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JAL Shareholder Discounts Lose Allure on Budget Competition

Japan Air’s Shareholder Fares Lose Allure on Budget Competition
A Jetstar Japan Co. aircraft, center, taxies near two Japan Airlines Co. (JAL) aircraft at Narita Airport in Narita City, Chiba Prefecture, Japan. Photographer: Tomohiro Ohsumi/Bloomberg

The rise of budget carriers is undermining a perk for retail investors in Japan Airlines Co.’s initial public offering of as much as 663 billion yen ($8.4 billion) -- cheap tickets.

Individual investors, who held 59 percent of JAL shares before its 2010 bankruptcy and delisting, are being offered discount coupons as the carrier holds the biggest IPO worldwide since Facebook Inc. Such vouchers used to give travelers some of the cheapest tickets in Japan. Now, they can be undercut by low-cost airlines, such as Jetstar Japan Co. and AirAsia Japan Co., which advertise fares a third of JAL’s prices.

“I have absolutely no interest in buying JAL stock again,” said Takashi Uema, 59, who used shareholder vouchers before the Tokyo-based carrier’s bankruptcy, which wiped out his investment. He was waiting for an AirAsia flight this week at the city’s Narita airport, which was “even cheaper than using a discount coupon,” he said.

Retail investors may also be deterred because JAL is offering a less generous voucher package than larger rival All Nippon Airways Co., said Ryota Himeno, an analyst at Barclays Plc. JAL is re-listing following a government-backed turnaround that has sparked opposition-party complaints about tax breaks.

‘Difficult Sell’

“It’s proving a difficult sell to individual investors,” Himeno said. “JAL’s discount-coupon deal isn’t as good as ANA’s and there are political risks.”

The JAL vouchers will give holders a 50 percent discount on a domestic coach-class flight. Stockholder will get one coupon a year for every 100 shares they own up to 1,000. After that, the number of shares needed for extra coupons increases.

Investors will need to spend at least 350,000 yen on JAL stock to get a voucher, based on the 100-share minimum and the 3,500 yen to 3,790 yen IPO price range announced today. ANA shareholders can get two coupons a year for half-price flights after an investment costing 177,000 yen, based on today’s 177 yen closing price. The Tokyo-based carrier gives two vouchers for every 1,000 shares held up to 4,000. Beyond that, the number of vouchers tails off in a similar manner to JAL.

Uema bought shares in ANA partly to get discount vouchers, the retiree said as he waited for his AirAsia flight to Okinawa. Half of ANA’s shares were owned by individuals and others as of March 31, 2011, according to its annual report. Financial institutions were the second-largest category owning 24 percent. Retail investors own about 20 percent of Tokyo-listed shares by market value, according to Tokyo Stock Exchange Group Inc.

JAL investors will get bonus vouchers if they hold onto 300 shares for at least three years, according to the carrier’s prospectus.

Sze Hunn Yap, a JAL spokeswoman, declined to comment. The carrier is due to list shares on Sept. 19.

JAL Turnaround

The airline is returning to the stock market after cutting 30 percent of routes, retiring its fleet of Boeing Co. 747 planes and shedding staff in a restructuring prompted by three losses in four years through March 2009. The carrier is predicting a profit of 130 billion yen this fiscal year. It will also benefit from tax credits against past writedowns, which has prompted the opposition Liberal Democratic Party to draft a bill to change these regulations.

Growing Competition

JAL is facing growing competition from budget carriers who are luring travelers with lower fares. Jetstar Japan was offering one-way tickets from Tokyo’s Narita to Sapporo leaving on Dec. 1 for as low as 6,790 yen on its website yesterday. AirAsia Japan was charging 4,580 yen for the same trip and JAL fares started at 12,400 yen.

“You don’t necessarily need to be a shareholder to get cheaper tickets anymore,” said Nicholas Cunningham, a Tokyo-based analyst at Macquarie Group Ltd. “The growth of the LCCs may reduce the value of the coupons.”

The three budget carriers that began flights this year -- Jetstar Japan, AirAsia Japan and Peach Aviation Ltd. -- all filled about 90 percent of domestic seats during this month’s peak holiday season. JAL and Tokyo-based ANA both had load factors of less than 80 percent for flights within the country, and both reported declines from a year earlier.

JAL has tapped into the discount market by investing in Jetstar Japan, which is also part-owned by Qantas Airways Ltd. ANA has similarly got stakes in Peach and AirAsia Japan, a venture with AirAsia Bhd., the region’s largest discount carrier.

Voucher Advantages

JAL shareholder vouchers still have some advantages over budget airlines, including a wider network and the possibility of using them for short-notice trips and during peak travel periods when budget carriers traditionally raise fares.

“Passengers do have a choice of when to use coupons,” said Shozo Shibata, who usually flies with ANA or JAL, as he waited to board his first Jetstar Japan flight. “During busy periods, when low-cost carriers’ tickets are expensive, it’s handy to use them.”

Still, as the new low-cost carriers expand their fleets they will be able to offer more flights and a wider range of destinations. Jetstar Japan has said it may have 100 planes by 2020 and its Chief Executive Officer Miyuki Suzuki has predicted that budget carriers may account for 35 percent of the nation’s air travel by the end of the decade.

The new carriers “are really cheap,” said Shigeru Sasaki, before boarding a Jetstar Japan flight from Narita to Sapporo with his family. “If you’re just traveling for fun, then they do the job.”

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