TT-791 -- Skymark: Death by Obstinance, ebiz news from Japan

An Insider's comments on Japan's high tech business world
* * * * * * * * TERRIE'S TAKE - BY TERRIE LLOYD * * * * * *
A weekly roundup of news & information from Terrie Lloyd, a long-term
technology and media entrepreneur living in Japan.
(http://www.terrielloyd.com)

General Edition Sunday, February 8, 2015, Issue No. 791

- What's New -- Skymark: Death by Obstinance
- News -- FX tampering yet another TPP hurdle
- Upcoming Events
- Corrections/Feedback
- Travel Picks -- Healing Village in Yamanashi, Art in Kumamoto
- News Credits

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+++ WHAT'S NEW

Budget airline company Skymark went into bankruptcy on January 28th,
marking the end of a painful 3-year process of spiraling losses
(especially in the last year) due to a declining market share and
expanding costs. The company apparently owes creditors about JPY71.09bn,
most of which is due to foreign leasing companies and to a lesser extent
the Japanese Ministry of Transport. The company has already found a
financial sponsor to help it rehabilitate. The CEO Shunichi Nishikubo,
one of the company's largest private shareholders, resigned, and the CFO
has become the CEO.

Our take on this bankruptcy is that Skymark had become an airline with
no clear mission or market positioning, and the failure by its senior
management to understand the massive changes going on led to its early
demise.

Originally started in 1996 by H.I.S. CEO Hideo Sawada and friends,
Skymark was Japan's first budget airline. Initially it's mission was
clear -- to introduce the Low-Cost Carrier (LCC) concept to Japan. While
they did offer slightly cheaper pricing to the incumbents, JAL and ANA,
Skymark was no revolutionary and after 7 tough years managed to carve
out a narrow niche for itself thanks to the organizational talents and
cash of CEO Nishikubo, who arrived in 2003. So for a while everyone made
money, and a radical remaking of the Japanese aviation landscape was
avoided. Indeed, Skymark almost seemed like it was paying lip service to
the concept of LCCs, which was sweeping the markets abroad.

Probably that sweet status quo would have continued if it had not been
for two key events that were totally out of Skymark's hands: firstly the
bankruptcy of JAL in early 2010, then secondly, later that same year,
the signing of the Open Skies agreement between the USA and Japan. The
bail-out of JAL by American Airlines was approved by the U.S. government
only in return for the Japanese caving in and letting foreign airlines
freely compete in the domestic market -- i.e., the Open Skies agreement.
This was a fateful event for Skymark, because companies like Peach,
JetStar, and AirAsia Japan (among others) were given a beach head here.
With the arrival of JetStar in particular, deeply funded as it was by
its foreign parent shareholders and able to service many more
destinations than Skymark, the beginning of the end was writ large.

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[...Article continues]

For the next three years Skymark became an airline with no discernible
advantages. It was so outclassed by the 100% committed and capable
foreign LCCs that it couldn't hope to match their pricing nor
cost-controls. Instead, the company decided that it should become an
international carrier instead and entered into a disastrous expansion
plan, committing to orders of expensive long-haul airplanes that it
didn't have the capital to cover. The new positioning strategy was
probably right, but the attempt to expand without proper financial
backing or a viable foreign network was their eventual undoing.

The senior management of Skymark were famous for their single-focus
determination -- otherwise known as "concrete-headedness". We met
Chairman Takashi Ide through a high-level introduction several years ago
and offered to help his company internationalize and attract foreign
inbound tourists, either carrying them into the country directly or
connecting with inbound carriers. The starting point was supposed to be
something as simple as some proactive English-language marketing. It was
a tough meeting, he was quite brusque and showed little interest in the
discussion. In the end, we came away from that meeting shaking our heads
and wondering what on earth he was thinking. Ide was not only not
interested in foreign travelers who needed extra attention (i.e.,
English services), but he was also quite adamant that the foreign LCCs
would not take his business away.

In the end those same foreign LCCs ate him alive.

The Skymark bankruptcy in many ways is a replay of the 2010 JAL
bankruptcy. Not only was the company buried by obstinate senior managers
who couldn't and wouldn't change their ways, but when they did go under,
the Japanese business ecosystem couldn't meet the challenge -- feeling
the risks were just too high. In JAL's case, it became necessary to turn
to the foreigners to help bail the business out. We're not saying that
foreign involvement necessarily made JAL a better company, probably that
laurel belongs to Chairman Inamori and his selection of troubleshooters.
But the fact that American Airlines and investment firm TPG pumped in
the best part of US$1.4bn did make a huge difference to the choices that
JAL had available to it in undertaking a major restructuring.

This is the same treatment that Skymark needs, if it is to survive.

Thus we find it ironic, that one reason given for Skymark being turned
down for investment by foreign funds late last year was the government's
restriction on foreign shareholdings of domestic airlines. Apparently
foreigners are not allowed to own more than 33.33% voting shares of a
Japanese airline, and if they own more than 20% then Skymark would lose
its high-value 36 landing slots at Haneda airport -- slots it received
through government largesse. As a result of this rule set, along with
management's insistence on independence, the airline was finally
pummeled into submission.

The thing is, though, that 33% rule doesn't really exist. Well, it does,
but it's elastic -- as JAL proved in 2013, when 46.91% of the company
was owned by foreigners. What happened in the end is that since the rule
meant that all foreign shareholders over the 33.33% limit were forced to
take unrecorded (non-voting) shares, JAL simply amended its constitution
so that they could still pay dividends to those shareholders. A
typically Japanese solution to a bureaucratically imposed problem, and
everyone is mostly happy about it.

Thus, by the same logic, we don't understand why Skymark doesn't just do
a tie-up with a well-monied foreign airline, someone like Etihad for
example, and give the new shareholder non-voting shares that pay
dividends and give certain other rights? For this they could tap into a
global customer network, and operations and marketing know-how. Instead,
they are going to get some emergency cash from local private equity firm
Integral Corporation, and will try to turn themselves around with a
purely domestic team. We think it's a losing value proposition, because
without a different focus the airline will still have no clear market
differentiation and is bound to wind up in the same bad place it is just
emerging from.

...The information janitors/

***------------------------****-------------------------***

+++ NEWS

- More on the new overtime law
- Nope, not a robot hotel because of demographics
- Next nuclear reactor to be back online in June
- Piketty on wealth redistribution
- FX tampering yet another TPP hurdle

=> More on the new overtime law

The about-to-be passed new overtime law is gaining lots of attention
abroad, and typically most of the commentary is about how long working
hours damage productivity. According to this article, 22% of Japanese
work more than 49 hours a week, compared to 16% of Americans and 11% of
French and Germans, and somehow those extra hours are to blame for the
nation's low productivity and birthrate. The new law is still not
clarified, and while companies are going to be legally responsible for
making sure that workers take off their allocated holidays, we suspect
that there will be plenty of let-out opportunities for SMEs in
particular. ***Ed: Let it be said here that overtime is NOT the cause of
Japan's low birth rate. If it were, Japan would have suffered a falling
birthrate long ago. The real problem is that young people don't have
enough money or job security to plan for the future and are generally
demoralized and demotivated when it comes to taking on the
responsibility of having kids. Abenomics is only making this situation
worse.** (Source: TT Commentary from thinkprogress.org, Feb 6, 2015)

http://bit.ly/1zkgAsq

=> Nope, not a robot hotel because of demographics

Although the foreign media have delighted in pointing to Huis Ten
Bosch's newly announced robot hotel as a sign of the times and Japan's
efforts to deal with demographics and depopulation, in fact, the robot
hotel is being set up for a completely different reason -- it will make
tons of money. The owner of Huis Ten Bosch is none other than
business-savvy Hideo Sawada. No doubt Sawada has seen the runaway
success of the Robot Restaurant in Tokyo in attracting foreign tourists
and has decided to up the ante. It's a smart move and one that will
become a "must-do" on the bucket list of any foreign tourist going to
Western Japan. ***Ed: The new hotel will be called "hen-na hotel"
(strange hotel) -- a dead giveaway that this is a publicity stunt by
Sawada.** (Source: TT commentary from Feb 5, 2015)

http://alj.am/1C6jkM1

=> Next nuclear reactor to be back online in June

With a date calculated to have least impact on upcoming local
by-elections, government sources have leaked that they expect Kyushu
Electric Power's Sendai power plant to go back online in June or later
this year. The facility is on track for having its final checks
completed in June, and providing no further maintenance is needed, will
be allowed to go back online shortly after. Since the reactors have been
shut down for 3 years, a long time in the life of a production reactor,
there may be additional maintenance required that will delay the
resumption of service. ***Ed: Furthermore, the reactors are 30 years
old, and so in theory they should be mothballed soon anyway -- making
this start-up very much a politically motivated one.** (Source: TT
commentary from reuters.com, Feb 5, 2015)

http://reut.rs/1C7Hd8q

=> Piketty on wealth redistribution

The Japanese media has been falling over itself to hear the opinions of
French economist Thomas Piketty, whose translated book on wealth
inequality hits the shelves of book stores soon. According to Piketty,
Japan's problems are being exacerbated by Abe's policies which move more
wealth to the rich and deprive the poor and middle class. ***Ed: We have
to say that we agree with that part of his premise, that consumption tax
is really a tax on the poor (although it does do a good job of prising
money from the aged, who otherwise won't spend it). We do not, however,
agree with Piketty's suggestions of raising taxes on the rich. Instead,
Japan's real problems lie in misallocation of investment and government
spending. The focus should be on revitalizing the sector which is the
largest employer of Japanese regular people -- small and medium-sized
companies, not dinging people who have worked hard to become successful.
(Source: TT commentary from bloombergview.com, Feb 4, 2015)

http://bv.ms/1Itc3hV

=> FX tampering yet another TPP hurdle

Now that Japan and the USA negotiators are in the final straight for a
TPP agreement, or so they say, protectionists on both sides of the
pacific are lining up new ammunition to scuttle or rebalance the deals
being cut. The latest salvo, from the U.S. side, is a demand that any
TPP agreement include a framework for determining and enforcing currency
manipulation by pact signers. This is obviously in retaliation for the
Abe government's aggressive devaluation moves on the Japanese yen, and
the resulting US$78.3bn trade deficit blow-out suffered by the U.S.
vis-a-vis Japan trade in 2013. ***Ed: No mention being made, of course,
of the fact that Japan is just copying from the USA's own QEIII
playbook. When you're the big dog of the pack you get to make the
rules.** (Source: TT commentary from thehill.com, Feb 4, 2015)

http://bit.ly/16FLpRJ

NOTE: Broken links
Some online news sources remove their articles after just a few days of
posting them, thus breaking our links -- we apologize for the inconvenience.

***------------------------****-------------------------***

+++ UPCOMING EVENTS/ANNOUNCEMENTS

------------------- ICA Event - February 19th ------------------------

Speaker: Brent Conkle - President & CEO Business Across Cultures Co.,
Ltd. Executive Leadership Coach and Talent Management Consultant
Title: "If your employees aren't growing they're going! -- Solution:
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Details: Complete event details at http://www.icajapan.jp/
Date: Thursday, February 19th, 2015
Time: 6:30 Doors open, Buffet Dinner included and cash bar
Cost: 4,000 yen (members), 6,000 yen (non-members) Open to all. No sign
ups at the door!!!!!!!
RSVP: By 10am on Monday 16th February 2015
Venue is The Foreign Correspondents' Club of Japan
http://www.fccj.or.jp/about/access.html
---------------------------------------------------

***------------------------****-------------------------***

+++ CORRECTIONS/FEEDBACK

=> No corrections or feedback this week.

***------------------------****-------------------------***

+++ TRAVEL DESTINATIONS PICKS

=> Iyashino-Sato Nenba Healing Village, Yamanashi
Thatched roof houses highlight Japanese culture

Nestled among the base of the mountains in Yamanashi Prefecture is a
charming village called Saiko Iyashino-Sato Nenba. Also known as
"Healing Village", the community is comprised of 22 traditional thatched
roof houses that depict old-time scenery of the Showa Period
(1926-1989). Each house highlights traditional Japanese culture through
hands-on experiences such as crafts, sampling of local produce, and an
opportunity to dress up in armor or kimono. In winter, snowfall
transforms the village into a magical, fairytale-like landscape that
commands a magnificent view of Mt. Fuji like no other!

The restored area of Nenba is just on the northwest end of Lake Saiko.
It was once a dignified settlement with thatched houses of
"Kabuto-zukuri", or roofing designed like a samurai warrior helmet,
until it was devastated by a typhoon in 1966. Today, revived Nenba
thrives with culture and a natural environment that ties into the
region's history. The village name Saiko Iyashino-Sato Nenba was born in
2006.

http://bit.ly/1C6uQ9Y

=> Kumamoto's Kyu-jogakko-ato
A historic school-turned-retro complex near Aso Shrine

Almost every town and neighborhood in Japan has some sort of hidden
'treasure' - a place a little bit off the beaten path, not well
advertised, but well worth visiting. The Kyu-jogakko-ato, or 'remnants
of a former girls' school' near the Aso Shrine and Monzen Shopping
Street is just such a place.

In 1902, the first school for girls in the area was established here. It
lasted until 1977, and weaving was done in the facility for a number of
years after that. The collection of traditional buildings is now a
lovely complex filled with unique shops, galleries, and a couple of
cafes. If you start at Aso Shrine, walk down the shopping street to the
end. Turn left and walk a short distance. At the next road, turn right.
Water will be running along the street here on your left. Follow the
road and soon, on your left, will be Kyu-jogakko-ato.

http://bit.ly/1Fln2ow
***------------------------****-------------------------***

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+++ ABOUT US

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Written by: Terrie Lloyd (terrie.lloyd@japaninc.com)

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