Skymark stock rose by 25.6% today, ending up ¥50 at ¥245 (US$2) after the Nikkei business daily's online service reported that the troubled airline was negotiating a code-share agreement with JAL on a number of routes.
A code share agreement with JAL would be good for Skymark and would allow the airline to sell tickets through the JAL ticket agents. This is the main reason for the share price increase as investors realise that the main failing of Skymark is the same as that for AirAsia Japan, the JV with ANA – tickets were sold online only which is not what the Japanese customer wants. On the other hand JAL would gain access to a low-cost operation that it can use to compete against ANA on certain routes.
Separately it could be argued that JAL would be able to assist Skymark in sorting out more favourable terms for the Airbus A380 cancelation penalty payments if it so wished – or at least that is what investors hope. The truth in all of this is that the Japanese government still has oversight of all JAL operations until 2017 and they have made it very clear that they would prefer a private airline (ANA in this case) to assist Skymark out of danger. But, as investors have taken note of today, a story such as this would not have leaked without the Japanese government having already given-up on ANA in part and given-in to the possibility of Skymark and JAL code sharing on a number of routes.
With local elections around the corner in Japan and the possibility of a snap general election being called due to the current deft of credible political opposition to government, there is no way that the government can be seen to be letting JAL go on any spending spree. By the same token it must do all that it can to ensure that Skymark does not collapse with unpaid debts. A code share with JAL represents a middle ground that all parties can feel happy with. The risk remains that Skymark shares will fall-back very sharply indeed next week if this story is not backed by a formal statement. But if the codeshare does go ahead then Skymark will be on the road to partial recovery. Of course the business plan for Skymark, as these offices reported some 13 months ago, remains poor, akin to that of Kingfisher Airlines.
All of this is playing out against a backdrop of increased risks for Japanese airlines: There is the war on deflation in the Japanese economy with the Bank of Japan printing money as fast as it can during this quarter in the hope of reaching a 2% inflation target in 2015. This should in turn mean that more tax increases are on the way to pay for the same. But the reality is that consumption tax increases in April 2014 caused GDP to slump by well over the expected 7.1% (on an annualised basis) which added to the deflationary pressures. This current round of quantitative easing in Japan will have to lead to further tax increases at some point. Consumption tax (the same as VAT) has already risen by more than any other developed county of late and any further rise would risk moving towards a doubling of the rate which may be a political tipping point. These tax increases have and will continue to dampen demand for air travel. Moreover there is a growing argument for creating a UK-style air passenger duty taxation scheme in Japan, for as the Japanese government desperately tries to increase tax revenues during 2015 and beyond it will have to consider far reaching and meaningful taxation on discretionary spending which puts aviation firmly in the crosshairs.
Far across Asia in Vietnam one wonders if the government there is getting the message from investors that an IPO for just 3.5% of Vietnam Airlines is just too small to get excited about. In the end local banks alone bought the stock, but things could have been very different indeed if this airline were to be sold off completely, or shall we say a more meaningful percentage was sold off by the state. Question now is how long will it take for a far larger IPO to come to market for this airline? Sooner rather than later is the mantra locally…
Many people wonder why we have not mentioned more about Delta this week buying up Airbus aircraft – Well there is not much to say on that subject other than to reiterate that Boeing are unable to match delivery timetables and pricing on their competing products because a) they have been so popular and b) they do not need to. The upside for Airbus is the gradual creep into the US market towards its larger products and possibly at some point towards the A380.