Low-cost carriers in Japan : challenges and paths to success - using a corporate simulation model for empirical analysis

Abstract

This paper analyzes the causes behind the sluggishness of new airlines, low cost carriers (LCCs), in Japan. The object is to identify and to recommend innovative policy changes and ideas for the industry, by analyzing the condition and the development of management policy for the establishment of new airline companies and regulatory reforms. The traditional airline companies all over the world have been struggling with the changes in current market. With the global deregulation movement on the airline industry in the 1980s, LCCs have established their business very rapidly. Following this global trend, two new airlines started in Japan in the late 1990s, but the market had not been active for a long time. It is only recently that other new LCCs started servicing the Japanese market, while the deployment of LCCs has become very active and successful in North America, Europe, and Asian countries except Japan. First, this thesis focuses on the analysis of critical successful factors in the foreign market. Then this thesis examines the condition and business environmental issues that make the foreign LCC business model not so effective in the Japanese market. Second, with the consideration of the previous section, the successful LCC business model is introduced and is verified using a variety of simulations including the financial simulation using the corporate model and risk analysis using the Monte Carlo Method. These two sets of analytical results are put together for applying to other areas such as policy making, regulations, and market structural changes. Furthermore, the paper comes up with six critical points for the management policies of new airline companies: 1) Promotion of higher productivity and lower cost; 2) Appropriate airfare and the fare structures; 3) Appropriate routes selections and the number of flights; 4) Proactive utilization of secondary airports; 5) Penetration to the air cargo market; and 6) Availability of sufficient fund for supporting the preparation and establishment of a new entity. Traditionally, the government has tightly regulated the aviation industry in Japan. In order to consider and to deploy the LCC business establishment conditions, the analysis of government policies is becoming the key element. Integrating the results of the policy analysis and simulations analysis, this research recommends the following criteria. Elimination and changes of regulations and management structures, that may restrict the free competition and the management freedom of the new entities, are essential. From the perspective of aviation policy and the promotion of competition, the following requirements must be fulfilled in order to achieve these goals: 1) Converting the form of the market intervention methods on market structural restriction from proactive to reactive; 2) Elimination of the government control of the airports demands adjustment of both domestic and international routes, the foreign funds, and the cabotage restriction; and 3) Establishment of new airport policies for promoting more active use of secondary airports. These findings will help promoting the healthy growth of the airline industry in Japan. Activities of consumers, airline companies, and the government will be revitalized and be benefited as a result.