Skymark Airlines in Japan is an 18 year-old budget airline that makes a modest profit. They had aspirations on becoming a long haul, international, premium class airline. Now, there is nothing wrong with that I hear you say.
On the face of it, you are correct. However, in the airline business, it requires a little more than coming up with the idea and sourcing new planes.
It seems that Skymark didn’t exactly plan it too well. They ordered four Airbus A380s with an option on two more. At book price, they are $414.4 million each. Skymark got them for $1.7 billion. Normally, airlines get a discount. Where is it?
The Airbus A380 is the largest plane in the world with a second deck on top. Airbus have been having problems getting orders in the US because the Americans think the plane is too big. So Airbus welcomed the order with open arms.
Airbus sold 30 A320/321 narrowbody jets in March 2014 for $3.3 billion to All Nippon Airlines. And JAL placed a landmark $9.5-billion order for 31 A350XWB airliners in October 2013.
But Japan has such high passenger volumes on some domestic routes that they have bought Boeing 747s. Even Boeing has released special 500-seat-plus versions of its 747 jumbo jet that are customised for Japan's domestic market.
In 2012, Skymark began to face stiff competition from a new group of low-cost carriers in Japan particularly at its Narita base that is also a base for AirAsia Japan and Jetstar Japan. This led to a reduction in Skymark's frequencies on highly contested routes such as Narita-Sapporo and Narita-Fukuoka, and a refocusing of aircraft on more exclusive routes such as Narita-Ishigaki.
The A380 typically has 525 seats. Skymark planned to have only 394. This would have priced them as being the most expensive in the market and made them uneconomic.
On Tuesday 29th July 2014, Skymark cancelled the orders. Airbus is slightly upset with this and will now have to find a buyer for the two aircraft that they have built for Skymark. It’s likely that will be difficult.
What happened was that Airbus were just ready to kit out the interiors to Skymarks’s specs and they queried their ability to make repayments and their plans in this new venture. They suggested that Skymark join a bigger airline group and form partnerships.
Skymark were unhappy at being told what to do. "We cannot accept a demand that would shake management independence," Skymark said in a statement. They said that the company has been able to offer lower prices precisely because of its independence.
Skymark cancelled the orders. Airbus is likely to keep the $260 million Skymark has paid so far. It could seek additional penalties of 70 billion yen ($681 million), according to Japanese media reports. As a result, Skymark shares have plunged, and the airline warned this week that there is uncertainty about its ability to remain a “going concern” given its potential exposure to Airbus. They accused Airbus of demanding "exorbitant" cancellation fees.
Stefan Schaffrath is an Airbus spokesman. He denied that Airbus has made any demands about Skymark's future business structure. He said it "is reserving all its rights and remedies”.
In late 2012, an aviation research firm in Australia - the Centre for Aviation – predicted the initiative as being doomed to fail in a detailed analysis of Skymark’s “quixotic order”. They commented on its plan to have the fewest seats of any A380 operator in the world—only 394. They also remarked on its lack of airline partners to provide feed traffic. Skymark planned to begin its initial A380 service from Tokyo to New York in late 2014.
While this is a problem for Skymark, it is also a problem for Airbus. They have been struggling with the A380 since its first flight in April 2005.
They sold 318 A380 planes to 19 customers and have delivered 135 jets as of the end of June 2014. So far, planes delivered have been unprofitable, though Airbus hopes to break even on A380 shipments from next year. That would require about 30 A380 deliveries each year. Airbus still needs to book further orders to secure that production rate from 2016.
So, due to a lack of planning, Skymark have caused a massive problem and possibly created the demise of their own airline.