In terms of the privatisation of its airports, Japan is a relative newcomer to the stage, so the world was watching when an international consortium signed an $18 billion deal to operate and develop Osaka’s Kansai and Itami airports until 2060.
The consortium – spearhead by global airport operator VINCI Airports and Japanese financial firm ORIX Corporation – was certainly entering new territory when the concession began on April 1, 2016, as the Japanese government had never before handed over control of one of its existing gateways to the private sector.
How would the airlines respond to the change in dynamics? Was the fee too high considering the work that needed to be done in terms of infrastructure enhancements to Osaka (Itami) International Airport?
And what could the new concessionaire, Kansai Airports, do that the government couldn’t to stimulate traffic growth in a mature aviation market with an aging population and where new infrastructure costs come at a premium?
The company’s recent announcement that it will expand its Japanese portfolio by taking over the operation of nearby Kobe Airport from April 1, 2018, probably tells you all you need to know about the success to date of the Osaka airports concession.
Indeed, Kansai Airports intends to operate Kansai International Airport (KIX), the newly rebranded Itami – now known as Osaka International Airport (ITM) – and Kobe Airport (UKB), located in Kobe City just 35 kilometres from Osaka, as one airport system in the future.
“The concession fee was never an issue because building KIX on a man made island 40 kilometres south of Osaka was a huge operation and the government always wanted to recover its investment,” says Kansai Airports’ Co-CEO, Emmanuel Menanteau.
“How have the airlines responded to the change of owners? All of them have been very positive because they have seen that we are committed to developing the airports and have introduced a new pricing structure that is designed to stimulate traffic growth.
“What do we bring to the table as a private operator? “We bring investment and international best practice and skills in operating airports.
“We are quite unique in our business model in that we invest in, design and operate airports with the aim of enhancing capacity.”
Talking about how the first 18 months of the five decade long concession have gone, he adds: “I would say we have done well and look forward to doing even better over the coming years.
“Traffic is up at both airports since we took over the concession. We have also been quite successful in expanding Kansai’s route network, overseen the expansion of Terminal 2 at KIX, and are now looking to complete the enhancement of the facilities at ITM.”
He also reveals that the company has introduced a number of new technologies and processes to the Japanese market such as Smart Security, Fast Travel and ‘Smart Lanes’, which he believes have “changed some of the rules of the game with airlines and some stakeholders”.
The appeal of Japan
To those that thought that there was little to no future growth left in the Japanese market, think again, and Menanteau has little hesitation in stating that there is much more to come.
His confidence is, in part, boosted by the fact that Japan has only embraced the low-cost carrier phenomenon in the last few years and, as KIX and ITM have proved since Kansai Airports took over the concession, route development will follow if airlines are offered the right incentive schemes.
“We [VINCI Airports] never had any doubt about the appeal of the Japanese market and, with our experience in construction and operating airports, and with the support of our Japanese partner, ORIX, we feel that we can grow the business,” says Menanteau.
“In many ways it is a typical VINCI Airports concession in that it requires a high demand in capital, but is a long-term investment with expected good returns.”
VINCI and ORIX each have a 40% stake in Kansai Airports with the remaining 20% of the shares owned by local investors.
He says that giving investors and bankers “good visibility” about the long-term objectives of airport concessions usually helps secure the backing required for construction intensive projects, which he reveals generally offer a quicker, but smaller, return on investments.
“Although Japan is a mature aviation market and traffic growth has been quite flat, in recent years the government has made a big push to promote tourism, and this has had a positive impact on visitor numbers, particularly from China, Korea, Taiwan and Hong Kong,”
“The campaign has actually exceeded its targets for the last two years, and this shouldn’t come as a surprise really as Japan has a great product. Tourists have a great desire and willingness to visit the country, and I am pleased to say that today, KIX is the number one airport in Japan for Chinese and Korean visitors.”
He notes that the government fell just short of achieving its target of attracting 20 million international visitors annually to Japan by 2015 and is now aiming for 40 million by 2020, when Tokyo hosts the Olympic Games, and 60 million by 2030.
And with a record 30 million visitors expected to visit Japan in 2017, it is arguably ahead of the game in its 2020 target.
In terms of traffic growth at its airports, rising tourist numbers and the continued growth of the low-cost carriers in the domestic market, helped make 2016 a record year for passenger traffic at Osaka’s airports.
A total of 25.7 million passengers (+7%) used KIX in FY2016 and the upturn, primarily being driven by a rise in international traffic, has continued this year with round 27.5 million passengers (+7%) expected to have passed through the gateway by year-end.
While ITM handled 15.1 million passengers (+3%) in FY2016
and, despite its capacity constraints, its numbers were up by around 4% in the nine months ending September 30, 2017.
The introduction of a new pricing structure for the airlines,
which includes reduced landing and parking fees for carriers launching new routes, certainly seems to have made an impact at KIX where AirAsia X commenced non-stop services to Honolulu in June and Qantas will resume flights to Sydney in December after a 10 year absence.
Scoot also recently announced that it plans launching services to Honolulu from KIX as well as transpacific services to North America using B787 Dreamliner aircraft.
New airlines launching services from KIX in 2017 have included Jetstar Pacific (Hanoi and Da Nang) and Air Seoul (Seoul Incheon).
Menanteau is quick to point out that KIX boasts more direct routes to China today than either Tokyo’s Narita or Haneda airports, and is actively working to add more, along with new services to South East Asia, which is a key focus area for the airport.
He suggests that narrow-body aircraft such as the A320neo and B737 Max now make it possible to serve a number of new destinations in South East Asia from KIX, and is keen to explore the options with different airlines.
The top five airlines at KIX today in terms of passenger numbers are Peach, the Jetstar Group (Jetstar Airways, Jetstar Asia Airways, Jetstar Japan and Jetstar Pacific Airlines), Japan Airlines, All Nippon Airways and Cathay Pacific.
LCC growth at KIX
Menanteau reveals that the LCCs, led by Peach, now account for 42% of all passengers at KIX.
Talking about the rise of the LCCs in Japan, which first entered the market in 2012 and now account for 10% of the world’s third largest domestic market, Menanteau says: “For a number of reasons Japan got its first LCCs much later than most other countries in Asia, and they are quickly making up for lost time.
“They have made it easier and more affordable to fly domestically. They are cheaper to use than the high-speed trains and have really changed the way people travel within Japan.
“We have also seen the introduction into the market of non-Japanese LCCs such as AirAsia X and Scoot, which are developing Japan as a hub for international traffic.”
Other LCCs serving the Japanese domestic market from KIX include Jetstar Japan and All Nippon Airways subsidiary, Vanilla Air, which is quickly evolving into a medium to long-haul operator.
More visitors/people inevitably means a country needs to upgrade its infrastructure to cope with demand, and Japan is no different. The country is fast building new hotels, developing its road and rail networks and enhancing facilities at tourist sites to ensure that it is equipped to cope with long-term growth.
The January 2017 opening of the expanded Terminal 2 at Kansai Airport means KIX currently has the capacity to accommodate predicted growth for the foreseeable future, but Menanteau states that improvements still need to be made to Terminal 1 to make it more operationally efficient.
“We are currently in the study phase for the reconfiguration and renovation of Terminal 1 as the high growth in international traffic since 2010, while its domestic numbers have remained relatively static, has created some capacity issues as the facility was designed for an equal split between international and domestic operations.
“The imbalance in growth levels means that the international part of the terminal is always busy and congested and the domestic terminal sometimes looks empty.
“Re-organising the terminal will allow us to reset the balance because at the moment we are tight for space for international operations and have capacity on the domestic side.”
Terminal 1 is expected to handle around 22 million passengers this year with international operations accounting for the bulk of the operations and 85% of all traffic at KIX.
KIX’s new-look Terminal 2, a dedicated LCC facility currently used by Peach and Spring Airlines, now spans 66,000sqm and boasts separate ‘international’ and ‘domestic’ complexes and a host of new retail/F&B and passenger friendly facilities.
These include the first walk-through duty free stores in Japan, Smart Security lanes, reconfigured and easier to use drop off and pick up zones, additional bus stops and car parking for up to 1,600 vehicles.
Menanteau says: “It maybe a low-cost terminal, but it is definitely not a no frills facility in terms of its facilities.”
Kansai Airports is also overseeing ITM’s first major upgrade in nearly 50 years, investing much more than required under the terms of the concession to create a more efficient and user-friendly terminal.
“In terms of innovation and facilitation, we are going to create a real Fast Travel experience with Smart Security in order to ensure quick and easy passage through the terminal,” he enthuses.
“Why are we doing this? Because we feel that ITM faces direct competition from the Shinkansen high-speed trains, especially on the Osaka–Tokyo route, where it takes up to 85% of the traffic. If we are to tempt people to change their travelling habits and go by plane, getting stuck at security for half an hour doesn’t work.
“We are also going to increase the range and variety of commercial offerings in the terminal. The new additions will include a walk-through shopping mall after security and a revitalised landside that we hope will appeal to local people and encourage them to visit the airport to shop, dine and be entertained.
“New landside facilities will include a kids park, a business zone, an expanded third-floor terrace and new shops and restaurants, some of which will offer high quality dining. Sense of place reflecting the Osaka region will be central to everything.”
Menanteau says that the addition of Kobe Airport to its Japanese airport portfolio next year, following the signing of a 42-year concession contract with owners Kobe City, gives Kansai Airports the opportunity to activate a three airport system in collaboration with local stakeholders.
Although Kobe Airport is tiny in comparison to both KIX and ITM, and capacity constrained because it is limited to 60 aircraft movements daily and has a night curfew, he believes that it offers Kansai Airports the opportunity to develop the gateway in time.
It is currently working on formulating a strategy for all three airports, which it aims perfecting with local stakeholders represented on a newly reformed airport council devoted to ensuring the future success of the gateways.
“We have decided to reactivate the council that used to exist here and is 100% focused on developing a common strategy for all three airports,” he says.
“A common vision is required. What kind of passengers, what kind of airlines and what strategic direction do we want to take for each airport?”
He goes on: “It will be interesting to find out whether it will be possible to de-regulate Kobe Airport in the future so that we can bring international airlines and international traffic to the city.
“Also, if this is possible, what kind of airlines do we want to serve the airport – legacy or LCC? Do we want to develop Kobe more as a tourist or business destination? It may, for example, be best suited to the development of more specialised traffic such as medical tourism because of the city’s large number of hospitals and medical facilities.
“We also believe that there is room to develop business jet operations, FBO activities and charter flights due to its downtown city location.”
Council members which will help Kansai Airports make these decisions include local mayors, the chambers of commerce of Kansai, Osaka and Kobe and a number of associations, organisations and tourism boards.
He points out that KIX and ITM do not compete against each other today and never really have as each airport handles a different type of traffic.
Indeed, ITM was supposed to close after KIX opened in 1994, but never did largely due to its support from communities living to the north of Osaka who complained that it would take them over an hour to get to the new airport for flights of less than an hour.
The Kansai region, it is worth noting, has a large and affluent population of 22 million people and a GDP on a par with that of the Netherlands and almost as big as South Korea, so when the community speaks, politicians normally listen!
A condition of the airport’s reprieve, however, is that ITM is limited to handling domestic traffic and has a cap on aircraft movements and a night curfew.
With ITM already at its limit for aircraft movements, Menanteau admits that the only way additional capacity can be squeezed out of the airport is through the upgauging of aircraft, which operators All Nippon Airways and Japan Airlines have started to do over the last year.
With traffic on the rise, ongoing infrastructure enhancements at both KIX and ITM, and work about to commence on a long-term strategic plan for a three-airport system that includes Kobe, Osaka’s gateways are certainly in safe hands with Kansai Airports.