April 30, 2015 12:00 am JST

Skymark, Integral accept ANA's help in turnaround bid

TOKYO -- After initial reluctance, Japanese budget carrier Skymark Airlines and rehabilitation sponsor Integral have agreed to accept investment from ANA Holdings.

     "We will all be in the same boat going forward," Nobuo Sayama, a representative director at Integral, said with apparent relief at an April 22 press conference to announce the agreement.

     But while the concession was necessary to hold the turnaround plan together, its effect on Skymark -- and Japan's airline industry as a whole -- may not be entirely positive.

Not exactly ecstatic

Under the reconstruction plan, Integral, ANA and other investors will pour a total of 18 billion yen ($151 million) into Skymark, all of which will be used to repay the carrier's debts.

     If the plan is approved at a meeting of creditors in June or July, Skymark's current top executives will step down, with a new chairman to be appointed by Integral and a new president by ANA. The restructured company will have six directors and will seek to re-list within five years.

     Integral signed a sponsorship contract with Skymark about a week after the airline filed for bankruptcy protection with the Tokyo District Court on Jan. 28. The investment fund had planned to select a co-sponsor as early as February, but ended up taking much longer.

     ANA was a viable candidate from the start, having already helped another budget carrier, AirDo. But Skymark management had reservations because the legacy airline had earlier refused to help Skymark when it sought to raise money by selling extra aircraft parts to ANA.

     Sayama also attempted to keep ANA in check, saying that Skymark does not need support from an airline. But a major creditor demanded that ANA be a co-sponsor.

     ANA could not afford to let the opportunity slip past, either, as its main rival, Japan Airlines, has been growing stronger since receiving a government bailout.

     Currently, JAL is prohibited from making new investments, such as adding routes. But this restriction will be lifted at the end of March 2017, and ANA was eager to have Skymark on its side before then.

     The basic agreement among the three stakeholders sees Skymark reconstructing itself as an independent company.

     "We judged that, unlike other ANA affiliates, we will be able to maintain our independence," Skymark Chairman Takashi Ide said at the April 22 press conference, which Skymark President Masakazu Arimori and ANA Senior Vice President Toyoyuki Nagamine also attended.

     Some analysts, however, have warned that competition in the airline industry will suffer, as taking a stake in Skymark will increase ANA's group share of landing slots at Haneda Airport to about 60%.

     Another issue is that if Skymark continues offering cheap flights, the carrier will remain a thorn in ANA's side. The two companies will have to find a way to return Skymark to profitability while accounting for their competing interests.

Unfriendly skies

With ANA's purchase of a stake in Skymark, Japan loses its only "third-force" airline, one which does not belong to either the ANA camp or the JAL camp.

     The transport ministry has extended a degree of support to new airlines, prioritizing them in allocating landing slots at the crowded Haneda Airport. The ministry has even had a hand in deciding the locations of check-in counters to make sure startups are not pushed to the edges by ANA and JAL.

     Such support has borne little fruit, however. AirDo and Star Flyer, which started as independent carriers, have already been put under ANA's umbrella.

     While some newcomers fell victim to poor business judgment, the underlying reason for many failures is the country's business environment, which favors more established companies at the expense of younger ones.

     Japan's rigid labor market, for example, makes it hard for new companies to attract sufficient human resources. Difficulty securing pilots and mechanics was a major hurdle to Skymark's growth.

     Additionally, there is not sufficient risk money available in Japan to finance the massive investment needed to get a new airline business off the ground. "The financial health of startup airlines is weak, so when larger peers wage a fare war, new carriers instantly fall into financial trouble," a senior transport ministry official said.

     One solution to this problem is to tap foreign capital. Having more foreign budget carriers operating in the country would benefit Japanese consumers. Japan could also ease restrictions on foreign investment in the airline industry. With Skymark set to make a fresh start, it is time for the government to re-examine regulations on civil aviation.

(Nikkei)

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