January 21, 2010

Keynes Killed JAL

Filed under: Uncategorized — ktetaichinh @ 5:34 am
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The airline fell victim to infrastructure stimulus gone terribly wrong. Is China next?

An inefficient route network is among the most frequently cited reasons for the demise of Japan Airlines, which filed for bankruptcy protection Tuesday. Blame the government, which has directed JAL to fly money-losing domestic routes even after it was privatized in 1987, right?

Yes, but it’s worth delving into the history of the airports those routes connect. Where did they all come from? At some point, someone thought it made economic sense to build those runways and terminals. Clearly that was wrong. The Yomiuri Shimbun newspaper reported in October that one-third of JAL’s 151 domestic routes filled fewer than 50% of their seats. Only 11 of the other 99 flights hit a load factor greater than 70%. The high landing fees that fund construction and maintenance also dragged on JAL’s bottom line—and the bottom lines of all the businesses and individuals buying tickets.

To understand this airport glut, remember British economist John Maynard Keynes and his views about the stimulative benefits of infrastructure. Generations of Japanese politicians have embraced his ideas with fervor.

Starting in the 1960s, successive governments concocted aviation plans focused on building new airports. Perhaps this was justifiable back then, when Japan was an Asian tiger economy with a growing population. But in 1964, even before the bulk of the airport construction, the bullet train appeared. At that point, and especially as the shinkasen high-speed-rail network developed, it might have been prudent to ask whether air would invariably be the most efficient way to connect domestic destinations.

Unfortunately, by then the airport boom had taken on a life of its own. During the lost decade of the 1990s, airport construction popped up in many stimulus plans. National and local politicians, not to mention the politically powerful construction lobby, wanted to put an airport in every prefecture. And ordinary airports wouldn’t do. Because Japan’s relatively small flat surface area is in such high demand, one airport after another was built on reclaimed land in the middle of the ocean at enormous expense. Despite periodic public fulminations about out-of-control costs, in practice “expensive” seemed to be viewed as a net positive.

Boosters touted airports as creators of short-term construction jobs and longer-term boons to their areas. This airport binge has continued right up to today. Japan’s 98th airport opened last year: Shizuoka-Mt. Fuji, roughly 50 miles from the famous mountain. California, with a larger land area, has around one-third as many airports in regular commercial service, with another 35 or so “reliever airports” to handle business jets and general aviation.

Japan’s strategy hasn’t worked for the airlines or the airports. Those half-empty JAL flights helped push the carrier to bankruptcy. They also translate to less revenue for airports. Take Kobe Airport, which opened in 2006: It was supposed to create 130 billion yen ($1.4 billion at today’s exchange rate) in vaguely defined economic benefits over 50 years for a region hit by a devastating earthquake in 1995. That was then. Today, Kobe is operating at roughly 60% capacity. It faces stiff competition from nearby Kansai International (built, like Kobe, on reclaimed land in the middle of a bay) and the older and more popular Itami airport in the region.

Meanwhile, one irony is that while Tokyo was busy dotting the countryside with “airports to nowhere,” it lagged on beefing up air-transport infrastructure at places that actually need it. A third runway at Narita, the country’s main international gateway, remains mired in political wrangling.



For taxpayers, the airports represent a sunk cost. JAL itself may be able to use its bankruptcy process to finally free itself of the burden of serving so many useless routes. New transportation minister Seiji Maehara in September promised to review the government fund that pays for new airports. His Democratic Party of Japan draws less support from the construction lobby that backed the Liberal Democratic Party, so Mr. Maehara may feel he owes less to the builders.

For everyone else, there’s a lesson here about the costs of Keynesian stimulus. While political debates on infrastructure spending so often focus on how much government will have to pay for a project today, businesses can end up stuck paying the price for inefficient infrastructure tomorrow—and the day after. It was just JAL’s bad luck to have to work with or around Japan’s airport Keynesianism.

Lest anyone think this is a uniquely Japanese problem, consider all the other places in the world currently undergoing their own Keynesian infrastructure booms—and especially China. For instance, a new high-speed rail line is due to connect Beijing to a station an inconvenient 45 minutes from the downtown commercial center of Guangzhou in southern China. The train will take somewhat less than eight hours to connect cities reachable in under three by air. Will enough passengers ever make that trek for the train to operate in the black?

Maybe. But if 20 years from now we’re writing about a bailout for, or the imminent bankruptcy of, China’s high-speed train operator or another similar business, they won’t be able to say the Japanese didn’t warn them.

Mr. Sternberg edits the Business Asia column.


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