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Shot at growth misfires for pioneering Japanese airline

TOKYO -- Skymark Airlines tried to counter competition from low-cost carriers with a huge aircraft purchase that left it dangerously overextended.

     Japan's third-largest airline sought bankruptcy protection here Wednesday, becoming the biggest player in the industry to do so since Japan Airlines in 2010.

     The company disclosed 71 billion yen ($603 million) in liabilities at the time of its filing with the Tokyo District Court. But the total likely exceeds 100 billion yen when off-balance-sheet obligations are factored in, including a penalty of up to $700 million sought by Airbus in connection with a miscalculated order of A380 superjumbo jets.

     President Shinichi Nishikubo, the Internet entrepreneur who led the airline since 2004 and is its biggest shareholder, resigned at a board meeting Wednesday and was replaced by Director Masakazu Arimori.

     Skymark intends to continue to operate flights with interim financing from Integral, a Tokyo-based private-equity firm that has offered to provide credit to the struggling airline until it has a plan for restructuring. Integral has also expressed openness to investing in Skymark.

     Foreign airlines and aircraft leasing companies are also showing an interest in sponsoring Skymark's turnaround. JAL and All Nippon Airways are possible contenders as well, but the former's scope for investing remains limited by the terms of its government-led bailout. Top creditors have a big influence on the choice of a sponsor. In Skymark's case, Airbus and Intrepid Aviation, a U.S. aircraft leasing company, will play key roles in determining the outcome.

Solo flight

Founded in 1996, Skymark became the first new competitor in Japan's deregulated airline industry and has been the only one to remain independent of either JAL or ANA.

     Hideo Sawada, chairman of H.I.S., one of Japan's biggest travel agencies, got Skymark off the ground. But when Nishikubo stepped in, it was tilting into insolvency. He staked his own money on righting the airline, becoming its top shareholder in 2003 and, the following year, its president.

     "I was attracted by the vast scale of commercial aviation, which was unlike that of Internet businesses," Nishikubo later recalled.

     He set about retiring Skymark's midsize Boeing 767 jets and building a fleet of smaller, fuel-efficient 737s. Under his watch, the airline also simplified in-flight service, developed its own flight management system and made other improvements that enabled it to undercut ANA and JAL on fares. Earnings turned upward impressively. In fiscal 2011, Skymark posted a 15.2 billion yen operating profit on 80.2 billion yen in sales.

Turbulence ahead

     Eyeing an expansion into international flights, Skymark contracted with Airbus to buy six A380s for 191.5 billion yen -- more than double its annual revenue. Nishikubo's ambition of taking on big Japanese rivals seems to have influenced his decision-making on this massive commitment.

     But Skymark's fortunes took a turn for the worse. Fare competition intensified with the arrival of Peach Aviation and other Japanese budget airlines on the scene in 2012. A weak yen inflated fuel costs. Fiscal 2013 brought Skymark's first net loss in five years.

     To try to differentiate itself from low-cost carriers, Skymark rolled out A330 midsize jets last year, giving passengers about 20% more legroom. But it proved unable to fill all these new seats, and the planes' higher lease and operating costs only deepened its earnings slump.

     Last summer, Airbus said it terminated the A380 order after Skymark's payment prospects dimmed and has demanded the airline pay a cancellation fee. Skymark struggled in vain to raise funding from investors. It had no big banks at the ready to provide credit, having operated essentially debt-free.

     Last November, Skymark began negotiating a code-share deal with JAL in hopes of filling more seats. But Japan's transport ministry frowned on this move, worrying that such a tie-up could confer an advantage to JAL, which had already benefited from a government-backed bailout.

     Skymark was forced to seek some sort of three-way arrangement with JAL and ANA. Those two airlines were going to apply for code-sharing approval this week. But the prospect of such an alliance comes too late for Skymark, which has exhausted its working capital.

Japanese aviation's broken 'third wing'

Skymark's bankruptcy filing deals a setback to government efforts to free up Japan's air travel market. JAL and ANA, along with their budget airline subsidiaries, could end up with even greater pricing power.

     Japan embraced airline deregulation in the mid- to late 1990s, hoping to break up the existing oligopoly. Skymark and other new competitors sharply undercut the big carriers on the routes they entered. Encouraged by these developments, the government gave new airlines preferential treatment in awarding domestic arrival slots at Haneda Airport, a lucrative commodity.

     But even with such nurturing, Airdo, Star Flyer and other fledgling airlines proved unable to succeed on their own and turned to ANA for investment. Many of Japan's newer low-cost carriers also have the financial backing of big airlines and thus do not constitute real competition for JAL and ANA.

     Skymark may yet remain an independent alternative to these giants if a foreign carrier -- perhaps Malaysia-based AirAsia, which had explored a capital tie-up with Skymark -- sponsors its turnaround.


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