November 26, 2013 1:00 pm JST

Kansai Airport's budget carrier dreams challenged by reality

JUN WATANABE, Nikkei staff writer

TOKYO -- Kansai Airport is staking much of its future on the success of budget carriers. The trick for now is getting them to set up base there.

     The airport, which sits on an artificial island in Osaka Bay, has been western Japan's premier air hub for nearly two decades. But revenues have never been strong. 

     New Kansai International Airport, the airport's operating company, has plans to build a third terminal that would be dedicated to budget carriers servicing the rest of Asia. But completion would be in fiscal 2016 at the earliest. In the meantime, the airport has to convince the rest of Asia that it is best airport in Japan to set up shop.

     Other airports in Japan are also working hard to woo budget carriers, which makes Kansai's task even more challenging.

Rising together

Since opening in 1994, Kansai Airport has focused much of its energy on Western destinations. But it is now seeking to bring in more tourists from the rest of Asia, especially since visitor numbers from various countries in Asia to Japan have been rising of late, mostly notably because of eased visa requirements.

     “If we do nothing, we'll miss out on a great opportunity to benefit from growing demand for air transportation in Asia,” said Keiichi Ando, president of the airport operator. “We intend to use Terminal 3 to expand our growing low-cost carrier network.”

     The company plans to spend about 10 billion yen ($97.6 million) building Terminal 3. It would be located next to Terminal 2, which opened in October 2012 and currently is used exclusively by Peach Aviation, a discount Japanese airline. 

     Ando has been traveling Asia to pitch the airport’s new terminal services to the executives of Asia's biggest budget carriers, including AirAsia CEO Tony Fernandes. Australia's Jetstar Airways and Singapore Airlines' budget subsidiary carrier Scoot, have expressed strong interest in setting up at Kansai.

     The airport's push to bring in more budget carriers has also been endorsed by the local business community.

Ripe timing 

One of the big advantages of Kansai Airport is that it operates around-the-clock. Narita Airport, the Tokyo area's main international hub, does not in principle handle flights after midnight. This means any flight delays that push a landing past midnight could spell cancellation of the flight for the day. This is expensive for airlines, and poses a major burden to budget carriers' bottom lines.

      Peach Aviation has reported strong earnings, which it says is mostly because it is based at Kansai Airport. Terminal 2 has been designed to be less expensive to operate. There are no jetways, and the building is only one story, which eliminates the need for elevators. Fees for airlines using Terminal 2 are about half that of Terminal 1.

     Many Asian budget carriers have expressed interest in setting up at Terminal 2 to launch services to Japan. But so far, there is only Peach. The carrier had a large say in the terminal's design, and sources say that it has a major influence in any decision to allow other airlines to use the terminal.

     Peach currently operates flights to 12 destinations in Japan and abroad from Kansai. It has a fleet of 10 aircraft, all of which are based at the airport. 

     One of the biggest problems for the terminal is the crowds at security, which are largest in the morning and make it impractical to add more flights.

Waiting to take off

The airport operator plans to work out design details for Terminal 3 by the end of March 2015 and to start construction in fiscal 2015, which begins that April.

     Most Peach flights are less than four hours. The plan for Terminal 3 is to make it better suited for large aircraft used for longer flights. This would enable Terminal 3 have flights to Thailand, Vietnam, Indonesia and other distant destinations.

     The downside for now is that all of this is at least two-and-a-half years away.

     “Even if our board quickly decides to build the new terminal, the project will not be ready until the government approves the budget,” said a senior executive of the company. “That will inevitably cause delays.”

     The airport needs this government approval because it is a special entity fully owned by the government.

     Meanwhile, Peach is not waiting for Kansai as the airline expands its services. Already it has established Naha Airport in Okinawa Prefecture as its secondary base for Asian destinations.

     The goal for the next few years for Kansai Airport is to figure out how to raise its low-cost profile even before Terminal 3 is ready.

Budget carrier Peach Aviation is the only airline that uses Kansai Airport’s Terminal 2.

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