United’s Welcome in Japan Less Than Warm
The skies United Airlines flies may be as friendly as the ads say, but the welcome the giant U.S. carrier received on the ground here was positively cool.
When United took over Pan American’s Asia-Pacific routes in early February, a local newspaper exhorted Japanese carriers to “work out joint measures to cope with” United’s expansion into Asia.
“Japanese airlines must be prepared for a full-scale ‘dog-fight’ over the Pacific,” the mass-circulation Mainichi warned in an editorial Feb. 12, the day United’s first flight on Pan Am’s old route from Honolulu arrived here.
Asahi, another national daily, said: “It is almost certain that Japan’s civil aviation industry will experience a heavy blow if United Airlines . . . introduces substantially lower fares on international routes.”
United’s Pacific area general manager, Donald Moonjian, said United has “no intention of lowering fares in the Japan market to the U.S.,” but a Japan Air Lines executive said his company is “scared” by the competition from United. The Japanese seem certain that United will use its huge network of U.S. flights to its advantage in the transpacific competition, feeding passengers arriving from Asia directly onto domestic flights.
United Chairman Richard Ferris hinted as much when he said: “I do not believe that our strategy, which is coupled to our strength, is any secret. The fact that we serve 164 cities in the United States offers a great feed potential.”
JAL has already fought one legal battle in order to stop an attempt by United to combine super-cheap domestic U.S. fares with internationally set transpacific fares. In 1984, JAL persuaded the now-defunct U.S. Civil Aviation Board to rule against United because the combination fares conflicted with international fare agreements.
But United’s promise not to do what it did in 1984 does not mean that its hands are tied. In contrast to the United States, where deregulation has made it possible to offer super-cheap tickets over the counter, in Japan 15% of international tickets are sold at clearly defined official rates. The remaining 85% of international tickets are sold on a freewheeling market with several layers of wholesalers and retailers.
Discounting by travel agents takes place on a massive scale thanks to a system of “sales incentive fees,” or kickbacks, which the airlines pay to wholesalers and the wholesalers pay to the agencies. Airline executives normally refuse to go on record about discounting, but the practice is altogether legal in Japan.
This arrangement makes it possible for travelers to buy a two-way ticket to Los Angeles, which would cost $2,000 at an airline counter in Tokyo, for anywhere between $820 and $960 from a travel agent, depending on the carrier and the traveler’s ability to shop around.
It was to this freewheeling market that Moonjian referred when he said: “I think there are varying levels of travel agent compensation. I think we would be very naive if we said there were not. And we are very willing to be competitive with those varying levels no matter where and no matter when.”
A Tokyo travel agent who asked not to be identified by name said that, since United took over Pan Am’s routes, the cost of transpacific tickets in the discount market has gone down. It is now cheaper to fly United than either Northwest or Japan Air Lines, according to this agent.
Moonjian also promised to give the competition a run for its money on what he referred to as “service levels.” And this is what concerns JAL officials. To celebrate its $750-million takeover of Pan Am’s routes, United is offering to upgrade full-fare business class passengers flying transpacific on United from Japan to first class on the carrier’s routes in the U.S. mainland.
The offer troubles JAL officials because it combines United’s international and domestic U.S. routes and offers a service the Japanese carrier is unable to duplicate.
For JAL, United’s Feb. 11 expansion could not have come at a worse time. The move gave United 53 transpacific flights a week, up from seven, and increased its share of the U.S.-Japan air market to 17% from 3%.
The Japanese flag carrier is still reeling from the shock caused by the crash last Aug. 12 of one of its Boeing 747s in which 520 people were killed. The crash, the worst single-plane accident in aviation history, has opened a Pandora’s box for JAL. It gave the Japanese government the justification it needed to announce that the company will be returned to private ownership next year and to strip it of its privileged status as the only Japanese carrier permitted to fly on scheduled overseas routes.
All Nippon Airways, which has been given permission to fly to the U.S. territory of Guam next month, has filed a request for a regular route to Los Angeles. Also, Toa Domestic is almost certain to win approval for flights to Honolulu.
Also as a result of last year’s accident, JAL’s top management has been replaced. A new vice chairman from private industry has accused former managers of fomenting strife between the company’s labor unions and creating an atmosphere not conducive to high safety standards. “It scares me that pilots and mechanics rarely talk (to each other),” he said.
Passengers who in the past were willing to pay a premium in the discount ticket market in order to fly JAL are now shying away from the carrier. Domestic traffic on JAL was down by as much as 25% in the months after the crash, and, for the first time in a decade, JAL had fewer passengers on its overseas flights during the New Year holiday than the year before.
Adding to JAL’s troubles is Northwest’s purchase of Republic, which threatens to create an American carrier with an international-domestic linkup that is almost as large as United’s. Northwest President Steven Rothmeier said his firm, soon to be America’s third-largest airline, is now “ready for the challenge in the Pacific markets brought on by United Airlines’ purchase of Pan Am’s Pacific routes.”
So far, JAL’s response to changing times has been somewhat more limited. Internationally, the carrier hopes to extend its network to include Atlanta. On domestic runs, it is offering discounts of 20% to couples whose combined ages add up to 88 or more, and 30% for those traveling on weekends. Previously, the biggest discount was less than 10%.