.
74(Unit Costs for Equipment and Maintenance)
・ Unit costs for flight equipment 29 vary among the Asian flag carriers, yet in
general, Air Asia‟s remains the lowest of all. This is realized by its high rate of
operations which enable it to operate at less cost. In addition, Air Asia made its
cost cut effort when entering into a lease agreement of B737-300s in the past.
Its unit maintenance and overhaul costs are also lower than those of the other
Asian carriers because it operates with only one type of equipment. (At
present, it is using two types of equipment because it is switching from the
B737-300 to the A320).
29
“Equipment cost” here is the total of rental costs and equipment depreciation costs.
7576
・ Looking at the cost gap between Air Asia and the Asian flag carriers, as far as
personnel costs are concerned, there is little difference in terms of crew costs
(in fact, costs for Air Asia are higher), meaning that crew personnel cost
differences are not crucial. Air Asia has realized a total of 3.90 cents cost
reduction by cutting the cost of: passenger service (21%), ticket sales and
promotion (17%), user charges for facilities (16%), fuel charges (21%), and
aircraft maintenance and equipment (25%), indicating that its low cost carrier
business model has been contributing successfully to its cost superiority.
・ Air Asia plans to enter the long-distance international market. With
strengthening its international network, Air Asia is expected to reinforce in-
flight passenger service as flight hours increase and add aircraft (as a result of
which, they will incur additional maintenance). Therefore, the cost gap in in-
flight passenger service and equipment and maintenance and overhaul cost is
expected to narrow in the future.
77・ When the costs of the Japan carriers are compared to those of the Asian flag
carriers, the differences in flight crew costs are surprisingly small, while the
gaps in passenger service (17%), equipment cost (19%), user charges (11%),
and sales and promotion (14%) are relatively substantial.
Breakdown of unit cost for Japanese Carriers
78・ The cost comparison between the Japan carriers and Air Asia also shows
rather small differences in crew costs while the gaps in passenger service
(18%), sales and promotion (15%), user charges (13%), and equipments costs
(18%) are relatively substantial.
Breakdown of unit cost for Japanese Carriers
79・ Transportation within Asia is expected to expand significantly in the future. If
the Japan carriers hope to grow within this area, they need to be ready to
embark upon severe competition with other carriers. For Japan carriers to
compete with the rapidly growing Asian LCC, it is necessary that they reduce
costs. Yet, the rate of operation improvement may not be obtainable by their
efforts alone due to external factors such as airport conditions. For example,
because user charges are public obligations, its cost gap is the external factor.
Because the rate of operation is influenced by limits of operation hours which
are also imposed by the public sector, cost gaps in equipment costs and
aircraft overhaul and maintenance are the external factors as well. Regarding
those cost gaps, Japanese airlines are not able to change by their own efforts.
・ Further investment for in-flight passenger services is important for Japanese
carriers so as for them to be able to provide higher quality service in an
attempt to appeal to business passengers who are regarded as a vital source
of revenue. Yet it is important to recognize that there are many passengers
who prefer low fares to a higher quality of service and that type of passenger
will be more attracted to the Asian LCC which is expected to further grow in
the future. It may not be an easy matter to attract more business passengers
than the number of those passengers above who are more favorable to low
fares.
・ In order to respond to such challenges, it is necessary to develop a strategy to
attract those passengers looking for low cost fares by adopting the business
model like Asian LCCs which is probably not practical in the Japanese
domestic market. However, if this is the right direction, it is then desirable to
have a much freer investment environment in the international civil aviation
arena.
803. Conclusion
・ The growth in transportation demand for US-Asia flights tends to be in terms
of direct flight, which enlarges the volume of traffic bypassing Japan,
generating the so-called “Japan bypassing” effect. The role of US-Japan flights
as the “Gateway to Asia” is also diminishing. Dependency on direct flights to
the destination country is growing.
・ On the other hand, intra-Asia transportation is becoming much more
voluminous than US-Asia transportation, especially in and out of China. Japan
carriers, in addition to their US-Japan flights, need to move into this market,
especially those international routes centering on China.
・ To achieve this goal, bold and strategic liberalization and deregulation
measures might be required in order to enable Japanese carriers to enter
these intra-Asian routes.
・ In the Asian regional market, in addition to the flag carriers who enjoy cost
advantages and exploiting low personnel costs in general, a super LCC (Air
Asia, which not only has had low personnel costs but also a major cost
advantage in terms of other expense items) is now establishing itself. The
rivals to the Japan carriers are no longer limited to the six major network
carriers or the Asian flag carriers, forced to compete with such LCCs as Air
Asia. Air Asia might lose some of its cost advantage as higher equipment
costs are generated from its entry into the international market as well as the
impact of oil price hikes. Yet its strong cost advantage as compared to the
Japan carriers as well as the six major network carriers is unchanged, thus
waging very powerful competition with all of them.
・ Asian carriers maintain an assured cost advantage, so for Japan carriers to
enter the Asian market, it is not enough to provide high quality service to
business travelers. They also need to develop strategies to create a separate
line of business incorporating the Asian LCC model to attract customers who
are looking for low cost fares. This will make further liberalization in the
investment environment in the international civil aviation more desirable.
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