How low cost will change the game in Japan

These days, when people talk of opportunity markets in Asia, it’s always about China, India and, lately, Indonesia. Japan, which was the travel juggernaut of the region for most of the 80s and 90s, is hardly mentioned.

But things are changing. The advent of low cost airlines will undoubtedly change the landscape and tourism players are realising that the giant, which fell into slumberland the last few years, may be awakening. Couple with that changes in customer behaviour due to the adoption of smartphones and tablets, and you’ve got a paradigm shift in your hands and guess what, it may get young Japanese travelling abroad again.

From not having a single low cost airline, Japan now has seven registered entities – AirAsia Japan, a joint venture between AirAsia and All Nippon Airways; Jetstar Japan, in partnership with Japan Airlines; Peach, an ANA subsidiary; and four privately owned – Air Do, Skymark, Solaseed and Starflyer.

Theo Panagiotoulias (below), vice president Asia Pacific of Sabre Airline Solutions, who lived in Japan the last several years heading up American Airlines in Tokyo, believes low cost airlines will be for sure a game changer.

“Having low cost carriers is very important for Japan. Price points between domestic points were very high and the competition will be welcomed by the Japanese customer.

“China is a booming market but you can never underestimate the importance of the Japanese market. It is matured and established but Japanese travellers are looking for new options and new creative experiences.”

The question he has is what kind of low cost airline model will evolve in Japan. “It won’t be the same as in Europe or North America, it may be similar to South-east Asia, or maybe not?”

From his experience working in Japan, the Japanese customer is willing to pay a premium for customer service and so it may not always be about the lowest price.

While agreeing that “most customers want the lowest possible price”, he argues, “It’s about the value proposition”.

“If you give me what I truly value, I will buy your product,” he said. Japanese customers, he added, were focused on researching options. “They are huge on search but once the Japanese customer identifies what they want, they will pay for the premium.”

Dan Lynn, CEO of AirAsia Expedia, is also excited about the Japanese market. “People forget how big the market is and we are excited by the growth potential, especially in online travel,” he said.

According to PhoCusWright, Japan represents 32% of the US$294 billion total travel market in Asia Pacific in 2012. And of the online travel market share of US$70.6 billion in APAC, Japan accounts for 45%, the single biggest online travel market in the region.

Peter Harbison, executive chairman of CAPA (Centre for Aviation), believes the low cost impact will be far, far bigger than anyone anticipates.

It will result in changes in travel behaviour – more services to regional airports, more frequent short trips, new travellers. It will force legacy airlines to restructure. It will undermine balance of pricing between airlines, Shinkansen and toll roads. It will move tourism away from the Tokyo-focus. And above all, it will produce innovations across all sectors.

Lynn believes that whatever people say about Japanese consumers being different, “low prices will spur people to travel and we certainly hope it will get the young, who’ve not been travelling in previous years, to start travelling. And that’s the segment that will book online.”

At WIT Japan, held earlier this year, Katz Oshiden, Google’s director for industry sales, illustrated how search behaviour on desktop vs mobile was changing across Asia, with Japan showing the highest – 33% – of travel queries being done on the mobile.

Supporting Panagiotoulias’ observation that Japanese customers like to search, he showed that travel queries in Japan were up 141% year on year from 2011 to 2012 while the growth was 498% on smartphones.

With smartphone penetration on the rise – from 6% in Q1 2011 to 20% in Q1 2012, Oshiden said these devices have become a major access point of search, with 68% of consumers searching on their smartphones everyday.

Not only are they searching for travel – 54% – but they are also purchasing, with 39% of smartphones users having purchased a product on their device. And oh yes, let’s not forget the tablets, said Oshiden.

Kei Shibata, CEO of Venture Republic, which runs travel.jp, Japan’s largest air search site, said that since the launch of low cost flights, out of top 10 keywords in Google that users searched and ended up coming to Travel.jp, four were LCC-related keywords.

He cited the case of the UK which has seen a doubling in airline passengers in the last 20 years after LCCs started penetrating the market. (see chart below)

He believes that Japan, which has one of the highest costs of transportation in the world, may see more than a doubling in the next five to 10 years.

“In addition, ground and rail transportation will also come down in costs and coupled with the growth in inbound tourists, especially from China, the overall travel market in Japan could see a significant turnaround after a decade of decline.”