1996 Reports

Domestic aviation in Japan: Responding to market forces amid regulatory constraints

Alexander, Arthur J.

Japan's airline industry appears to be thoroughly regulated by law and ministerial directive. In actual practice, however, there is much less regulation than first meets the eye and more competition than often is acknowledged. Laws not only restrict severely the entry of new carriers but also the expansion of service by existing carriers. Yet, at least two competitors vie for traffic on the 59 highest-volume routes. Despite a formally regulated fare structure, market forces strongly influence domestic passenger fares. Japanese carriers must contend for international business against the world's lowest-cost airlines by offering competing fares. In domestic cargo markets, too, the airlines compete with one another and with other modes of transportation - mainly railroads. Among international air shippers, the 40 or so foreign carriers flying into Japan offer substantial price and service competition; consequently, the price of cargo shipments results from negotiations between shippers and the airlines. Thus, while not nearly the open aviation market that prevails in the United States, the air services industry in Japan is more competitive than a surface reading of the regulatory framework might lead one to expect. The formal level of regulation has been reduced slowly over the past 10 years, partly in response to global trends in airline deregulation. In addition, aviation technology and the development of domestic demand have had major effects on the process. The main objective barrier to thorough deregulation - at least in the minds of most Japanese industry participants, government and established companies - is serious capacity constraints at Japan's major airports.