How a Budget Chinese Airline Carved a Niche in Japan

Knowledge@Wharton

Republished with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.

Spring Airlines, China’s first and largest budget airline, is continuing to blaze new trails in Asia. Its Japanese subsidiary, Spring Airlines Japan, is run by Wang Wei, son of legendary entrepreneur Wang Zhenghua, the airline’s founder who also started one of China’s largest tour companies, Spring Group. Knowledge@Wharton recently spoke to Wang to talk about his experiences operating a Chinese budget carrier in Japan. Initially considering a career as a consultant or teacher, Wang was persuaded by his father to set up an airline in Japan, where he had previously studied and worked.

Spring Airlines Japan launched its first flight in August 2014. Since then, its passenger volume has increased by 59.3% annually. The carrier serves four Japanese domestic routes and two international routes between Japan and China. It is planning to enter more international markets in the near future.

An edited transcript of the conversation follows.

Knowledge@Wharton: How did the founding of the airline in Japan come about?

Wang Wei: As early as 2009, the management of Spring Airlines recognized the rising trend of Chinese tourists visiting Japan. The first international route from Shanghai to Ibaraki was launched in July 2010. Spring Airlines has since expanded to many cities in Japan and covers three metropolitan regions — Tokyo, Osaka and Nagoya.

However, according to the Sino-Japanese aviation agreement, there is a limit to the number of flights for Chinese airlines to fly to Japan. That means Spring Airlines could only fly to airports near Osaka or Tokyo.

Based on the market’s potential, my father decided to set up a subsidiary in Japan, which is a way to avoid Japan’s regulation on airline routes. The plan is to offer more efficient flight routes for tourists visiting Japan.

Knowledge@Wharton: You were not working for Spring Airlines at that time, right?

Wang: I worked for a Japanese consulting company for many years after my graduation. I was not even thinking of working for Spring Airlines. I thought I would be more suitable at teaching.

In March 2011, an earthquake in Japan resulted in the Fukushima nuclear [disaster,] which caused panic among a lot of tourists to Japan. I volunteered to inspect the areas affected by the situation in Ibaraki. I took a lot of photos and tried hard to persuade pilots who were reluctant to fly to resume flying. After that, my father talked me into starting Spring Airlines Japan.

Knowledge@Wharton: Have you come across any regulatory barriers in starting a Chinese airline in Japan?

Wang: In Japan’s airline market, there is a rigid limit on foreign investment. In many European countries and the U.S., the upper limit of foreign investment is 49%. But it is 33% in Japan.

“We emphasize our warm and friendly service while being more affordable than traditional airlines.”

Furthermore, the foreign management headcount cannot exceed 33% and the number of foreign directors is limited to 33% of the board in Japan. That is why our legal representative and the CEO are both Japanese.

However, in our negotiation with investors, we have made it clear that [their investment] does not give them the right to appoint senior executives, including the CEO, CFO, and the HR manager.

Knowledge@Wharton: Why did your Japanese shareholders accept such an agreement?

Wang: The Japanese aviation market is dominated by two giant companies — JAL and ANA. Some Japanese would deem such a market distorted. There has to be a third party [competitor]. Spring Airlines fitted the bill.

One investor owns 25% of Spring Airlines Japan’s equity. Its main business is manufacturing and it has an affiliated company doing aircraft leasing. However, they have not asked us to lease their aircraft. They invested in us mainly because they were optimistic about the operations of Spring Airlines, as well as the huge potential of the Chinese market.

Knowledge@Wharton: It’s not easy to build trust and negotiate such deals. Was your father involved?

Wang: The first, second and third rounds of negotiations were mainly conducted by me and [a colleague who] specializes in financial structure and equity structure design. However, when the deal was close to being signed, my father made the final push.

In 2012, after political acrimony [arose between Japan and China over the disputed ownership of] the Diaoyu Islands, there were many [investors] who felt disturbed. My father came to Tokyo to talk to them face to face — and they signed the deal the next day. I guess that’s due to his unique personal charisma.

Knowledge@Wharton: There are already some low-cost airlines in the Japanese market. How do you compete with them?

Wang: There are three major low-cost airlines — Peach airlines targets women passengers, Jetstar [Japan] is mainly a low-priced [carrier] and Vanilla Air focuses on leisure travelers.

[To set ourselves apart,] we emphasize our warm and friendly service while being more affordable than traditional airlines and we also offer better service than other low-cost airlines.

At present, our domestic flight in Japan costs one-third less than the Shinkansen (Japan’s high-speed rail service) rate. We have been among the best low-cost service airlines, according to the aviation media.

“You have to do everything attentively and devotedly. Only by doing that, would others trust you and ask you to do things for them.”

Knowledge@Wharton: How many routes do you fly now?

Wang: We have four Japanese domestic routes and two international routes — from Tokyo to Wuhan and Tokyo to Chongqing. Both are major cities in middle-China. We are going to launch more international routes in the near future — from Tokyo to Tianjin, Harbin, Xian and Qingdao. These are major cities from which Spring Airlines has already operated flights to Japan.

Knowledge@Wharton: What are the challenges of running an airline company in Japan?

Wang: The Japanese take time to try something new. They trust recommendations by friends, relatives and colleagues. So our passenger load factor was not high at the beginning. However, it is gradually rising after more passengers tried our flights.

For the same reason, it is not easy to hire people for new companies in Japan. The Japanese join one company after graduation and work all the way to retirement. Job-hopping is very rare in Japan. However, when we started having more flights as well as better market exposure, young people, including freshmen, were willing to work for us.

Knowledge@Wharton: What are the major differences in the management of low-cost airlines in Japan and in China?

Wang: The operational costs are higher in Japan. For example, all the pilots and plane attendants are Japanese so expenses are higher. However, there are two low-cost terminals in airports in Japan with lower rentals, which is not available in China as yet.

On safety rules, China is stricter. On service, Japanese employees are more self-motivated. For example, Spring Japan’s flight attendants take the initiative to organize interest groups to improve the service process. In addition, for meals and goods sold on planes, Japan uses more professional third parties.

On passenger preference, the Japanese like seat selection and quick boarding, while the Chinese care more about on-flight meals. They are more likely to buy products on flight.

“On safety rules, China is stricter. On service, Japanese employees are more self-motivated.”

Knowledge@Wharton: What have you learned from your father about managing companies?

Wang: I went to Japan after high school and worked in Japan after university. My interaction with my father was actually not that much before working for Spring Airlines. Sometimes we only exchanged a few words a week. However, after I started working for Spring Airlines Japan, our communication became more frequent. Other colleagues would also mention him constantly. Since then, I have gained more knowledge and understanding of my father.

There is one colleague in Japan who has worked with him for more than 20 years and would always tell me stories from the past. For example, he mentioned that my father would clean up every table and every cup before taking on a new Spring Tour company trip. He would always say that you have to do everything attentively and devotedly. Only by doing that, would others trust you and ask you to do things for them.

Knowledge@Wharton: Your father is well known for his frugality. As his son, do you follow his style?

Wang: My understanding of his frugality is to let everything serve its proper purpose. He wants to do the best in whatever he does and that requires more resources. He spends on other things: for example, sending dozens of young people to join important industry meetings in Britain. That’s a lot of money. He has his own way of spending for a good purpose.

But in terms of life, he would tell a young girl who doesn’t want to finish [her bowl of] noodles that “if you throw these noodles away, it’s a sign of disrespect for the people who made them.”

Knowledge@Wharton: What’s the difference between your management style and that of your father?

Wang: Although I am part of the younger generation, I am actually more conservative than my father in some ways. For example, I tend to hire more experienced people. He does not stick to hiring just [people with the appropriate skills]; the driving motive is his aspiration for innovation.

The other difference is I feel less strongly about challenging myself constantly than he does. For example, I will set a goal for my current career and when I reach it, I [can relax]. But my father would quickly set a second and third goal. He has a lot of ideas and plans in mind. He is now thinking of setting up airport industrial parks and airport financial centers.

 
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