JAPAN'S AIRLINE INDUSTRY: A TAKEOFF FOR DEREGULATION?

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00590R000300440002-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 10
• Document Creation Date: December 22, 2016
• Document Release Date: May 13, 2011
• Sequence Number: 2
• Publication Date: August 1, 1985
• Content Type: REPORT

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Directorate of
Intelligence
3-
Japan's Airline Industry:
A Takeoff for Deregulation?
See. et
EA 85-10155
August 1985
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Directorate of
Intelligence
Japan's Airline Industry:
A Takeoff for Deregulation?
Directorate of Operations
This paper was prepared by ~ Office of
East Asian Analysis. It was coordinated with the
Comments and queries are welcome and may be
directed to the Chief, Northeast Asia Division, OEA,
Secret
EA 85-10155
August 1985
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Japan's Airline Industry:
Key Judgments As a result of the growth in competition in the international civil aviation
Information available marketplace, Tokyo is under increasing foreign and domestic pressure to
as of 1 August 1985 deregulate Japan's airline industry:
was used in this report.
A Takeoff for Deregulation? 25X1
? Except for Japan Air Lines (JAL)-which now dominates the market-
the Japanese airline industry has much to gain from deregulation, and
the smaller airlines in Japan are winning support for the idea from some
members of the Liberal Democratic Party (LDP) and the business
community.
? The mood of business in Japan, moreover, favors the steps toward
deregulation taken by the Nakasone administration in a variety of sectors
as part of its effort to shrink the size of government and its financial bur-
den. Keidanren-Japan's most influential business organization-for
example, has called for deregulation of transportation businesses, includ-
ing civil aviation.
Even the Ministry of Transportation, which views deregulation as under-
cutting its powers, is showing signs of moving to lift some controls over in-
ternational routes and fare setting:
? The Ministry, however, is not sold on a program to liberalize the
marketplace and, in our view, will probably try to hold down the pace of
deregulation.
? The capacity limitations at major Japanese airports are also likely to
cause further delays in any step to open up the market.
Nonetheless, we believe the pace of deregulation could quicken if new
airports open as scheduled in the late 1980s and early 1990s and if industry
pressure on politicians to expedite the deregulatory process continues to
mount. Overall, deregulation of Japan's airline industry could benefit the
United States by offering new bargaining chips in bilateral civil air
negotiations and providing an expanded market for US aircraft producers
and construction companies.
Secret
EA 85-10155
August 1985
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Secret
Japan's Airline Industry:
A Takeoff for Deregulation?
Changes in the international civil aviation environ-
ment over the past decade are spurring Japanese
domestic and air cargo carriers to press for revisions
in Tokyo's civil aviation policies. Demand for air
transport services in Asia and to the United States has
been the major impetus. In 1975, for the first time,
more Japanese traveled to the United States than
Americans to Japan. By 1979 most trans-Pacific
airline traffic flowed to, from, or through Japan. The
combined effect of increased domestic demand and
the growth in Japan's through-flight role in the
Pacific has increased pressure for more slots and
frequencies for incoming aircraft.
Lighter and smaller package-express-style cargo also
is making air transport of goods increasingly attrac-
tive. As a case in point, Japan's air cargo exports
increased by almost 34 percent in 1984 over the
previous year. The Transportation Ministry has fore-
cast that the opening of a new international airport in
Osaka will almost double the cargo tonnage now
flown. The Ministry projects that 820,000 tons of
cargo will pass through Japan's new Kansai Interna-
tional Airport annually once it is completed in 1993;
714,000 tons already flow through Narita.
ANA opened its bid for the cargo business in 1978,
when it established Nippon Cargo Airlines (NCA) in
cooperation with six shipping lines. In 1982 NCA
began to seek entry into the United States. In the
emerging market for door-to-door delivery of cargo
and small packages, Sagawa Express-Japan's small
package delivery service-has linked up with Federal
Express to provide deliveries throughout the Pacific.
Sagawa and Federal are positioned to begin services
as early as April 1987, although their venture must
wait for the Transportation Ministry to fashion re-
quired regulatory and legal changes. Its failure to
take this step toward deregulation could delay startup
by as much as two or three years. Depending on the
Ministry's behavior, several of Japan's larger cargo
companies will probably also want to compete in this
market.
JAL, the established domestic air carriers, and the
new cargo firms all are targeting the same political
decision makers to lobby their cases. Their focus is the
LDP's Aviation Committee, which is currently con-
sidering changes in Japan's aviation policies. Not
surprisingly, the committee's internal lineup mirrors
the split in the industry over deregulation:
The deregulation of the US airline industry in 1978
has had a sizable impact on Japan. In addition to
stimulating the international trend toward deregula-
tion, it has energized Japan's domestic carriers to
lobby harder in Tokyo for their share of the profitable
Pacific market and a place alongside JAL. All Nippon
Airways (ANA) and Toa Domestic Airlines (TDA) are
pressuring the government to break JAL's monopoly
over international passenger flights. Their main goal
is to win licenses to operate regularly scheduled flights
overseas, particularly to the United States, but they
also want a portion of the international cargo market.
? The JAL group on the committee essentially pushes
JAL's interests and opposes pressure to break the
airline's monopoly on regularly scheduled interna-
tional flights. For the last three decades JAL sup-
porters have dominated the committee, and they are
likely to put up a hard fight against efforts by ANA
and TDA to win access to new passenger routes
established under the May 1985 US-Japan provi-
sional agreement.
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Japan Air Lines: Established October 1953. Japan's
flag carrier; among international airlines, ranks first
in cargo handling and second in number of passengers
carried. About 38 percent government ownership.
Has exclusive rights to regularly scheduled interna-
tional passenger flights based on Japan's 1972 avia-
tion constitution. Also operates domestic routes and
manages hotels through its subsidiaries. Established
Southwest Airlines-Japan's fourth-largest carrier-
with local Okinawan enterprises in 1967; services
flights throughout islands in Okinawa and Kagoshi-
ma prefectures. Wholly owns Japan Asia Airways
(JAA), established in 1975, which operates passenger
and cargo flights between Japan and Taiwan.
Aircraft purchase plans-12 Boeing 747s, 9 Boeing
767s by 1989
All Nippon Airways: Established December 1952.
Largest domestic airline; ranked sixth in world in
number of passengers carried; largest passenger carri-
er outside the United States and Soviet Union. Began
international charter lights in September-1984. Has
partial ownership of Nippon Cargo Airlines. Also
services routes to Hokkaido, Kyushu, and the Izu
islands through its subsidiary, Nihon Kinkyori Air-
ways, established in 1974. Operates hotels in Asia:
and Hawaii through another subsidiary, ANA Enter-
prise Company.
Aircraft purchase plans-10 Boeing 767s, 2 Boeing
747s by 1988
a Dollar figures were determined at the exchange rate of 250
yen/$1.
Nippon Cargo Airlines: Established in September
1978 and acquired operating license in 1983. Six
Japanese shipping companies and ANA together hold
61 percent of NCA's total stock; banks, insurance
companies, trading companies, and freight forwarders
own remaining stock.
Aircraft purchase plans-none confirmed at this
time, but has already purchased 2 Boeing 747s
Toa Domestic Airlines: Established in May 1971
through merger of Japanese Domestic Airlines and.
Toa Airways. Japan's second-largest domestic air-
line; ranks third among Asia's passenger carriers
after ANA and JAL. Ownership of the airline shared
by Tokyo Electric Express Railway Company, Toa
Kosan, JAL, Kinki Nippon Railway, and others. Has
60 percent holding in Japanese Air Commuter-a
new carrier serving local routes in the Nansei islands.
Capital-$38 million
Aircraft purchase plans-5 McDonnell Douglas 81s,
4 McDonnell. Douglas 87s by 1990
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? The domestic business group supported NCA's re-
quest for entry into the international cargo market
and is likely to press for revisions that would make
ANA and TDA eligible for international passenger
routes. NCA's major victory over JAL in the hard-
fought battle for entry into the cargo business -
suggests the political clout of this group is on the
upswing. ANA and the shipping lines that formed
NCA have tried to coordinate their lobbying via
longstanding ties to influential LDP Diet members.
Other pressures also are at work on the LDP's
Aviation Committee. In particular:
? Keidanren-Japan's most prestigious big business
umbrella organization-threw its support behind
change in May, when it proposed the deregulation
of transportation businesses,- including civil aviation.
Keidanren recommended to the government's spe-
cial council on administrative reform that legislation
pertaining to fares, licenses, and tariffs be revised
and that restrictions on passenger and cargo trans-
portation be removed. The administrative reform
council-an advisory group to the Prime Minister
on streamlining government-passed on recommen-
dations for regulatory reform to Nakasone last
month, and its report included a call for deregula-
tion of the airline industry.
? The Japanese press has also climbed aboard the
deregulation bandwagon. Reporting has closely fol-
lowed the progress of deregulation in the United
States. The press has pointed out that relaxation of
regulatory controls by the Transportation Ministry
could improve the international competitiveness of
Japan's airlines as well as benefit domestic consum-
ers.
Construction companies and financial groups, lured
by the business prospects surrounding the new Kansai
International Airport and an extension of Haneda
Airport in Tokyo, are another potential influence on
the LDP. For deregulation to be profitable, all parties
to the debate recognize that expansion of airport
capacity is required. Reports that suggest the Kansai
Airport will cost $8 billion, with an additional $25
Glossary of Terms
Frequencies: number offlights allowed into a country
along one specific route.
Slots: (1) number of flights capable of landing and/or
taking off in a given time period; (2) number of
physical spaces to park aircraft at airports.
Capacity: restrictions in bilateral agreements on ei-
ther flight frequencies, aircraft size, or both.
Regularly scheduled international flights: commer-
cial aircraft operations carried out regularly, with a
formally established pattern of occurrences -so as to
constitute a scheduled international air service; de-
termined under bilateral agreements.
Charter flights: irregular aircraft operations ar-
ranged by individuals, groups, or air carriers through
hiring or leasing of aircraft; also determined under
bilateral agreements.
billion or $30 billion in related infrastructural and
commercial construction expenditures, are certain to
spur the politically powerful construction lobby to line
up solidly in favor of deregulation.
The pressure- for deregulation has already produced
some results. The Ministry of Transportation's deci-
sion last year to grant NCA a license to service cargo
routes to the United States, which won Washington's
approval in May, was an early sign of progress. JAL
attempted to block the move by creating obstacles for
the Japanese team negotiating with Washington for
NCA's entry, but, according to the US Embassy, it
was pointedly warned by the Transportation- Ministry
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that it must'comply with NCA's entry or risk non-
renewal of the president's tenure.' The Ministry also
granted ANA charter flights to Hawaii in September
1984 and will probably approve regularly scheduled
routes from Tokyo to Guam. ANA is hoping for
approval of regularly scheduled passenger routes from
Tokyo to Los Angeles by April 1986.
Despite this progress, we do not expect rapid deregu-
lation, and Japanese officials have said the study
period to evaluate deregulation will be lengthy. Some
industry and Transportation Ministry officials also
have predicted deregulation in Japan probably will
not go as far as that in the United States. Physical
limitations on air service in Japan remain a major
constraint. Although the Transportation Ministry
hopes by the late 1980s to announce revisions in the
aviation constitution to allow additional airlines to
offer international passenger flights, the Ministry
may not implement changes until new airports are
built in Japan. Major airports currently are at capaci-
ty, and granting access to-new airlines will not be
possible until the first phase of an offshore extension
project at Haneda Airport for domestic flights is
completed in 1988 and the Kansai International Air-
port is ready in early 1993.
As the main opponent of deregulation and the carrier
with the most to lose, JAL is clearly under. pressure.
We believe that JAL will continue to fight hard to
keep its monopoly control over regularly scheduled
international passenger routes, but it is also clear that
the airline is positioning itself for impending change.
In the short run, JAL is likely to.deal with new
competition by increasing its domestic routes and
diversifying into new services. JAL has already ap-
plied for more routes-within Japan and is involved in. a
new company-Japan Airship Services-that leases
airships in Japan for sightseeing flights, advertise-
ments, and :aerial surveys. JAL has also devised new
strategies in an attempt to retain its hold on interna-
tional routes to=the United'States and Pacific areas.
Even so, we expect the domestic airline industry will
keep pushing for greater access for Japanese carriers
to the United States and the profitable Pacific mar-
ket. The impact of industry pressure on politicians to
expedite deregulation is difficult to gauge, but we
believe it will probably quicken the pace. The US-
Japan provisional agreement of May 1985 may have
already had that effect. The agreement opened the
way for more Japanese airlines to operate routes to
Guam, Saipan, and the United States, and domestic
airlines are anxious to compete with JAL for these
routes.
A reorganization in the Transportation Ministry last
year may also open the way for movement toward
deregulation. The Ministry's Civil Aviation Bureau
now handles only domestic aviation issues, ceding to
the newly created International Transport and.Tour-
ism Bureau oversight of international air transport
and shipping services. The change reduces the effec-
tiveness of the historically strong ties between JAL
and the Civil Aviation Bureau and breaks JAL's
direct influence on individual bureaucrats who regu-
late official policy on international services. The
Transportation Ministry's call for Japanese airlines to
streamline their businesses and increase their opera-
tional efficiency also suggests movement to decrease
direct government control. Last year, for example, the
Ministry considered-but did not adopt-a program
of greater pricing flexibility for domestic flights, and
at least encouraged airlines to develop discount pack-
ages for use on a trial basis.
Implications for the United States
Deregulation should pave the way for a more competi-
tive environment and new opportunities for US air-
lines serving-the Pacific. Pressure by Japanese: domes-
tic airlines for access to international markets-and.
the US market in particular-will give Washington
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valuable bargaining chips in bilateral civil aviation
negotiations. The United States won major conces-
sions on cargo and passenger routes in return for
approving NCA's entry this spring. Under the princi-
ple of reciprocity, the United States could stand to
gain additional routes as more Japanese airlines break
into the international market and demand routes to
the United States. Although competition from an
increasing number of airlines poses some downside
risks, continuing market growth in the Pacific should
preclude significant losses in revenue for US carriers.
Japanese airlines' efforts to win pricing flexibility
should also help Washington achieve its own goal of
liberalizing fare setting for US airlines serving routes
through Japan.
The expansion of airports in Japan also offers oppor-
tunities. Foreign carriers, for example, could compete
for new routes, slots, and frequencies that become
available as new airports open. The addition of routes
for Japanese airlines when bilateral aviation agree-
ments are renegotiated is also likely to increase
Japanese demand for aircraft. According to recent
press reports, ANA may buy two Boeing 747s-each
valued at about $110 million-by August 1986, and
10 Boeing 767s-costing between $50 million and $70
million apiece-over the next two years to service new
routes.
Finally, Japanese Government procurement plans re-
lating to the construction of Kansai International
Airport should offer opportunities to foreign compa-
nies. According to the US Embassy in Tokyo, the
Vice Minister of Transportation said in June the
Ministry would favor a bidding system open to foreign
contractors. The Kansai International Airport Corpo-
ration-a joint government-private-sector group re-
sponsible for construction of the airport-appears to
be less forthcoming, reportedly preferring to accept
foreign bids only for projects in the postconstruction
phase. It has encouraged foreign firms to provide
equipment and technology, however, through partner-
ships with established Japanese construction compa-
nies.
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