JAPAN: Skymark Emerges From Bankruptcy

On March 28th, Skymark Airlines [BC/SKY] announced that it had completed its corporation revitalization process and received approval to emerge from bankruptcy. At the same time, it also revealed its mid-term plan for FY2016-2018, which includes opening up international routes and targeting 80 billion JPY in total revenues to produce an operating profit of 7 billion JPY by FY2018. Japan's third largest carrier filed for bankruptcy protection on January 29th, 2015 with the Tokyo District Court.

Boeing 737-8HX(WL) JA73NP arrives at Sapporo New Chitose. What future for Skymark? The domestic market is shrinking, while regional international routes are now well-served by LCCs. One solution could be the combination of using midnight international routes at Haneda (which would increase utilization), coming up with a loyalty program, and upgrading their reservations system to enable code-shares with international carriers (which would allow them to leverage their domestic network), though the third would most likely be vetoed by ANA.

Once post-deregulation's most successful start-up to challenge the ANA/JAL duopoly, Skymark was re-launched on September 29th under new ownership (Skymark relaunched with ANA sponsorship.). Integral Corporation holds the majority 50.1%, ANA Holdings has a grip on 16.5%, and UDS Airlines Investment has 33.4%. UDS is a new investment firm jointly owned by Development Bank of Japan (DBJ) and Sumitomo Mitsui Banking, both loyal partners of ANA. ANA Holdings is the parent of Japan's now largest carrier All Nippon Airways [NH/ANA].

Skymark's creditors initially demanded 308.9 billion JPY in total liabilities (Skymark's total debts skyrocket to 300 billion JPY.), however, that was reduced to 154.3 billion JPY after negotiations. Under court protection, the final repayment figure was settled at 16.1 billion JPY. Major creditors included Intrepid Aviation, Airbus, Rolls-Royce, and CIT Aerospace. The U.S.-based aircraft lessor initially sought for 900 million USD for scrapping Airbus 330 leases (Skymark terminates all Airbus A330 leases.) and fought against ANA to sponsor Skymark with Delta Air Lines [DL/DAL] (Intrepid picks Delta to sponsor Skymark.). The European planemaker at first called for 700 million USD for the A380 cancellation (Skymark hopes to settle Airbus A380 penalty in October.), but drastically reduced the amount after ANA agreed to take those A380s (Bye-bye Skymark, Hello ANA Airbus A380?).

Skymark's financial performance is quickly improving, partly helped by lower fuel costs. FY2015 is expected to finish with revenues amounting to 70 billion JPY, producing an operating profit of 1.5 billion JPY. It reverses the airline's results for FY2014, which saw revenues totaling 80.9 billion JPY but translating to a 17.6 billion JPY operating loss. It now targets FY2018 with total revenues at 80 billion JPY with an operating profit of 7 billion JPY, calculating with crude oil at 50 USD per barrel. "We have 26 737s in our fleet, but only use 20 of them at once. Bringing utilization up to 24 aircraft will help increase revenue," said President Masahiko Ichie, adding "Our CASK (cost per available seat kilometer) is 8.5-8.6 JPY, and we're aiming for 8 JPY." During the time frame, a new future aircraft type will also be evaluated.

The revitalized airline also announced plans to go international by FY2018 starting with charter flights. "We need to use FY2016 to further strengthen our balance sheet. We'll carry out feasibility studies in FY2017, and hope to operate the first charters in FY2018," said Mr. Ichie, adding "East Asia and Southeast Asia, as well as Guam and Saipan are likely candidates." Skymark's President also said they are evaluating re-entering markets it withdrew from during its bankruptcy, mentioning Ishigaki [ISG/ROIG], Kumamoto [KMJ/RJFT], Miyako [MMY/ROMY] (Skymark to cut 15% of flights, ground all Airbus A330s.), Sendai [SDJ/RJSS] (Skymark to pull out of Sendai in October.), and Yonago [YGJ/RJOH] (Skymark decides to close Yonago, keep Ibaraki.). "We don't want to axe a new route after only one year," said Mr. Ichie, explaining new destinations would be carefully considered.

Meanwhile, Chairman Nobuo Sayama reiterated that code-sharing with ANA has been indefinitely postponed, as Skymark continues to refuse to adopt ANA's Able-D reservation system. Mr. Sayama believes retaining its own reservations system is key to keeping Skymark independent, and taking up Able-D would essentially relegate Skymark to a de facto puppet of ANA, joining the likes of AIRDO [HD/ADO] (d.b.a. Air Do), Solaseed Air [6J/SNJ], and Star Flyer [7G/SFJ]. "Our performance is improving, so there is no urgent need for code-sharing," said Mr. Sayama, adding "Our arms are open. We have proposed to code-share by placing an interface between ANA's and ours. We don't necessarily need to adopt their system. It's up to ANA."

Mr. Sayama, who also serves as the President of Skymark's largest shareholder Integral, is seemingly determined to limit ANA influence to only maintenance and operational issues, and not with business decisions. The conflict will continue between Integral and ANA as the former's interest lies in keeping Skymark operationally independent until its planned re-listing in 2020 or before, while the latter wants to keep Skymark under its influence for as long as possible to shut out true competition at bread-and-butter Tokyo/Haneda [HND/RJTT]. However, even if code-share talks do not bear fruit, for ANA its investment may have already been worth it, as otherwise a Delta-backed Skymark would have posed a much stronger threat to ANA.