Japan looks at first airline failure


JAL is taking over JAS, and now ANA may look at a stake in Air Do

TOKYO, Japan -- Hokkaido International Airline plans to file for bankruptcy, seven years after its inception, sources suggest.

It would be the first airline to fail in Japan since the industry opened up in 1997. It is looking to restructure with help from All Nippon Airways, Japan's No. 2 carrier.

The airline is known as Air Do. Its troubles illustrate the difficulties of an upstart airline going wing to wing with Japan's entrenched carriers.

Air Do runs six discount flights a day between Tokyo and Sapporo. Its initial sale offers undercut the competition by as much as 40 percent.

A $45 million liability load

According to one report out of Japan, the airline filed in court on Monday for protection from creditors, under Japan's civil-rehabilitation law.

But Jiji wire service states it is still mulling the move and likely to announce it on Tuesday.

Air Do is attempting to shed a debt burden that means its obligations outweigh assets by around 5.5 billion yen ($45 million).

Japan Air Lines is Japan's No. 1 carrier, and is buying the No. 3 carrier, Japan Air System. Regulators rejected their initial proposal because they feared it would lead to less competition.

A local startup

Town governments, companies such as the electric utility and around 3,500 individual backers in the prefecture of Hokkaido started and owned Air Do.

Sapporo is a city in Hokkaido prefecture in the north of Japan. It is popular for skiing in winter and for summer getaways.

The high cost of starting an airline typically dissuades competition. But Japan's air industry is deregulating.

At Air Do's inception, passengers could travel from Tokyo to Sapporo for 16,000 yen ($131), one-way.

The flights ran from Tokyo's domestic airport at Haneda to New Chitose Airport in Sapporo.

High occupancy rate

The cheap fares led to 80 percent seat occupancy. But Air Do's competitors slashed their prices on the same routes only, to match its initial sale price.

Air Do then temporarily cut its prices even more. As a result, vacationers or work travelers could fly between the two cities for as little as 10,000 yen ($82) one-way.

But it failed to draw sufficient interest in helping it stay afloat with those prices. Another upstart, Skymark Airlines Co., is still selling discount tickets from Tokyo to the city of Fukuoka.

It also has yet to turn a profit. But it is backed by H.I.S. Co., a travel agency that has effectively guaranteed its 2.5 billion yen liability load ($20.5 million).

A 20 percent stake

Thanks to a liberalization of the law in Japan in 2002, airlines are now able to price flights on specific routes at whatever level they choose.

Japan is also pushing privatization of its airports. That will likely meet resistance from local governments (full story).

Elsewhere in the Asia-Pacific region, Macquarie Bank is raising money for Sydney International Airport, which may eventually float on the stock exchange (full story).

All Nippon Airways is likely to buy 20 percent of Air Do and keep it afloat. But it will not have the flexibility of an upstart airline.

One source in Japan suggests Air Do has asked the local Hokkaido government to forgive 1.8 billion ($14.8 million) in obligations.

It is seeking a fresh start with total capital of around 3 billion yen. It started out with total capital of 7.2 billion yen.