Skymark Airlines downfall caused by 2 key management mistakes

A man leaves Skymark Airlines headquarters on Wednesday night after the company was reported to have filed for court protection under the Civil Rehabilitation Law.

Skymark Airlines has filed for court protection from creditors, the wings of Japan's third-largest carrier apparently clipped as a result of two major policy missteps.

The airline's business performance deteriorated due to competition with fast-growing low-cost carriers, and its problems were exacerbated by excessive investment in aircraft, according to observers.

After abandoning efforts to turn around its failing business on its own, Skymark filed for bankruptcy protection under the Civil Rehabilitation Law on Wednesday.

The first misstep was the firm's plan to purchase six A380 superjumbo jets from European aircraft manufacturer Airbus for use on international routes. Skymark poured ¥190 billion into the project, about double its annual revenue.

The A380 purchase was apparently pushed through by Skymark President Shinichi Nishikubo. As the largest individual stockholder with more than 30 per cent of the carrier's shares, Nishikubo became the dominant authority within the company.

However, Skymark struggled to make the payments for the jets and eventually faced demands from Airbus to remit as much as US$700 million (about S$946 million) in penalties after it cancelled the contract last year.

The second misstep was the company's introduction of Airbus A330s in place of the standard Boeing 737 aircraft. The A330 has wider seats and can hold 271 passengers - significantly more than the 737's capacity of 177 passengers - but its fuel and other operating costs are almost twice those of its Boeing counterpart.

As low-cost carriers ventured into the domestic air market, Skymark attempted to differentiate itself from other major airlines. However, passenger growth failed to increase as expected, and the move further contributed to the decline of its business performance.

"[The massive investment] was disproportionate to the airline's management strength," one observer noted.

Crowded out by LCCs

Skymark took to the skies in 1998 as an independent operator that was not under the wing of the major carriers. As the first new domestic airline in Japan in 35 years, Skymark was understandably seen as a poster child for relaxing regulations in the aviation industry.

The airline was established in 1996 by a consortium of investors including Hideo Sawada, who was then president of H.I.S., a travel agency that had grown rapidly by offering discounted airfares. Before that, domestic air routes had been dominated by Japan Airlines, All Nippon Airways and Japan Air System.

Enacted in 1952, the Civil Aeronautics Law had severely restricted the entry of new players into the market, through measures such as prohibiting a single route from being serviced by several airlines. In a bid to stimulate competition and thereby lower stubbornly high airfares, the Transport Ministry (now the Land, Infrastructure, Transport and Tourism Ministry) began to gradually ease industry regulations to encourage the emergence of new airlines.

By streamlining in-flight services and outsourcing aircraft maintenance, Skymark was able to offer fares at about half the price charged by the major carriers. It benefited from the preferential treatment the ministry gave to new airlines when it was allocating landing and departure slots to each carrier at Tokyo's Haneda Airport, a high-traffic hub.

Skymark also flew on routes linking Haneda with cities including Naha and Sapporo.

But the situation began to worsen in recent years as the major airlines stepped up their efforts to counter Skymark's advantages and a string of low-cost carriers joined the market. Trapped between the premium services offered by its bigger rivals and the low fares that served as a draw for budget airlines, Skymark's business performance began to deteriorate.

Since last year, the transport ministry had been prodding Skymark to start code-share flights with JAL and ANA to boost its performance. The failure of the firm's management to escape this rut is also certain to deal a massive blow to the administration of Japan's aviation industry.

Fund to offer assistance

Integral Corp., an investment fund based in Chiyoda Ward, Tokyo, has decided to support Skymark and plans to provide financing for the time being.

However, Integral has little expertise in operating an airline, so the cooperation of other air carriers is expected to be necessary.

Skymark holds 36 landing and departure slots at Haneda, which is Japan's busiest airport in terms of passenger traffic. Possessing the slots, which are limited in their overall availability, could bring prospects for a certain amount of revenue. If the financial uncertainty swirling around Skymark is resolved, a business restructuring could be approached from a variety of angles.

Meanwhile, it has been decided that Skymark will be delisted from the Tokyo Stock Exchange's First Section on March 1. Its shares will continue to be traded until that time.

At the close of trading Wednesday, Skymark shares were worth 317 yen (S$3.62) each.