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The Heat is On for Haneda: DOT to Release Decisions Soon

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The Heat is On for Haneda: DOT to Release Decisions Soon

The Heat is On for Haneda: DOT to Release Decisions Soon
May 04
12:21 2016

MIAMI — Ten years ago, U.S. carriers were emphatically advocating for their individual rights to operate nonstop service from their hubs to mainland China, resorting to a wide spectrum of tactics ranging from congressional lobbying to collecting internet signatures to even trash talking one another in order to garner public support.

Four contenders – American, United, Northwest and Continental Airlines – were each vying for a single daily pair of landing rights to fly to China. American wanted to fly from its DFW hub to Beijing, while United wanted to fly from its Washington Dulles hub to Beijing as well. Both Continental and Northwest were interested in Shanghai, and lobbied for flights from their Newark and Detroit hubs, respectively, to Pudong airport.

With China’s economy booming and U.S. carriers scrambling to globalize their networks in wake of increasing low-fare competition on domestic routes, the “China craze” pretty much rendered Japan as a foregone consideration.

New long-haul capable aircraft with advanced technology and fuel efficiency, as well as liberalized air service agreements between the U.S. and China created massive potential for American carriers to reach alpha markets such as Shanghai and Beijing directly from their U.S. gateways.

Of course, this meant overflying traditional 6th freedom hubs in North Asia, such as Tokyo and Seoul, who would inevitably bleed traffic that otherwise connected in Narita (NRT) or Incheon (ICN) airports.

Fast forward to 2016, and the dust has settled on the China frenzy. All four carriers, in both pre-and-post merger contexts, have eventually received what they wanted and all of the aforementioned routes are now scheduled services (with the exceptions of United operating Newark – Shanghai after merging with Continental, and Delta operating Detroit – Shanghai after merging with Northwest).

Chinese route authorities are more readily available and market demand isn’t as pent-up as it was in the mid-2000s, thanks to faster visa-processing times for both U.S. and Chinese citizens and a more laissez-faire regulatory structure at China’s primary airports.

But in a rare twist of events, the attention has shifted back to Japan – except this time, spotlighting another opportunity to unlock a potential goldmine at Tokyo’s Haneda (HND) airport.

Suddenly, Japan is relevant again. Haneda debacle traces back to the 1970s, then early 2010s.


The truth is, the “big bang” for rights to Tokyo Haneda airport is not new. In fact, the demand for access to Haneda’s resource-constrained airport – and the drama that has transpired alongside it – for US carriers has been drawn out for the better part of a decade.

In 2010, the US DOT enabled carriers the rights to bid for four nighttime landing slots at HND – located much more conveniently to Central Tokyo’s business district rather than Narita airport, where the vast majority of transpacific and intercontinental flights operate.

But former Delta CEO Richard Anderson contends that U.S. carriers, specifically Delta, are entitled to special privileges dating back to actions taken by the Japanese authorities in the 1970s. After Narita airport was constructed, Northwest Airlines (then Northwest Orient) was mandated to relocate its operations from Haneda to Narita airport by the Japanese Government.

Delta, having acquired Northwest’s Narita hub in 2009, sees itself as the primary benefactor of Haneda route authorities based on the compliance of its merger partner back in the day. The Japanese Government has viewed unfavorably upon Mr. Anderson’s blunt, if not outright bullish, comments regarding such a suggestion.

There was, however, a breakthrough in 2010 when the Japanese government granted rights that would permit four daily flights on U.S. carriers into Haneda airport. Ultimately, the US DOT – who was in charge of awarding the route authorities to US bidders – offered two to Delta, one to American and one to Hawaiian.

Delta was given 50% of the slots in consideration of its lack of a partner carrier in Japan, whereas United-Continental had an extensive agreement with All Nippon Airways (ANA) and American Airlines had a relationship with Japan Airlines.

Both United and ANA were in the finalizing stages of formulating a transpacific joint venture, which would permit ANA to also operate transpacific services from Haneda airport to U.S. and Canadian airports.

As such, United was not allocated any slots in the initial rounds. American was allocated one route to Haneda given its minor presence in Asia at the time, as well as the weakened financial health of Japan Airlines, who was restructuring in bankruptcy. JAL was also permitted to operate a few transpacific routes from Haneda airport to the U.S., but on a much smaller scale than its rival carrier ANA.

Delta had been granted rights to fly from its Detroit and Seattle hubs to Tokyo Haneda, while American was granted rights to fly from New York JFK. Hawaiian had bid for Honolulu – Haneda.

The routes were scheduled to commence in Spring 2011, but there was drama from the very beginning. For starters, within weeks of commencing operations in March of that year, the Japanese earthquake ravaged areas around Tokyo, causing Delta and American to postpone their respective services for several months due to fallen demand.

Service recommenced later that year, but the U.S. carriers soon discovered that the designated arrival and departure times were extremely sub-optimal for their Haneda operations, with arrivals permitted no earlier than 10pm and return flights no later than 07:00. Passengers were inconvenienced with limited connecting flight opportunities on the inbound and outbound flights, and also dealt with limited public transit options when arriving and departing at such odd times.

For the U.S. carriers, it became clear that it was impossible for an airline to viably serve Haneda from any market other than the U.S. West Coast or Hawaii due to the time slots. Shortly thereafter, Delta requested that the DOT amend one of its two daily rights to switch service from Detroit to Seattle, which sparked major backlash from United and American.

Meanwhile, after filing for bankruptcy and continuing to lose money on its JFK – Haneda flight, American eventually relinquished its slot, which United scooped up in 2014 (and now operates from San Francisco).

Even after the adjustments, Delta’s Haneda service from Seattle continued to fare poorly with the allocated time slots. In fact, in 2015, Delta had adeptly created a schedule that only operated the bare minimum number of frequencies during the winter period linking Seattle with Haneda – flying a string of daily flights every six weeks or so – because load factors had been so abysmal. American accused Delta of under-utilizing the slots, and challenged the DOT to reconsider the validity of Delta’s route authorities.

When the DOT finally reviewed the situation and mandated a, “use-it, or lose-it” policy, Delta eventually surrendered the route authority knowing it would rather bow out of Haneda than continue to lose money on the route.

In 2015, the US DOT re-awarded Delta’s SEA slot to American, which has been in operation since February 2016 (offered this time from LAX as opposed to New York JFK). Only Delta’s daily flight from LAX (1 of the original 2 slots it was awarded back in 2010) and Hawaiian’s flight from Honolulu has consistently been offered year-round to customers since day one.

But that’s about to change. In February, the U.S. and Japan reached a new agreement that would permit U.S. carriers the rights to operate six daily round-trips to Haneda. Of these, five will be granted daytime flights, while one will remain a nighttime slot. To thicken the plot, all interested parties, regardless of their years of service and commitment to Haneda, will have to re-apply to be considered.

There have been massive changes in the US – Japan market since 2006


The reality is that the decision to re-evaluate all proposals for Haneda operations comes after a period of drastic evolutions in the US – Japan commercial landscape. There have been major fluctuations since 2006 – and even 2011 – since Haneda was opened up to U.S. operators. Most notable has been the joint venture alliance agreements formulated by United and All Nippon Airways (which eventually included Continental) as well as between Japan Airlines and American.

Delta acquired Northwest’s legacy Tokyo Narita hub, while Hawaiian, surprisingly, has only ventured into the Japanese service in the past five years. ANA and JAL have utilized the 787 Dreamliner to reach medium-sized markets in the U.S., and on a smaller scale, fifth freedom operators such as China Airlines, Singapore Airlines and Korean Air have maintained a presence in the U.S. – Japan corridor, while others, such as Varig and Thai, have bowed out.

United States – Japan Route History & Changes: 2006, 2011 and 2016

2016

US-JP_AA-DL

2011

US-JP_HA-NH

2006

US-JP_NW_RG

American, United, Hawaiian want to largely bulk up current service; Delta wants to overhaul its US – Narita operations


On April 21, United, American, Hawaiian, and Delta formally submitted applications to serve Tokyo Haneda Airport. United and American have opted to more or less continue current levels of service to Haneda, with some additions. Hawaiian and Delta, conversely, are proposing a more radical approach to their scheduling bids, thereby creating a more complex situation for the DOT to evaluate.

American Airlines wishes to operate two daily flights from its US hubs. It intends to roll over its current Los Angeles – Haneda service, operated with a Boeing 787, to a day time slot, and add a flight from its largest hub at Dallas/Fort Worth, utilizing a Boeing 777-200.

The airline’s DFW fortress hub has experienced significant growth as an East Asian gateway in recent years. It currently offers daily flights to five Asian destinations, including Hong Kong, Beijing, Shanghai and Seoul, and two daily flights to Tokyo Narita. Japan Airlines, now a Joint Venture partner, operates a daily flight to Tokyo Narita as well on behalf of American.

United’s proposal is similar to American’s. It plans to shift its current San Francisco-Haneda flight (also operated by a Boeing 787) from a night time slot to a day time slot, and tack on another flight from Newark’s Liberty Airport, connecting the New York metropolitan region with Tokyo Haneda (this link has been void since American vacated New York – Haneda in 2013).

The Newark service that United proposes would be operated on a Boeing 777-200. Like DFW, Newark also serves a handful of other destinations in the Asia Pacific region, offering daily flights to Beijing, Shanghai, Hong Kong, and Tokyo Narita.

Hawaiian Airlines wants to switch its current night time service from Honolulu to a day time slot as well. The airline also applied for a second daily flight, which would operate from Honolulu four days per week and from Kona the other three days per week.

Both flights would use A330 aircraft. However, one key differentiating feature of Hawaiian’s application is that it is willing to bid for the one nighttime slot at Haneda that the DOT needs to fill, which the other applicants have largely ignored.

Furthermore, Hawaiian is proposing a variegated schedule on one of its two frequency bids, split between Honolulu and Kona either during the day or during the night. Hawaiian may realize that it is in the best position to continue night time service, due to its geographical advantage located halfway between the U.S. and Japan, and the fact that more of its customers are origin and destination passengers rather than connecting traffic.

Delta is asking for the most out of the bidders, having submitted proposals to obtain three of the five available day time slots – whereas the competing bids have only proposed for two flights. Delta would like to not only switch its current Los Angeles night time service to a day time flight, but also wants to add day flights from its Atlanta and Minneapolis/St. Paul hubs, all with Boeing 777-200 aircraft.

Delta’s interest in adding a flight from Minneapolis/St. Paul, rather than from Detroit, also deserves some attention. Delta likely made this decision since it previously attempted serving Tokyo Haneda nonstop from Detroit.

Although the airline is more likely to turn a profit with a more convenient day time slot, it may believe that the DOT would look unfavorably on any proposals to restart a route that it previously cancelled. That also renders its proposal from Atlanta as a valid option, which is also one of the world’s largest airport hubs.

Delta also contends that its competitive position in Japan stands the most to lose if the DOT were to favor other carriers in the HND battle, given that it operates a hub at Tokyo Narita. Haneda Airport sits right near the heart of downtown Tokyo – comparable to the convenience of Dallas Love Field or New York LaGuardia Airport – and therefore offers a far more convenient entry point into Tokyo over Narita, which is located nearly an hour away from the city.

Delta believes that additional service to Haneda, if awarded to its competitors instead, will substantially undervalue its operations at Narita.

The chart below lays out the details of each airline’s proposal, including the origin city, a measure for how connected the origin city is with the airline’s broader network, the aircraft type, number of seats, and frequency.

us-carriers-haneda-bids

The DOT should factor optimal connectivity and seat availability into its decision


Applicants have until May 5 to submit arguments and evidence supporting their respective service proposals, also known as “answers” to provide additional detail into the business cases for their route bids. Those are then published to the public, and in turn, the bidders have until May 12 to respond to these “answers.”

After these dates, the DOT will then conduct its own internal review of the applications and determine how it intends to distribute the slots. With nine proposed flights on the table for six available frequencies, split between five daytime and one nighttime authorities, obviously, there will be some losers. The DOT should make a decision that maximizes the public benefit of the new agreement with Japanese regulatory authorities.

In our view, the DOT has two primary objectives in creating the greatest possible public benefit: to maximize available seats and to maximize connectivity. Larger aircraft with more seats provides greater opportunities to accomplish this. Therefore, the DOT should look more favorably on proposals from airlines with more seating capacity on each aircraft.

As illustrated above, Delta’s 291-seat Boeing 777-200’s consistently feature the greatest possible daily flight capacities to Tokyo Haneda, although, the seat capacities offered by competing bids do not trail Delta by an overly large margin.

Furthermore, the proposals featuring smaller gauge aircraft are virtually all operated by the Boeing 787. The Dreamliner boasts advantages in terms of passenger comfort, in addition to better fuel efficiency which will help make the routes more sustainable even if oil prices trend upward again. These are important components the DOT should consider in maximizing long-term value.

The larger factor in the eyes of the DOT should be facilitating one-stop itineraries from virtually anywhere in the country with the more convenient daytime slots. This is best achieved by matching the Haneda flights to airline hubs with a high degree of connectivity. OAG’s Connectivity Index provides a good tool to which the DOT might refer in its goal of maximizing connectivity.

According to the data, Atlanta and Dallas/Fort Worth offer the largest volumes of connecting feed to support the proposed Haneda flights from each station. This is important for the DOT to consider, because both of these airports currently lack Haneda service and make them stronger candidates for new flights.

Most of the travel to Tokyo will ultimately stem from connecting traffic, rather than origin-and-destination passengers (O&D) with itineraries beginning in one of the few cities to receive service. The DOT can make travel to Haneda more convenient for the greatest number of potential passengers by including airports with a higher degree of connectivity in its distribution.

However, on a practical level, stripping service from where it currently exists is an undesirable course of action. For instance, despite the fact that American offers the fewest number of seats to Haneda from LAX, the DOT would likely face backlash from the carrier given that it was only granted rights as recently as February 2016. Although push-back from the airlines is not the principal concern, the DOT is engaged in a tricky balancing act, attempting to satisfy all four carriers while optimizing the public benefit.

One solution the DOT may consider is to allow all four airlines to continue operating their current services to Haneda, and permit American, Delta and United to shift their services from Los Angeles and San Francisco to daytime slots, while retaining Hawaiian’s Honolulu flight for the single night time slot.

This would at least permit all four carriers to continue to serve Haneda, and perhaps some flexibility in terms of up-gauging aircraft based on seasonal demand and market need. Given that American and Delta are growing their LAX hubs, and United is also growing its SFO hub as well, the connectivity piece will not be a major concern.

As mentioned earlier, Hawaiian has geography working in its favor, with Honolulu/Kona both more conducive destinations to arrival times in Tokyo after 10 pm. More of Hawaiian’s customers are local as well, reducing the burden of the later flights.

Hawaiian may have cornered itself by applying for the nighttime slot, which the DOT may honor to focus solely on awarding the five remaining daytime slots among the remaining three carriers rather than all four. Although Hawaiian boasts a strong record with its current flights, and currently carries the most passengers to Haneda of any U.S.-based airline as it will loudly trumpet, it is nevertheless in the DOT’s best interest to distribute the still scarce day slots elsewhere.

For the remaining two day time slots, the DOT might choose to focus on connectivity, distributing them to American and Delta to start up Dallas/Fort Worth and Atlanta service, respectively. Although providing a non-stop link between Haneda and cities with strong individual demand for travel to Tokyo is important (as United will rightfully claim with its proposed New York area service), maximizing one-stop connection opportunities should weigh more heavily on the mind of the DOT. Furthermore, United’s Joint Venture agreement with ANA can permit one of the two carriers from eventually launching a Newark – Tokyo Haneda route with the eventual removal of slot restrictions at Newark airport.

Furthermore, the DOT can also look to Europe to provide some descriptive data points on how movement between Narita and Haneda on long-haul services impact connectivity and passenger demand patterns. The Haneda debacle has not created anywhere near as much drama in Europe, nor Canada, where similar patterns have taken place, as it has with the U.S. Of course, a large reason for this has been that European and Canadian carriers have been given daytime slots, but nevertheless, the possible scenarios presented by the U.S. carriers do emulate what took place between Canada/Europe and Japan in 2013/2014.

The heat is on for Haneda: with proposals on the table from four airlines, the DOT is now on the clock.

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A Global Review of Commercial Flight since 1994: the leading Commercial Aviation publication in North America and 35 nations worldwide. Based in Miami, Florida.

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