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Terrie's Take: Skymark Airlines: Death by Obstinance, Japan's New Robot Hotel, and More!

Terrie's Take: Skymark Airlines: Death by Obstinance, Japan's New Robot Hotel, and More!

Terrie’s Take is a selection of Japan-centric news collected and collated by long-time resident and media business professional Terrie Lloyd. AkihabaraNews is pleased to present Terrie’s learned perspective; we all could use another take on the news - here’s Terrie’s:

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Terrie’s Take on February 9, 2014

Feature:

  • Skymark: Death by Obstinance

Briefs:

  • More on the new overtime law
  • Nope, not a robot hotel because of demographics
  • Next nuclear reactor to be back online in June
  • Piketty on wealth redistribution
  • FX tampering yet another TPP hurdle

Skymark: Death by Obstinance
Budget airline company Skymark went into bankruptcy on January 28th, marking the end of a painful 3-year process of spiraling losses (especially in the last year) due to a declining market share and expanding costs. The company apparently owes creditors about JPY71.09bn, most of which is due to foreign leasing companies and to a lesser extent the Japanese Ministry of Transport. The company has already found a financial sponsor to help it rehabilitate. The CEO Shunichi Nishikubo, one of the company's largest private shareholders, resigned, and the CFO has become the CEO.

Our take on this bankruptcy is that Skymark had become an airline with no clear mission or market positioning, and the failure by its senior management to understand the massive changes going on led to its early demise.

Originally started in 1996 by H.I.S. CEO Hideo Sawada and friends, Skymark was Japan's first budget airline. Initially it's mission was clear -- to introduce the Low-Cost Carrier (LCC) concept to Japan. While they did offer slightly cheaper pricing to the incumbents, JAL and ANA, Skymark was no revolutionary and after 7 tough years managed to carve out a narrow niche for itself thanks to the organizational talents and cash of CEO Nishikubo, who arrived in 2003. So for a while everyone made money, and a radical remaking of the Japanese aviation landscape was avoided. Indeed, Skymark almost seemed like it was paying lip service to the concept of LCCs, which was sweeping the markets abroad.

Probably that sweet status quo would have continued if it had not been for two key events that were totally out of Skymark's hands: firstly the bankruptcy of JAL in early 2010, then secondly, later that same year, the signing of the Open Skies agreement between the USA and Japan. The bail-out of JAL by American Airlines was approved by the U.S. government only in return for the Japanese caving in and letting foreign airlines freely compete in the domestic market -- i.e., the Open Skies agreement. This was a fateful event for Skymark, because companies like Peach, JetStar, and AirAsia Japan (among others) were given a beach head here. With the arrival of JetStar in particular, deeply funded as it was by its foreign parent shareholders and able to service many more destinations than Skymark, the beginning of the end was writ large.

For the next three years Skymark became an airline with no discernible advantages. It was so outclassed by the 100% committed and capable foreign LCCs that it couldn't hope to match their pricing nor cost-controls. Instead, the company decided that it should become an international carrier instead and entered into a disastrous expansion plan, committing to orders of expensive long-haul airplanes that it didn't have the capital to cover. The new positioning strategy was probably right, but the attempt to expand without proper financial backing or a viable foreign network was their eventual undoing.

The senior management of Skymark were famous for their single-focus determination -- otherwise known as "concrete-headedness". We met Chairman Takashi Ide through a high-level introduction several years ago and offered to help his company internationalize and attract foreign inbound tourists, either carrying them into the country directly or connecting with inbound carriers. The starting point was supposed to be something as simple as some proactive English-language marketing. It was a tough meeting, he was quite brusque and showed little interest in the discussion.

In the end, we came away from that meeting shaking our heads and wondering what on earth he was thinking.

Ide was not only not interested in foreign travelers who needed extra attention (i.e., English services), but he was also quite adamant that the foreign LCCs would not take his business away. In the end those same foreign LCCs ate him alive.

The Skymark bankruptcy in many ways is a replay of the 2010 JAL bankruptcy. Not only was the company buried by obstinate senior managers who couldn't and wouldn't change their ways, but when they did go under, the Japanese business ecosystem couldn't meet the challenge -- feeling the risks were just too high. In JAL's case, it became necessary to turn to the foreigners to help bail the business out. We're not saying that foreign involvement necessarily made JAL a better company, probably that laurel belongs to Chairman Inamori and his selection of troubleshooters. But the fact that American Airlines and investment firm TPG pumped in the best part of US$1.4bn did make a huge difference to the choices that JAL had available to it in undertaking a major restructuring.

This is the same treatment that Skymark needs, if it is to survive.

Thus we find it ironic, that one reason given for Skymark being turned down for investment by foreign funds late last year was the government's restriction on foreign shareholdings of domestic airlines. Apparently foreigners are not allowed to own more than 33.33% voting shares of a Japanese airline, and if they own more than 20% then Skymark would lose its high-value 36 landing slots at Haneda airport -- slots it received through government largesse. As a result of this rule set, along with management's insistence on independence, the airline was finally pummeled into submission.

The thing is, though, that 33% rule doesn't really exist. Well, it does, but it's elastic -- as JAL proved in 2013, when 46.91% of the company was owned by foreigners. What happened in the end is that since the rule meant that all foreign shareholders over the 33.33% limit were forced to take unrecorded (non-voting) shares, JAL simply amended its constitution so that they could still pay dividends to those shareholders. A typically Japanese solution to a bureaucratically imposed problem, and everyone is mostly happy about it.

Thus, by the same logic, we don't understand why Skymark doesn't just do a tie-up with a well-monied foreign airline, someone like Etihad for example, and give the new shareholder non-voting shares that pay dividends and give certain other rights? For this they could tap into a global customer network, and operations and marketing know-how. Instead, they are going to get some emergency cash from local private equity firm Integral Corporation, and will try to turn themselves around with a purely domestic team. We think it's a losing value proposition, because without a different focus the airline will still have no clear market differentiation and is bound to wind up in the same bad place it is just emerging from.

More on the new overtime law
The about-to-be passed new overtime law is gaining lots of attention abroad, and typically most of the commentary is about how long working hours damage productivity. According to this article, 22% of Japanese work more than 49 hours a week, compared to 16% of Americans and 11% of French and Germans, and somehow those extra hours are to blame for the nation's low productivity and birthrate. The new law is still not clarified, and while companies are going to be legally responsible for making sure that workers take off their allocated holidays, we suspect that there will be plenty of let-out opportunities for SMEs in particular. ***Ed: Let it be said here that overtime is NOT the cause of Japan's low birth rate. If it were, Japan would have suffered a falling birthrate long ago. The real problem is that young people don't have enough money or job security to plan for the future and are generally demoralized and demotivated when it comes to taking on the responsibility of having kids. Abenomics is only making this situation worse.** (Source: TT Commentary from thinkprogress.org, Feb 6, 2015) - http://bit.ly/1zkgAsq

Nope, not a robot hotel because of demographics
Although the foreign media have delighted in pointing to Huis Ten Bosch's newly announced robot hotel as a sign of the times and Japan's efforts to deal with demographics and depopulation, in fact, the robot hotel is being set up for a completely different reason -- it will make tons of money. The owner of Huis Ten Bosch is none other than business-savvy Hideo Sawada. No doubt Sawada has seen the runaway success of the Robot Restaurant in Tokyo in attracting foreign tourists and has decided to up the ante. It's a smart move and one that will become a "must-do" on the bucket list of any foreign tourist going to Western Japan. ***Ed: The new hotel will be called "hen-na hotel" (strange hotel) -- a dead giveaway that this is a publicity stunt by Sawada.** (Source: TT commentary from Feb 5, 2015) - http://alj.am/1C6jkM1

Next nuclear reactor to be back online in June
With a date calculated to have least impact on upcoming local by-elections, government sources have leaked that they expect Kyushu Electric Power's Sendai power plant to go back online in June or later this year. The facility is on track for having its final checks completed in June, and providing no further maintenance is needed, will be allowed to go back online shortly after. Since the reactors have been shut down for 3 years, a long time in the life of a production reactor, there may be additional maintenance required that will delay the resumption of service. ***Ed: Furthermore, the reactors are 30 years old, and so in theory they should be mothballed soon anyway -- making this start-up very much a politically motivated one.** (Source: TT commentary from reuters.com, Feb 5, 2015) - http://reut.rs/1C7Hd8q

Piketty on wealth redistribution
The Japanese media has been falling over itself to hear the opinions of French economist Thomas Piketty, whose translated book on wealth inequality hits the shelves of book stores soon. According to Piketty, Japan's problems are being exacerbated by Abe's policies which move more wealth to the rich and deprive the poor and middle class. ***Ed: We have to say that we agree with that part of his premise, that consumption tax is really a tax on the poor (although it does do a good job of prising money from the aged, who otherwise won't spend it). We do not, however, agree with Piketty's suggestions of raising taxes on the rich. Instead, Japan's real problems lie in misallocation of investment and government spending. The focus should be on revitalizing the sector which is the largest employer of Japanese regular people -- small and medium-sized companies, not dinging people who have worked hard to become successful. (Source: TT commentary from bloombergview.com, Feb 4, 2015) - http://bv.ms/1Itc3hV

FX tampering yet another TPP hurdle
Now that Japan and the USA negotiators are in the final straight for a TPP agreement, or so they say, protectionists on both sides of the pacific are lining up new ammunition to scuttle or rebalance the deals being cut. The latest salvo, from the U.S. side, is a demand that any TPP agreement include a framework for determining and enforcing currency manipulation by pact signers. This is obviously in retaliation for the Abe government's aggressive devaluation moves on the Japanese yen, and the resulting US$78.3bn trade deficit blow-out suffered by the U.S. vis-a-vis Japan trade in 2013. ***Ed: No mention being made, of course, of the fact that Japan is just copying from the USA's own QEIII playbook. When you're the big dog of the pack you get to make the rules.** (Source: TT commentary from thehill.com, Feb 4, 2015) - http://bit.ly/16FLpRJ

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That was Terrie's Take - what about yours? Let us know down below!

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