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Pilot shortage reveals cracks in Peach's top spot

TOKYO -- Peach Aviation is in danger of losing its top position in Japan's budget market due to a pilot shortage. The airline's sudden announcement that it will slash services during the peak summer period due to the shortage also means there is now an opportunity for domestic and foreign rivals to increase pressure on the market leader.

Peach Aviation is in danger of losing its lead in Japan's budget airline market due to a pilot shortage.

     On April 24, Peach said it will reduce up to 2,088 flights for the six months through October due to pilot shortages. The reduction is nearly equivalent to the number of extra flights it had planned for the summer.

No help from big brother

Despite the announcement, ANA Holdings, the top shareholder in Peach with a 38.67% stake, did not offer any immediate help.  "Basically, they have to handle the problem on their own, " said a senior ANA official. "We have to maintain the firewall (between the two airlines' operations) and also need to consider sentiments from our employees." 

ANA has maintained a position of minimal intervention in Peach's management since the low-cost carrier began services in March 2012. It sends senior personnel to Peach, but allows the partner to develop its own flight plans. 

     The strategy helped foster a sense of independence within Peach's management. The airline aggressively rolled out routes that were also served by All Nippon Airways, the core ANA unit. Employees of the two companies regard themselves as rivals, which has created a healthy sense of competition between the two and helped lift the group's overall competitiveness.

     But Peach's pilot shortage puts the ANA group in a bind. ANA had 2,061 pilots at the end of March 2013. While it may seem that the larger partner can help out, this is not an option. It plans to increase the number of its own international flights by 45% from fiscal 2013 by fiscal 2016. ANA is also bracing itself for future pilot shortages. In April, it introduced a new work program to lengthen the average number of flight hours for their pilots.

     Peach has led the pack in Japan's budget market, overtaking Jetstar Japan, a joint venture between Australia's Qantas Group and Japan Airlines, as well as Vanilla Air, the wholly-owned ANA subsidiary. Its domestic reservation rate during the Golden Week holiday season from April 25 to May 6 this year stood at 70.0% as of April 18. This is far beyond that of its two rivals. So its announcement of massive flight cuts, coming just before a major travel season, has severely eroded consumer confidence in the company.

     Peach's flight reduction amounts to 16% of its total services and is expected to affect up to 26,175 passengers who have already made reservations. In 2008, Skymark Airlines carried out similar flight cuts due to pilot shortages, cancelling 633 flights for the three months through August that year. Peach is expected to set a new record, with the service suspension projected to slash its revenue by up to 3 billion yen ($29 million).

Plans crumble

Peach initially planned to secure 62 pilots by the end of October to cope with the summer service expansion, but recruitment hit a snag. Budget airlines around the world were racing each other to secure pilots, as cannibalizing talent, including copilots, is becoming widespread within the industry. As of April 24, the Japanese airline had 52 pilots.

     Peach's service expansion plan was developed based on the assumption that it could handle a situation where three pilots take sick leave at the same time. But since February, eight pilots have been removed from the firm's roster due to health issues, forcing it to revise operational schedules.

     "As customers are our first priority, we have decided to adopt this measure over the next six months," said Shinichi Inoue, CEO of Peach. However nicely he seeks to explain the situation, the fact that the company has long been walking on thin ice to juggle pilot schedules threatens to tarnish its brand image.

     Peach appears to have logged an operating profit for fiscal 2013 -- something no Japanese budget airline had achieved -- although it does not disclose earnings forecasts and monthly passenger load rates. Jetstar Japan and Vanilla operate services mainly from Narita Airport, while Peach is based in the western Japanese airport of Kansai. This has helped it avoid any direct price competition from its Narita-based rivals.

     But Peach will not be able to maintain this edge by solely depending on its Kansai-based services. Jetstar is working to increase Kansai-bound flights from June to October to make the airport its second hub. The move is expected to expose Peach to savage price competition with its rival.

     Jetstar also has an edge in handling global pilot shortages, which are becoming more serious with the spread of budget airlines within emerging markets. It is prepared to source personnel from its foreign partners when needed. "At this moment, we are not worried about the lack of pilots," said a company official.

     Competition in Japan's budget market is expected to grow fierce, as overseas rivals look to roll out services in Japan. Spring Airlines Japan, a unit of China's largest budget carrier Spring Airlines, will launch domestic flights within Japan from late June. Malaysia's AirAsia, which terminated its partnership with ANA Holdings in 2013, is also working to re-enter Japan in 2015.

     Peach's present edge in the Japanese budget market is not guaranteed. The three Japanese players may all lose out unless they are prepared to rise to face the challenges from their international rivals.


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