Tokyo's Narita has long been under attack for its high user charges but as privatisation nears there are promises of reform
Another year is coming to an end, and with it another 12 months without resolution to the long-running dispute between airlines and the operator of Tokyo's Narita International Airport over the world's highest landing charges. However, the controversy appears to be inching towards a new phase, as the airport's operator, the Narita Airport Authority (NAA), is at last talking publicly about reducing charges.
While its pledge has been greeted with scepticism by users, NAA insists it is genuinely committed to bringing down fees as part of a planned privatisation.
In reality, Narita knows it has to become more competitive if it wants to maintain its lead as the main North-East Asian hub. It is again close to capacity limits despite the opening last year of a second runway and eager competitors are seeking to poach business away. Nearby Incheon International Airport in Seoul is of special concern, with no capacity problems and much lower landing charges than Narita's. Opened early last year, it is winning praise for pleasing aesthetics and lack of congestion.
Tokyo's congested Haneda airport, which is one of the busiest in the world but which handles almost exclusively domestic traffic, is also set to get a fourth runway around 2009. That is expected to allow it to be formally designated an international facility for short-haul Asian services. The only international traffic at Haneda now is from charter flights within the region during overnight hours, although from 30 November four daytime "shuttle flights" were due to have begun to Seoul's domestic Gimpo airport. So unless its troubles are sorted out, Narita's future looks cloudy, as does its planned privatisation.
Since 1984 NAA has maintained Narita's landing charges at ¥2,400 ($22) per tonne - easily the world's highest. That is despite the fact that the new second runway has reduced unit costs and the steady deflation in the Japanese economy. Users are also quick to point out that NAA continues to make substantial operating profits at a time when airlines have been losing billions of dollars. IATA has not been shy of highlighting these arguments in increasingly harsh public statements over the past year as it leads the fight for Narita to reduce its charges.
Solid profit
IATA has been demanding that NAA, which recorded an operating profit of more than ¥20 billion in its last financial year, cut its charges by more than 20% to around ¥1,900 per tonne. It argues that such a reduction would still leave the airport's operator with a solid profit. The gist of IATA's argument is that Narita's charges are being kept artificially high - and significantly higher than what it costs to provide related services.
NAA counters that land costs in Japan - a country the size of California but with a population half that of the entire USA - are extremely high, and that it has been making major investments to improve facilities and operations to the benefit of users. Early in 2002, as airlines were suffering from the aftermath of the 11 September terrorist attacks, the airport even sought to increase landing charges, to ¥2,600 per tonne. The reaction was predictable.
The Japanese Ministry of Land, Infrastructure and Transport also said in November 2002 that when all costs of a flight are taken into account (including taxes and other charges not related to airfield operations), Narita is cheaper to use than some other major international airports, such as New York JFK. The ministry issued the rebuttal after the US government raised Narita's charges as a trade issue in bilateral talks for the first time. The USA and IATA flatly rejected this argument, however, countering that ICAO's definition of charges is that they are levies to defray the costs of providing facilities and services for civil aviation. Taxes, on the other hand, are levies to raise general national and local government revenues that are applied for non-aviation purposes.
This secondary quarrel aside, NAA has recently been making its first pledges to reduce charges. The president of the airport authority, Masahiko Kurono, recently said fees may be reduced from as early as 2005, although he was not specific and made no firm guarantees.
Richard Stirland, director general of the Association of Asia Pacific Airlines, which represents 17 major carriers in the region including Japan Airlines (JAL) and All Nippon Airways, is one of the sceptics. But he is hopeful the situation will eventually improve at Narita, and admits to having been taken by surprise with NAA's talk of cutting fees. "It certainly hit me between the eyes because it's the first time I've seen Narita talking about reducing its charges," says Stirland. "It's the sort of thing where one really needs to read the fine print and find out whether it really is a reduction in charges or not. But let's give them the benefit of the doubt for the time being."
IATA is less charitable, claiming that NAA's pledges are "too vague". It also worries that the operator's future sale may lead to even higher charges at Narita, which in its view would be "a failure of privatisation". It has been pressing the Japanese government to establish an economic regulatory regime over Narita to ensure that its operator cannot use landing charges as a basis for ensuring exorbitant future profitability. "We're not saying airports should not be profitable," says IATA's Tokyo-based Asia-Pacific spokesman, Tony Concil. "But most governments put in guidelines on how much profits these monopolies should be able to make [after privatisation]".
The government's financial plan for privatisation remains a central concern and is being challenged by NAA itself. While NAA is capitalised at ¥300 billion, the government wants to reduce this significantly when the authority is turned into a corporation early in 2004. It plans to convert ¥150 billion into a 10- to 15-year loan. While it would be a loan without interest, the new company would carry this ¥150 billion as a debt. NAA will not officially discuss its negotiations with the government on this subject, but IATA says the proposed loan repayment requirement will put a new and heavy cashflow burden on the company of ¥10-15 billion a year. That could require charges to be raised to cover the additional financial obligation and to ensure that profits are maintained and dividends paid to new shareholders.
Airline concerns
For their part, airlines do not seem to care whether NAA is privatised or not - only that costs come down. "Our main purpose is to have an airport that is very efficient and cheap," says Isao Kaneko, the chief executive of its biggest user, Japan Airlines. "If it is operated by a government agency or the private sector, it is not a main factor for us. I don't care."
NAA is adamant that its privatisation can and will succeed, and that charges can be reduced. Narita's operator says one of the ways it intends to enable its fees to be lowered is through a cost-cutting exercise ahead of its privatisation. NAA is destined for part-privatisation in 2007, when the government plans to sell shares through an initial public offering (IPO). This will be followed at an undetermined later date by a full divestment that will possibly include the sale of shares to a strategic partner.
When the Japanese government first talked of privatising Narita in mid-2002, it proposed to do so by grouping it with Osaka's Kansai International Airport and Nagoya's new Central Japan International Airport, also known as Chubu, which is under construction and due to open early in 2005. While Narita is fully owned by the government, private companies already hold shares in Kansai and Chubu.
IATA and other groups immediately complained that this proposed "integration" of the three airports would result in Narita's profits being unjustly used to subsidise Osaka's heavily indebted, but still expanding, Kansai. The opposition forced the government to back away, saying Narita would be privatised independently.
While many details surrounding Narita's privatisation remain sketchy, the process is due to begin in April 2004 when NAA will be "corporatised". This will require the airport to pay corporate tax for the first time, currently set at around 40-45%. But NAA believes this can be compensated for through the easing of restrictions on the type of businesses it may engage in, allowing it to pursue new revenue sources.
Revenue increase
General manager of NAA's privatisation office Tatsuya Hamada says that under a "mid-term management plan" drawn up to lay out the aims of the operator in the three-year period leading up to the planned IPO, annual revenue should be increased to at least ¥170 billion by the end of the 2006 fiscal year from around ¥140 billion in the 2002 fiscal year. Hamada says that NAA plans to achieve this in part through the operation of duty free shops, as well as through an expected increase in revenue from aeronautical charges due to natural traffic growth.
NAA is barred from operating duty free shops under regulations that govern it as a public corporation, but will be allowed to do so as a corporatised operation. Aeronautical revenues make up around 70% of the total, while the remaining 30% comes from other sources, such as office rentals. NAA eventually hopes to have a near-even split.
Hamada acknowledges that this will be difficult to attain, however, as only a small number of Narita's passengers are in transit - roughly 15%, he says, with the other 85% comprised of O&D, or origin and destination, traffic. "The transit [traffic] is very, very small," says Hamada. "So the business concept becomes different from those of the airports in Europe and the USA, which handle more transit passengers. At Hong Kong or Singapore too, 40% or 50% of their traffic is in transit."
Hamada adds that NAA is being realistic about revenue growth from duty free shops, and will concurrently target a reduction in overall costs of "at least 10% by the end of the 2006 fiscal year", mainly by not replacing employees as they retire. NAA now has 900 staff, but this will fall through natural attrition by at least 10% by the end of FY2006, he says. "We think that 700 is the appropriate number" of employees for the airport operator, adds Hamada, although he stresses that reducing staff numbers to this level is a "long-term" aim.
The mid-term plan also details progress on expansion work at the airport's Terminal 1, served primarily by foreign airlines. Construction of its South Wing is due to be completed in March 2006 and should open in July that year.
In addition, NAA hopes to extend Narita's second runway to at least 2,500m (8,200ft) from 2,180m to enable it to handle aircraft larger than the Boeing 767, which will bring in more revenue. The airport, which has an overnight curfew, opened its second runway in April last year, increasing total annual capacity to 200,000 aircraft movements from 135,000 on the primary 4,000m-long runway.
Narita opened as Japan's main international gateway in 1978 with just one runway, and a 2,500m second runway has been planned for years but in the face of fierce local opposition. In 1999 the project was officially put on hold after area farmers continued to refuse to sell their land, and plans were changed to focus on the shorter runway, which is still considered an "interim" step. To this day, one farmer staunchly refuses to sell land.
Runway extension
Hamada says NAA is hopeful that agreement can eventually be reached to enable the runway to be extended to 2,500m, and possibly to more than 3,000m. He adds that "noise countermeasures" have already been prepared to allow for 220,000 annual movements on the two runways. These include soundproofing homes affected by aircraft noise and shifting flightpaths. But increasing annual capacity above the current limit of 200,000 movements will require approval from local community groups and government authorities, which will be a challenge to secure. "By 2007, the demand will reach 200,000 movements," says Hamada. "Now it is already 180,000, so we need to expand the runway."
But he accepts that the biggest issue surrounding the airport's planned privatisation is landing charges. He says that reducing fees is a high priority for NAA, although "by how much and when has not been decided". And until a definitive plan is tabled, the sceptics will continue to doubt the Japanese government's commitment to do so.
"We have been discussing charges with them for a very long time, so if they really are serious then it is time for them to sit down with us and go over how they are going to do it and when," says IATA's Concil. "It's fine to say these nice things about wanting to reduce charges, but it is difficult to take it seriously without any real commitment or detail."
Source: Airline Business
