10-14-2013 6-54-18 PMLast week, the Japanese government issued additional take-off and landing slots for international flights from Haneda, Tokyo’s downtown airport (picture). That airport, which is primarily used for domestic service, has recently added an additional runway, opening 20 new slots for international service. This week, the Japanese government awarded the first 16 of the 20, with 4 slots for destinations in the US yet to be decided.

All Nippon Airways (ANA) secured 11 of the 16 slots, with the remaining 5 going to Japan Air Lines (JAL). This is a substantial victory for ANA and its Star Alliance partners, as this airport is closer and easier to access than Narita, Tokyo’s main airport, for international traveler. ANA has been arguing that the $3.5 state bailout of JAL had put it at a competitive disadvantage, and it appears that their arguments have been heard. ANA lobbied for these slots by arguing that JAL’s $3.5 billion state bailout wiped out most of its debt and left it with tax credits, giving JAL pricing leverage over ANA.

The previous government regime was more “friendly” to JAL. Of course, JAL is appealing this allocation. “We have asked regulators to explain whether they gave consideration to the convenience of travelers and the impact on airline alliances in making their decision,” JAL President Yoshiharu Ueki said at a press conference last Friday. JAL recorded operating profit of ¥22 in the three months to June 30, while ANA recorded a loss of ¥5.6 billion.

Doesn’t it seem strange that in one of the most congested cities for air traffic, often cited as an example of a city that will require VLAs, neither ANA nor JAL (the two largest carriers in the country) own a VLA?  Each has retired their 747-400s, and the largest aircraft operated by either is the 777-300ER. Both are early customers of and operate the most 787-8s.

Narita and Haneda are crowded airports, and with continuing to grow, for many years slot constraints have fueled speculation that Japanese carriers would order new VLAs, especially since Japan was the largest market for the Boeing 747. This hasn’t happened as of yet, and neither ANA nor JAL appears to want to take the risk of new very large four-engine aircraft, as evidenced by JAL’s order for the A350-1000.

Having experienced the prior downturn in the Japanese economy, they understand how a large number of empty seats will translate into massive losses. As a result, they are being cautious, recognizing that they can remain profitable even while turning people away. As a result, we expect the next generation of large “Super Twins”, the Boeing 777-9 and the A350-1000, to be candidates as the mainstays for Japan’s major airline long-haul operations.

When VLAs first arrived, the rule of thumb was the larger the aircraft, the lower the seat-mile costs. That might hold true anymore, as the 787-10, A350-1000, and 777-9 will all have equal to or better seat mile costs than the 747-8I and A380-800, the current state of art VLAs. With equivalent seat-mile costs, airlines can match capacity to routes without having to worry about filling excess capacity through discounted fares.

Of course, to every trend there is an exception. Domestically, Japanese LCCs are changing competitive dynamics, and Skymark Airlines, which began as a LCC, is moving upscale, changing its strategy from that of a low cost carrier to one offering premium business service at competitive rates. Skymark currently operates Boeing 737s domestically (it retired its 767s), has ordered 7 Airbus A330s and 4 Airbus A380s, and plans to operate them with premium service once they begin to arrive in 2014.

Skymark applied for rights for its A380s between Narita and New York JFK and London Heathrow, configuring the aircraft with business class and premium economy. Their A380s will have only 394 seats (below the 400 for a typical VLA seat count), with 114 business class at 60 inch pitch and 280 premium economy “green seats” that have 38 inch pitch and are 22 inches wide. Their A330s, for domestic use, will have 271 “green seats” in a single class configuration.  So there will be more competition, and additional seats, on a couple of key long-haul routes.

Of course, there are few that can support an airline without good connecting at both ends. Skymark has a good domestic network within Japan, but lacks connecting traffic at Heathrow and JFK. In this regard JAL, which belongs to Oneworld, and ANA, which is a member of Star Alliance, have a significant advantage. Will Skymark be able to fill an A380 in both directions with traffic primarily generated from Japan? The jury is out, but their 394-seat configuration will be among the lowest seating capacities for A380. Or perhaps Skymark could join Sky Team.

Super-Twins
The next generation of VLAs will likely be “Super-Twins”, as materials and engine technologies continue to evolve. Historically, engine technology has driven aircraft development, and will continue to do so. As engines have evolved to enable additional range and capacity, airframe OEMs have taken advantage of those improvements to extend range and capabilities of aircraft.  Over the years, we’ve seen aircraft that were designed for long-range operations superseded by enhanced models – from the 747SP to 777-200ER to A340-500 – and find that their quickly disappear as larger capacity aircraft offer better economics. We expect the same for and 777-8 over the next decade, as engine improvements that enable larger, and equally productive, variants will render these models economically obsolete.  The A350 order from JAL is, in our view, symptomatic.

10-14-2013 6-56-07 PMUsing the 400-seat definition, the 777-9 will be the first twin-engine VLA, and the precursor for new models to follow. We expect that Airbus will need to fill the gap between the 350 seat A350-1000 and 525 seat A380-800. A larger A350 model, with 400-425 seats, would make sense for Airbus to bridge the 175 seat gap between its models. Boeing could also incorporate one more stretch for the 777X, and introduce a 450 seat 777-10 that would make sense for a number of markets. This aircraft would replace the 747-8I, which is economically obsolete and was dead on arrival in the market.

Stretching the currently planned twins into Super-Twins with more than 400 seats will likely be the next step in the wide-body market. Aircraft of this size, with range for 90-95% of airline missions, would likely sell well as a 747 and A380 alternative for smaller markets, and would be the logical next steps for Airbus and Boeing. The market needs efficient replacements for four engine VLAs that are no longer economically competitive, and Super-Twins are the answer.

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