Troubled Japanese Carrier Skymark Airlines Chooses Boeing Amidst Conflict with Airbus

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Jan 30, 2015
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While everyone is busy speaking of increasing carrier profits due to plunging oil prices, Japan’s third largest airline, Skymark Airlines (TYO: 9204), filed for bankruptcy because of rising losses and poor liquidity on the back of a weakening yen and differences with Airbus (EADSY, Financial). The airline believes its ill fate was caused by the failed deal with the European jet maker for 6 A380 superjumbo jets. Skymark is seeking bankruptcy protection and is looking to get restructuring support from a private-equity firm. The major decision that the carrier has taken for the restructuring is to maintain a Boeing (BA, Financial) only fleet. Here’s a low down on what happened.

Skymark’s sad state of affairs
Founded in 1999 the budget airline started its journey with a fleet of Boeing 737 narrow-body aircraft and believed having just one model in the fleet resulted in cost reduction. Skymark’s strategy was to charge less than half what its rivals were charging. However, with time the carrier started competing with the top players of the space and in 2010 decided to expand its fleet of 28 737s and mix it up a little. That’s when it ordered 10 A330s and 6 A380 superjumbos. Later in July 2014, Skymark cancelled the order for the superjumbos, triggering its conflict with Airbus.

The airline started facing cash crunch problems because of the dollar-denominated increasing cost of leasing aircraft and purchasing fuel from abroad. On top of that the decision to buy the A380s created all the trouble. As yen weakened, the cost of owning the models kept on increasing and reached a point where it became difficult for the carrier to continue. During the first 6 months of the year Skymark reported net loss of 5.7 billion yen (~$50 million). In its bankruptcy filing, the carrier mentioned its liabilities mounted to 71.09 billion yen ($605 million). Its poor performance also had a negative impact on its stock, and the latest cancellation of $2.5 billion worth A380 orders pushed down the stock price further.

Till date Skymark has already paid as much as 26.5 billion yen (~$226 million) to Airbus and the engine suppliers as pre-delivery charges, and now could be slammed with another charge – fine for cancelling the order. Airbus has asked for $700 million as the cancellation fee and this has caused the airline’s condition to deteriorate even more.

The case against Airbus and in favor of Boeing
This marks a big loss for Airbus in a market that has been long dominated by Boeing. Japan’s aviation market is dominated by airlines such as All Nippon Airways (ANA, Financial) and Japan Airlines (JAL, Financial) and these players consider Boeing to be a favorite while shopping for commercial jets. Boeing values the market’s potential at $280 billion and believes as the market grows over the next 20 years, demand for 1,360 new aircraft will arise. The American aero major has cherished the fruits of the Japanese plane market for decades as it single handedly met almost 80% of the demand for jets.

From all this one can easily understand that entering such a market is not a child’s play and Airbus was just started gaining traction. The cancellation affects the European jet maker in two ways – first, the orders for A380 dropped which weren’t much in the first place, and second, its exposure in Japan reduced. But the worst of all was Skymark’s decision to go back to Boeing and start maintaining an all-Boeing fleet again. This clearly hints at how reliable the Japanese carrier finds Boeing to be – something that can drive other players in the country to flock towards the Chicago based jet maker.