Terrie's Take 791 -- Skymark: Death by Obstinance, ebiz news from Japan

Terrie's Take terrie at mailman.japaninc.com
Sun Feb 8 23:08:34 JST 2015

* * * * * * * * 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.

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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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 

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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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)


=> 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)


=> 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)


=> 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)


=> 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)


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.



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=> No corrections or feedback this week.



=> 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 


=> 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.



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

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