Japan's airline industry is set for a major transformation in 2012 with the debut of three low-cost carriers, as airline executives bet that there is enough demand to match the sudden emergence of a competitive LCC market.

Japan is a late arrival on the low-cost scene compared to other mature airline markets. It has had only a few locally based carriers—most notably Skymark Airlines—offering low-cost service, but now both Japan Airlines (JAL) and All Nippon Airways (ANA) are setting up joint-venture LCCs.

ANA is one of the partners launching Peach Aviation in March, and is also teaming with Malaysia-based AirAsia to debut AirAsia Japan in August. JAL will introduce Jetstar Japan by the end of 2012 in partnership with Qantas subsidiary Jetstar. The main battleground will be Tokyo Narita International Airport, where AirAsia Japan will go head-to-head with Jetstar Japan as well as new service from Skymark.

The Jetstar and AirAsia branded LCCs are drawing heavily on their overseas partners' expertise in low-cost operations. JAL will not participate actively in setting up Jetstar Japan's business model or in its operations, says JAL President Masaru Onishi. The business plan will be determined more by the Jetstar Group. JAL was not involved in selecting the CEO of the Japanese startup, who is from outside the airline industry.

While ANA is also relying on its overseas partner's low-cost savvy, AirAsia Japan CEO Kazuyuki Iwakata is an ANA veteran, and about 20 other ANA employees have been seconded to get the carrier started. However, Iwakata notes that recruiting from outside ANA has now begun.

Iwakata says that while help from ANA specialists is required to set up the LCC, it is vital that the full-service culture is not transferred from ANA. “The most important thing for us is the LCC culture, and we're learning a lot about that from AirAsia,” he says.

The three new LCCs will each begin with just a handful of aircraft, but have ambitious growth plans. AirAsia Japan, for example, plans to have four Airbus A320s by the end of 2012, and expects the fleet to increase to 30 in 2016. This will include A330s from 2013 for medium- and long-haul international flights.

AirAsia Japan's goal is to be carrying more than 10 million passengers annually within five years. Iwakata says this is an achievable target, as the “Japanese LCC market potential is huge.”

New capacity at Tokyo's two airports has been the major catalyst for the emergence of LCCs. “For a long time in Japan, LCCs couldn't grow because of limited capacity at the Tokyo airports,” says Iwakata. But that situation has changed in the past few years, with Haneda opening a fourth runway and Narita gaining approval to increase slot numbers, which has created opportunities for LCCs.

The current market share for LCCs in Japan is less than 10%. Iwakata is “very optimistic” about the demand for low-cost travel, and because of this, he is not worried that there will be two other LCCs planning to begin operations in Japan next year. “I don't care how many LCCs appear, the [potential] market is enough to compete with others.”

Iwakata says the Japanese airline market is in a stage similar to Europe's in the 1990s, before the boom in European budget carriers that now account for as much as 30% of traffic. LCC market share in Japan should be similar to what it is in Europe and North America, he asserts.

While some traffic will be diverted from full-service carriers, LCCs will mainly stimulate new demand, says Iwakata. The introduction of low-cost service will give people another option for weekends, instead of expensive alternative leisure activities, he says. Domestic fares are relatively high in Japan, so many people cannot afford to fly often to visit family. However, they would do so if lower fares were available.

ANA CEO Shinichiro Ito stresses that the different hub cities for Peach and AirAsia Japan will mean little overlap for the two LCCs that ANA has helped to establish. Iwakata agrees there will not be much need for head-to-head competition initially, but the two will eventually compete on some routes.

AirAsia Japan's growth plan highlights the rapid expansion that could occur in the LCC sector. It intends to begin flying from Narita with two A320s in August, and the first three domestic routes will be to Sapporo, Fukuoka and Okinawa. A third A320 is due to arrive in October, allowing flights to the South Korean cities of Seoul and Busan. A fourth A320 will be added by the end of 2012, and there will be around 25 within five years.

The aircraft will be leased, and will likely come from existing AirAsia orders, says Iwakata. Discussions are under way with AirAsia regarding the leasing arrangement.

AirAsia Japan intends to place A330 orders sometime in 2012, with the first aircraft to arrive in 2013, says Iwakata. The carrier plans to expand the A330 fleet to 10-12 aircraft. Potential long-haul markets include Thailand, Singapore, Indonesia, Hawaii, Australia and New Zealand.