TOKYO -- As companies across Japan raised prices to adjust to the 2 percentage-point hike in consumption tax on Oct.1, railroad operator Keikyu went against the grain by reducing fares on its cash cow Haneda Airport-to-central Tokyo route by about 30%.
It was not as if the rail operator needed a shot in the arm. Keikyu commands a comfortable top share of 32% of the passengers using the urban airport. The fare revision is expected to blow a 4 billion-yen ($36.7 million) hole in revenue.
But a closer look at the decision making reveals a strategy of taking short-term losses for the sake of an even brighter future.
"I always used the monorail but after hearing that the prices went down, I tried Keikyu," a 51-year-old man told Nikkei in mid-October on his way to Haneda to take a plane back to his hometown in Oita Prefecture.
The price drop is considered significant, especially in an industry where it is not common globally to see fares reduced. Keikyu now charges 300 yen for a ride from Shinagawa Station to the airport, down from its previous 410-yen fare.
Rival Tokyo Monorail, an elevated line that follows the western coast of Tokyo Bay, charges 500 yen for a Haneda-Hamamatsucho ride. A limousine bus operated by Airport Transport Service asks for 730 yen for a ride to Shinagawa Prince Hotel.
For a comparison with an overseas airport, a train ride between Heathrow Airport to central London would cost about $30, whereas a subway trip from New York's JFK Airport to Manhattan will incur a payment of over $10. Both make Haneda's affordability stands out.
While October figures are not yet out, a Keikyu spokesperson says that it looks like the number of passengers has indeed risen. That may lift Keikyu's market share further, which would be problematic for Tokyo Monorail, which has a 23% share, and the limousine bus which has 25%.
The early bird gets the worm, said Ryota Himeno, an analyst at JP Morgan Securities. Haneda is expected to see a boom in passengers next year with new routes added due to an agreement over air space with the U.S. military and the Tokyo Olympics approaching.
And because the company had to make adjustments to their fare charts, ticket machines and computers to cater to the tax hike anyway, it made sense to conduct the price change at this time to avoid having to invest again.
At first glance, the bumper price cut looks to be a blow to Keikyu's revenue. But the strategy is based on the unique revenue structure of Japanese railroad companies.
For instance, if the 410-yen fare between Shinagawa Station and Haneda was disassembled, it would be divided between a 240-yen basic fare and an additional 170-yen charge the railroad company tacks on to recoup past construction costs.
The 30% cut Keikyu undertook this time was applied to the additional charge, reducing the company's intake from 170 yen to 50 yen per ride. For this, Keikyu expects a 4 billion-yen drop in revenue from the 6.2 billion it raised in fiscal 2018.
The Keikyu Airport Line, which opened in 1998, was expected to recover its 100 billion-yen capital investment through the additional fares by the fiscal year ending March 2022. As of this spring, it has recouped 81% of the initial investment, leaving about 20 billion yen left to be recovered.
The key factor for the company is that Japanese law does not specify a time frame for recouping construction fees. The decision over when to stop charging the additional fares is left to the rail operator. It does not require government approval, but is rather a notification matter. The Ministry of Transport, which has oversight of the industry, seemed to welcome the 30% fare reduction with open arms.
In theory, Keikyu can prolong the additional charges after the original 2022 finish line and recoup the construction fees over a thin but longer time frame, says Professor Koichi Hosokawa of Japan Women's University.
While doing so, Keikyu looks to increase market share with its more competitive fares. The increase in passengers due to price cuts is expected to increase annual sales by about 1.5 billion yen.
Having already completed its airport-line investment, Keikyu is not influenced heavily by depreciation or taxation.
Waiting ahead are new rivals eager to join the race. Tokyu is planning a new line connecting Kamata Station and Keikyu Kamata Station. Tokyu Vice President Fumiaki Shiroishi says that the plans are in a final phase and the company "will be able to announce commercialization within a year or two."
East Japan Railway is planning to open a 18-minute route from Haneda to Tokyo Station by fiscal 2029, that is widely seen to improve convenience significantly for travelers.
Existing rivals such as the Tokyo Monorail could counter with their own new fares.
Competition on the cash cow route looks to intensify further.