Japan's low-cost carriers (LCCs) are facing challenges as their growth model falters amid rising inflation. The low-cost model, which thrived on deflation, low labor costs, and cheap operational expenses, is struggling as fuel, labor, and maintenance costs increase. Major airlines like All Nippon Airways (ANA) and Japan Airlines (JAL) are also lowering fares to fill empty seats, diminishing the price competitiveness that LCCs once enjoyed.
According to a report by Nikkei Business, a publication under the Nihon Keizai Shimbun, the fare gap between major airlines and LCCs has decreased from 2.68 times in 2012 to less than 2 times by 2024. In 2012, when LCCs began to establish themselves in Japan, they were perceived as significantly cheaper than ANA and JAL.
Analyzing passenger revenue data from the Ministry of Land, Infrastructure, Transport and Tourism, Nikkei Business found that the revenue per passenger kilometer for ANA and JAL dropped from 17.8 yen in 2012 to 17.0 yen in 2024. In contrast, Peach Aviation and Jetstar Japan saw their revenue rise from 6.6 yen to 8.7 yen during the same period. This indicates that LCC fares, which were about 40% of ANA and JAL's in 2012, have now surpassed half of their fares by 2024.
The narrowing fare gap suggests that LCCs are losing their primary competitive advantage of offering value for money. A representative from Japan's Ministry of Land, Infrastructure, Transport and Tourism noted that even major airlines in the U.S. are adopting LCC-style services, such as Delta Air Lines introducing non-seat-assigned low-cost tickets, indicating that LCCs are at a turning point.
Peach Aviation, a leading LCC in Japan, is also adapting to this trend. Launched in March 2012 as Japan's first full-scale LCC, Peach was seen as a pioneer in the industry. It attracted younger travelers with low fares and a distinctive branding strategy, achieving its first operating profit in March 2014. As of March 1 this year, Peach operates 25 domestic and 15 international routes, serving over 9 million passengers annually.
However, as reliance on its low-cost image becomes less viable, Peach is shifting its strategy to broaden its customer base. In late March, the airline announced a rebranding, changing its bright pink logo to a more subdued beige to appeal to middle-aged customers. This move aims to expand its reach beyond the young female demographic that initially fueled its growth.
Additionally, Peach became a wholly-owned subsidiary of ANA Holdings in December 2024. This change in status is reflected in its operational strategies and role within the group. Initially, Peach operated with a degree of separation from ANA to establish the LCC model in Japan. However, there is now a clear trend of collaboration between the major airline and LCC in sharing routes and customer segments.
For instance, ANA recently suspended operations on four routes from Kansai Airport to Naha, Miyako, Ishigaki, and New Chitose, while Peach increased flights on the Naha and New Chitose routes. This indicates a shift where less profitable routes are being assigned to LCCs within the group.
The changing dynamics are partly due to declining profitability for major airlines on domestic routes. ANA and JAL explained in a May meeting with Ministry of Land, Infrastructure, Transport and Tourism experts that without government support, their domestic operations would be unprofitable. Rising fuel, labor, and maintenance costs, coupled with a shrinking population making it difficult to expand domestic demand, have exacerbated the situation. ANA acknowledged that the internal compensation structure, which relied on profits from major routes to sustain regional services, has reached its limits.
The evolution of the LCC model reflects Japan's economic shift from deflation to inflation. Companies that have thrived on low labor and operational costs are increasingly struggling to absorb rising expenses. The domestic airline market faces additional pressures from rising fuel prices due to geopolitical instability in the Middle East, further increasing the cost burden on airlines.
Ultimately, LCCs are entering a phase where relying solely on low fares for growth is becoming unsustainable. The future competitiveness of these airlines will depend on whether they can raise fares in line with major airlines while enhancing service value or maintain low fares while developing a profitable structure. As inflation persists, a strategic reassessment of the low-cost business model in Japan will become inevitable.
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.