Japanese aviation market performance during the COVID-19 pandemic - Analyzing airline yield and competition in the domestic market

Abstract

The Japanese aviation market experienced significant changes in the past decade, with a few entrant low-cost carriers (LCCs) changing the duopoly by the two dominant full-service airlines (FSAs) of Japan Airlines and All Nippon Airways. However, the major disruptions caused by the COVID-19 pandemic might change industry development trajectory. This study provides an updated review of the development and performance assessment of the Japanese domestic market, with a focus on the effect of the COVID-19 pandemic on airlines' capacity, frequency, yield and competition using data from 2019 to 2020. Special efforts are dedicated to investigating whether there is significant asymmetry between FSAs and LCCs across different types of routes. Our empirical results suggest that the pandemic did impose significant negative effects on airline yield, scheduled seats and frequency. Such effects were different across mainline vs. regional routes, with FSAs still maintaining much of their dominance. The two leading FSAs' duopoly appears to be strengthened, whereas the market share of the third-largest carrier, Skymark Airlines, shrank significantly towards the end of 2020. Regional routes’ sustainability has been further challenged to the extent that more resources may have to be allocated to maintain regional connectivity until sustainable recovery of travel demand. Entrant LCCs continue to put downward pressure on yield, but their contribution to overall market competition may be moderated by their affiliations with the two dominant FSAs under the so called airlines-within-airlines strategy. Affiliated LCCs could strengthen, instead of reducing, the dominance of the duopoly JAL and ANA over independent airlines in the Japanese domestic market. The government should ensure that there are no entry barriers blocking independent entrants to the market.