Sept. 20 (Bloomberg) -- Skymark Airlines Inc., Japan's largest discount carrier, came back from two years of losses by doing something the country's biggest airlines have failed to do: win new domestic customers and the prospect of at least a 50 percent gain for shareholders.

Skymark is attracting passengers with fares as much as 48 percent cheaper than Japan Airlines Corp. and All Nippon Airways Co. amid a slump in Japanese wages. The airline, which made a first-quarter profit, is also cutting costs by converting to a single type of aircraft, mimicking the strategy of Southwest Airlines Co., the world's largest low-fare carrier, and Ryanair Holdings Plc, Europe's biggest discounter.

``It's out of the crisis,'' said Mitsushige Akino, who oversees $468 million at Ichiyoshi Investment Management Co. in Tokyo. ``Skymark's stock is going to gain as investors put a premium on its growth prospects.''

The shares may climb to 350 yen in the next six months from today's closing price of 232 yen because Skymark has higher growth potential than rivals such as All Nippon, said Yasuhiro Matsumoto, an analyst at Shinsei Securities Co. in Tokyo.

Skymark's stock, already up 24 percent this year, is still worth less than one-seventh of its February 2005 peak of 1,770 yen.

`They're Cheap'

Passenger traffic at Skymark is surging as an eighth month of declines in Japanese wages in July makes consumers more price-conscious.

``There is a move to buy cheaper goods in Japan,'' said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo. ``The rise of the Internet has made it easier to compare prices, and that has helped discount airlines.''

Skymark's basic fare to fly from Tokyo to Sapporo in Japan's northern island of Hokkaido in October is 16,000 yen ($138), compared with 30,700 yen at All Nippon and Japan Air, according to fare announcements from the carriers.

Like most discount airlines, Skymark doesn't offer free drinks, snacks or newspapers on most flights.

``I fly with them because they're cheap,'' said Hiroki Fukui, 32, an assistant university professor waiting to board a flight at Tokyo's Haneda airport. ``I've flown with them half a dozen times now. I don't mind if there aren't any frills.''

The airline carried 40 percent more customers in the six months ended June 30 than a year earlier, compared with a 0.9 percent slide at All Nippon and a 1.5 percent drop at Japan Air. Skymark forecasts a profit in the full fiscal year, only its third since flights began in 1998.

The discount airline still has room to grow. It flew 1.7 million passengers in the first six months of this year, less than a 10th of Japan Air's 20.5 million or All Nippon's 21.3 million.

Cutting Routes

Skymark, which only flies within Japan, has moved quickly to cut routes that weren't making money. That helped it fill 75 percent of seats on flights in the three months to June, compared with an average of 56 percent a year earlier.

By comparison, Japan Air filled 59.2 percent of its seats last quarter and All Nippon filled 59.9 percent. The two bigger airlines have increased the pace of cuts to unprofitable routes since Skymark's changes last year. Still, Japan Air backed off from ending flights between the cities of Matsumoto and Sapporo earlier this year amid local opposition.

``Skymark never treated routes as a public responsibility and so didn't hesitate to cut them,'' said Shinsei's Matsumoto.

Skymark ended flights to three destinations at the start of last year and started flying between Tokyo and Sapporo, the world's busiest air route according to figures compiled by Japan Air, with almost 10 million passengers in 2006.

Fleet Conversion

Skymark will also save on fuel, training and maintenance by converting its entire fleet of 11 planes to Boeing Co. 737-800 aircraft.

The carrier added its fifth Boeing 737-800 last month. The company plans to replace its six Boeing 767-300ERs by March 2010, President Shinichi Nishikubo said last month.

The 737s burn about 43 percent less fuel than Boeing 767s, according to estimates from Japan Air. Skymark didn't provide a comparison of costs.

Southwest also flies exclusively 737s. The Dallas-based carrier had 22 of the aircraft after nine years of flying, the same period Skymark has been in business. It now has more than 500 planes and is the only major U.S. airline to have an investment-grade credit rating. Ryanair has 120 Boeing 737s and made an 11th straight annual profit last fiscal year.

By comparison, Japan Air has 23 types of aircraft, dominated by Boeing 767s and four-engine Boeing 747s. All Nippon has 11 types, with 767s being the most popular.

Fuel Costs

Fuel-efficient planes may not be enough to offset a surge in oil prices.

Crude oil, the raw material for jet fuel, rose to $82.51 yesterday, the highest intraday price for futures since trading began in 1983. Jet fuel, the biggest single cost for Asian airlines, has gained 29 percent this year and traded at a record $93.55 a barrel yesterday in Singapore.

Unlike its bigger rivals, Skymark doesn't hedge fuel costs, making it more susceptible to price increases. At the end of June, All Nippon had hedged 73 percent of its fuel needs for the fiscal year ending March 31, according to spokesman Atsushi Asano. Japan Air has hedged 65 percent of its needs, said spokesman Stephen Pearlman.

``Fuel costs are going to pressure profits,'' said Kiyoshi Ishigane, who helps oversee $61 billion in assets at Mitsubishi UFJ Asset Management Co. in Tokyo.

Fare Wars

All Nippon and Japan Air are also responding to Skymark by cutting fares. Earlier this month, they announced discounts for early morning and afternoon flights from Tokyo to Sapporo with prices as low as 14,900 yen, or 51 percent cheaper than regular fares, and less than Skymark's regular fare.

The budget carrier is undercutting those fares with discounts of as much as 24 percent for bookings eight days in advance, with tickets to Sapporo from Tokyo as low as 12,100 yen.

So far, Skymark is winning the price wars, luring passengers from the more established carriers in a market where consumers are known for their loyalty to well-known brands. Eriko Nitta, a 31-year-old housewife, recently flew with Skymark for the first time, on a visit to Tokyo from Hokkaido.

``They're cheap,'' she said. ``I was a little nervous because I didn't know what to expect. They were absolutely fine.''

To contact the reporter on this story: Chris Cooper in Tokyo at ccooper1@bloomberg.net

Last Updated: September 20, 2007 03:17 EDT