Air Transport Policy consistent with Japan s New Economic Strategy Prof. Tae Hoon Oum The University of British Columbia, and The Air Transport Research Society (ATRS) www.atrsworld.org Prof. Tae H. Oum 1
Air Transport Policy consistent with Japan s New Economic Strategy Outline Context: Japan s New Asian Economic Strategy Promoting a tourism-oriented nation and local economic revitalization Changed role of airlines in a modern economy Why open skies is consistent with new economic strategy of Japan; Impediments to Open Skies and How to Deal Haneda hub will work; but LCCs in Haneda? Why vibrant LCCs needed for new economic strategy of Japan Prof. Tae H. Oum 2
Context: Achieving Growth by Opening New Frontiers Platforms to support growth: demand-led growth in environmental, health and tourism industries to improve quality of people s lives Targets: Create Free Trade Area of the Asia-Pacific (FTAAP) Doubling flow of people, goods and money; Increase annual foreign visitors to 25 million by 2020 (8.4mm in 2007), and create 560,000 new jobs Prof. Tae H. Oum 3
Context: Japan s New Economic Policy Principal Measures: Actively promote trade and investment liberalization as the 2010 APEC host economy, and prepare a roadmap toward completion of the FTAAP agreement. Making Haneda a 24-hour international hub airport; Advance Open Skies agreements; Boldly revise regulations that obstruct flows of people, goods, and money. Easing tourist visa requirements for Asian citizens Study local holiday systems and other ways of staggering vacation times Prof. Tae H. Oum 4
Role of Air Transport in Modern Economy The Japan s New Economic Strategy requires air transport to serve the need for Japan s national economy and consumers: International Trade and Investment Tourism sector; FDI, Logistics and Supply Chain Other sectors of Japanese economies Enhance consumer welfare including aging population sectors What s being proposed is a substantial reversal of the Japanese govt s past approach to economic regulation of air transport Prof. Tae H. Oum 5
Changing Role of Air Transport in Japan s Economy In the past, consumer interests and the need for Japan s economic sectors took a back seat when the gov t acted to protect flag carriers; Japan signed Open Skies ASA with United States because JAL wanted; it was very unlikely even a year ago that Japan would sign an Open Skies agreement with US; But JAL s need due to its bankruptcy led to Open Skies (not necessarily to help consumers, tourism or trade/investment sectors of Japan). In any case, the new Pro Economy and Pro Consumer air policy is an important step in right direction: maximize Japan s overall economic interest Prof. Tae H. Oum 6
Why does Liberalization and Open Skies maximize economic interest of a nation? In the past, growth of Air Transport as an industry in itself created substantial Value-Added to the economy; In modern economy, airlines direct contribution of valueadded becomes relatively small as compared to the sizes of tourism, trade, foreign direct investment, etc. that depend on cheaper and more convenient air services. Therefore, airlines existence in modern economy is justified as a supporting industry, helping other industries to grow and helping consumers improve welfare This made the old style policy of protecting flag airlines inconsistent with nation s economic benefit maximization.
Air Transport Policy for an Advanced Economy Air Transport Policy should be to designed to maximize its total value added to the economy; Airlines total contribution to Japan s value added is quite small ($7.96 billion in 2005) as compared to value added by tourism sector ($297 billion in 2005; $265 b. 2008), $1.65 trillion of Trade (2007) and $4.91 trillion of Japan s GDP (2008) In modern economy, Consumer Welfare is a major part of national economic benefit; Therefore, air policy must shift to pro economy and pro consumer; most OECD economies like EU, US, Australia follow this principle. 8
Open Skies would make Japan s policy more consistent with those of other advanced economies United States Open Skies agreements with 95 nations including US-Canada Open Skies: has become Open Skies hub nation EU has formed Single Aviation Market since 1997 (EU Continental Open Aviation Area) Single Aviation market in Australia-New Zealand EU-US Open Skies began in March, 2008; and negotiation is underway to form Open Aviation Area including cabotage rights and foreign ownership of airlines Tae H. Oum 9
Regional and Trans Regional Open Skies Agreements North America Europe Increasingly, Regional Open Skies Blocs are forming around the world. US-EU ASEAN
S.Korea s Open Skies: 19 Pax+Cargo and 32 Cargo Passenger + Cargo Cargo only 11
How did Japan s Past Protective Air Policy Perform? Harmed consumers and citizens Passengers originating travel in Japan pay significantly higher air fares than the passengers originating in foreign point Conditions for discount fares are far more restrictive in Japan than in other countries (Open Jaw tickets, round trip longer than two weeks return) Air fares are not designed to encourage independent travelers (designed for group and/or tour packages) Did not help Tourism, Trade, FDI Sectors, Logistics sectors Did not help Airlines (vested interest) themselves Protectonism cannot make uncompetitive firm competitive (what happened to JAL? What about in Future?) Japan has been losing hub status (connecting passengers) to other airports largely because of higher air fares airlines (JAL, ANA, foreign carriers) charge 12
% of Direct vs. Connecting Passengers: Sept 2009 (Connecting passengers drop Japanese airports) Markets Direct Passengers (%) Connecting Passengers (%) Leisure Passengers Business Passengers Leisure Passengers Business Passengers Japan Asia & Oceania 97.0 96.6 3.0 3.4 Japan Europe 48.9 50.5 51.1 49.5 Japan N. America 67.1 66.1 32.9 34.0 Source: Compiled from Matsumoto, et al. (2009) 13
Japan USA connecting market: about 4 million pax, 2007 Connecting Airports Market Shares Volume (pax/year) Chicago 14% 560,000 SFO 10% 400,000 Incheon 7% 280,000 LAX 7% 280,000 14
Japan Europe connecting market (about 2.3 million pax) Connecting Airports Market Shares Volume (pax/year) Frankfurt 14% 322,000 Paris 13% 299,000 Incheon 10% 230,000 Helsinki 10% 230,000 15
New Air Transport Strategy: Liberalization and Open Skies (especially with Asian neighbors) Cheaper, frequent and more convenient air services free of any artificial economic restrictions would help: Integrate Japan s economy more effectively with China, Korea and other Asian neighbors Japan s tourism sector by attracting foreign visitors; Trade and FDI sector: Open Skies and FTA go together Improve competitiveness of logistics and supply chain sectors Internationalize Japan s society and economy, and improve quality of lives 16
Japan s trade with China+Korea exceeded Japan US Trade since 2003 (US$ Billion) 350.0 300.0 Billion US$ 250.0 200.0 150.0 100.0 Japan-China+Korea Japan-US Japan-China Japan-Korea 50.0 0.0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year Source: Japan Statistics Bureau & Statistics Center
New Air Transport Strategy: Making Haneda as Premier Int l Hub Airport Haneda will make better Int l hub Narita-Haneda (Int l domestics flights) connections do not work Presence of frequent domestic flights in Haneda Easier Access to Tokyo and Shinkansen Will have substantially increase slot capacity from Oct, 2010 Possible to do 24 hour flight operation 18
Haneda+Narita airport slots to increase from 536,000 to 620,000 (or to 710,000 under new ATC) in 2010 (thousand) NRT+HND NRT HND
Making Haneda as Premier Int l Hub Airport cont d Smart use of Haneda would allow Japan to Recapture the lost connecting hub function (via lowering air fares or costs of routing traffic via Japan) Attract more foreign visitors and connecting passengers via Japan (increased competition would reduce fares vis-à-vis passengers travel routing via other Asian hubs) Haneda hub can take advantage of the rapidly growing tourism demands in Asian countries 20
(thousand) Japanese overseas travelers is twice as large as Foreign Visitors to Japan Source: White Paper on Tourism 2009 21
China s Outbound Tourist volume grew 450% in 10 years 1998-2008 (index 1998=100) 22
Foreign Visitors to Japan by Country: Korean visitors are No.1; not doing well with China (thousand) Source: White Paper on Tourism 2009 23
LCCs are very important for Tourism and Regional Development LCC development: N. America, Europe, Asia Pacific North America Europe Asia Pacific Population: 290m # of LCCs: 9 Deregulation: 1978 Population: 375m # of LCCs: 50-60 Deregulation: 1997 Population: 3.5b # of LCCs: 24 Deregulation: in process LCC market share: 30% LCC market share: 20% LCC market share: 5% Source: Airbus Industries 24
Japan and Low Cost Carriers (LCCs) Japan was the first country in Asia that gave birth to LCCs in late 1990s Today, LCCs in Japan are weaker and have lower market shares than LCCs in Malaysia, Singapore, Thai, Indonesia, Korea and China Studies have proven that successful LCCs bring more economic benefits to the country, region or city than major airlines Important to embrace LCCs to grow without bound, without restrictions (currently they are being tolerated by policy and by major airlines) 25
Japan Skymark Airlines # of destinations # of aircraft Base Airport Traffic volume [2007] 5 10 Tokyo 3,680,000 Air Do 6 6 Sapporo 1,914,000 Skynet Asia 5 7 Miyazaki 994,500 Star Flyer 3 4 Kita Kyushu 923,000 Air Next 5 Korea LCCs of Japan and Korea # of destinations # of aircraft Base Airport Air Busan 3 5 Busan Jin Air 2 4 Seoul Jeju Air 8 8 Jeju Eastar Jet 4 4 Kunsan 26
NE Asian LCCs are infants as compared to sizes of US, European, SE Asian LCCs (2007) No. of aircraft 27
Phenomenal Traffic Growth at London-Stansted airport (STD): Ryan Air and Easy Jet base Source: Civil Aviation Authority(UK Airport Statistics)
Passengers come long distance to use LCC service: e.g. Ryan Air Catchment Area at Charleroi Airport (S. Belgium) Region Proportion of Traffic Brussels Area 25% Northern Belgium 19% Southern Belgium 18% The Netherlands 17% Luxembourg 8% France 7% Germany 6% Source: Dennis (2004)
Outline Global Air Transport Policy and Industry Development East Asian Traffic Growth and Need for Open Skies Bloc Impediments to Liberalization and How to Deal Strategies and approaches to deal Prof. Tae H. Oum 30
Impediments to Open Skies in N.E. Asia Government ties to flag carriers Fear that Open Skies would bankrupt airlines (e.g., Alitalia) Cost differences airlines from the higher cost country may lose market shares to airlines from the lower cost countries Asymmetric benefits airlines from the smaller country may benefit more than airlines from the larger countries Lack of political will to do good things for economy and citizens over vested interest
Impediments to Open Skies in N.E. Asia cont d Airline interests are placed above nation s economic growth (tourism, trade, foreign investment, efficient logistics, etc.) and consumer interests But it is clear that airline sector s value-added to an economy is really miniscule as compared to the benefits of Open Skies on Tourism, Trade, FDI, other sectors of economy and consumer welfare benefits US and EU understands this; most political leaders understand this (probably including China s leaders)
Stages of Liberalization in East Asia Unilateral Declaration of Expanded Open Access regions (or airports): WTO approach in early 1990s for tariff reduction India: Unilateral open access for air cargo services (despite Indian carriers are not competitive) Korea: Jeju Island China: Hainan Province Japan: Ibaragi Full bilateral Open Skies (phase-in access to Tokyo and Beijing if necessary) 3 rd /4 th freedom traffic 5 th freedom traffic (possibly 7 th freedom rights) NE Asian bloc creation in the medium/long-term
Approaches for NE Asian Open Skies Putting Open Skies as an agenda in Political leaders Summit meeting; realistic tradeoff emerges between Air Transport sector and other sectors of economies (Trade, FDI, Tourism, etc.) Canada-US: In 1994, President Clinton and PM Chretien appointed High-level Envoys (Ambassadors) for Open Skies deal making; initialed the Transborder Open Skies agreement within two months 3-year Phase-in period for Toronto, Montreal, Vancouver markets to deal with Canadian carriers fear of US mega airlines invasion Quasi-European approach: Create NE Asian Trade and (Air) Transportation Committee in order to find win-win solutions for all three nations; and to do research on critical issues;.
Open Skies policy Concluding Remarks Economic Rationale for Open Skies is clear: Open Skies are good for economy and welfare maximizing; There will be winning and losing airlines (the high cost airlines are likely to be losers); But high cost carriers will lose any way, regardless of what govts do ; so why protract the eventuality? Losers oppose Open Skies, so a political solution is necessary (e.g., Phase-in period for Tokyo, Beijing) Governments have responsibility to put nation s overall economic benefits (including consumer benefits) ahead of narrower vested interests.
Concluding Remarks cont d Haneda Int l Hub strategy Bring large benefits to Japan By winning back some of the lost market shares on Trans-Pacific market and Asia-Europe market LCC is very important for Japan s tourism and regional economic development (Opening Ibaraki,Narita, Centrair, Kansai, and other airports for LCCs would be good) Japan really need to strengthen anti-trust authority to deal with hidden collusions among (competing?) airlines
Long run: Asian Carriers need to multiple hub network: e.g. Tokyo, Beijing and Singapore Prof. Tae H. Oum 37
Long run: Asian carriers need to form multi-hub network e.g., Seoul, Shanghai and HKG Prof. Tae H. Oum 38
Thank You 2010 ATRS World Conference (Porto, 6 9 July, 2010) ATRS Global Airport Benchmarking Reports 8 th Year www.atrsworld.org Prof. Tae H. Oum 39
New Air Transport Strategy: Boldly Revise Regulations that Obstruct Flow of People and Goods (and Money) air travel market efficiency audit on consumers point of view needed in Japan (since travelers now choose where to make their connections): my anecdotal evidence show that competition does not work effectively even in so-called Japan s Open Skies markets (we can observe many collusive actions): e.g. If markets in Japan are competitive, why is the round trip airfares 300% of the fares if one returns after 15 days? One can observe many collusive behavior in Japan s airline markets. Need to strengthen the role of Competition Agency (Fair Trade Commission) 40