Silviase/jgov_v1.4_full_ann huggingface dataset:
examine the effects of the policy change by econometric analysis, focusing on the airlines' behavior and cost structure.

## 2 Evolution of Domestic Air Transport Policy

In 1952, Japan Airlines was established as a major private company and started service in domestic markets. The following year, Japan was allowed to operate an international air transport service, and the government decided to reform JAL to a "half public" corporation. The purpose of this reform was to foster the company as a national flag carrier. $ ^{1} $ Around that time, several private airline companies were founded. These companies were small and their business conditions were unstable, so some bankruptcies and consolidations occurred. In 1957, the two biggest of these carriers merged to form All Nippon Airways, which is the second major and purely private carrier. After that, the remaining companies had also undergone integration and consolidation, and in the mid-1960s, four airline companies in Japan existed: JAL, ANA, Japan Domestic Airlines (JDA) and Toa Airways (TA). In the second half of the 1960s, TA developed a cooperative arrangement with ANA, as did JDA with JAL. As a result, it was assumed that they would be consolidated into the big two, JAL and ANA.

However, the government policy changed its course due to the Cabinet Meeting Resolution “Concerning Airline Operations” of November 1970 and the Notice from the Minister of Transport in July 1972. The Cabinet Meeting Resolution of 1970 specified not a two-company system, but rather a three-company system resulting from the consolidation of JDA and TA. This sudden policy change was said to be brought about by strong political pressure from particular corporate groups, and this is clear evidence that Japanese government policy could be moved by influential private bodies at that time. Furthermore, the ministerial notification of 1972 laid out specific rules, etc., pertaining to the business fields of the three firms and increasing transport capabilities. According to this decision and notification, generally referred to as the “Aviation Constitution,” Japan Airlines would be responsible for international routes and domestic trunk routes; ANA would be responsible for domestic trunk routes, local routes and short-distance international charter flights; and Toa Domestic Airlines, the new company resulting from the consolidation of JDA and TA, would be responsible for local routes and a portion of domestic trunk routes. Thus, the so-called 1970-1972 airline regulation system (the old regime, hereafter) was established. $ ^{2} $

The old regime was intended to secure and nurture transport capacities of all members of the airline industry by establishing a segmented business base for each firm. $ ^{3} $ In actuality, trunk
route (Sapporo - Tokyo - Osaka - Fukuoka) markets grew much faster than other “local” markets and became a source of internal cross-subsidization. Under this internal cross-subsidization system, each carrier expanded their route network, and at the same time, succeeded in stabilizing their business. In 1970s, the average growth rate of revenue passenger kilometers in the domestic market was 12.2% and that of international market was 42.4% (!).

However, during the period from the end of the 1970s to the mid-1980s, new trends were witnessed in the field of air transportation. For example, the United States deregulated its domestic air transport market, and the results of this policy change sounded all over the world. In Europe, the Thatcher government started its privatization policy, in which British Airways was the most important objective. Influenced by these policy trends of foreign countries, it was in this period that general opinions in Japan started to change toward a more liberal environment in industrial policy. $ ^{4} $

In technological respects, the introduction and spread of wide-body aircraft changed the market structure and competitive strategies. Especially, international air cargo transport grew very fast, and this growth spilled over to the regulation of Japanese domestic air transport. The establishment of Nippon Cargo Airways (NCA), along with its entry into the market was a case in point. The firm was jointly founded in 1978 by ANA and several shipping companies in order to accommodate the rapidly growing field of international air cargo transport. The Ministry of Transport promptly granted NCA a license in 1983 following its application. This decision essentially resulted in the collapse of the single-company system in which JAL handled international routes in the field of air cargo transport.

In 1985, the government of Japan and the United States started negotiations on the entry of NCA and concluded a provisional agreement. The provisional agreement proved to be a decisive factor which voided the significance of the old regime. The contents of the US-Japan provisional agreement allowed both countries to commence operation of three new airline companies each on trans-Pacific routes based on “balanced expansion” of the air transport of both countries. On the basis of the conditions which led to the exchange of this type of agreement, the Minister of Transport consulted the Council for Transport Policy, an official advisory committee of the Minister, about the state of the future operating status of airline corporations in September 1985. The council submitted an interim report in December 1985 followed by a final report in June 1986. Both reports indicated that the old regime needed a change, and that efforts should be made to enhance competition both in domestic and international markets. In particular, the framework of this new aviation policy was outlined as follows:
(1) international routes will be served by multiple carriers;

(2) competition on domestic routes will be promoted by new entry to a particular city-pair market;

(3) Japan Airlines will be 100% privatized.

After receiving the interim report, the government immediately decided to abolish the old regime in a Cabinet Meeting Resolution.

## 3 New Policy Since 1986

The core of the new policy adopted in 1986 can be summarized as follows. Although we do not necessarily agree with its logic, we will describe its basic features.

With respect to a competitive policy itself, the report states that “an American-style deregulation does not suit the actual circumstances of Japan” based on the limitations of Tokyo International (Haneda) Airport and Osaka International (Itami) Airport and on the problem of differences in competitive strength between airline companies. As such, the report also states that, “For the time being, it is appropriate to proceed with policies which promote competition through the implementation of flexible administrative management as much as possible.” In this report, promotion of competition specifically refers to “the promotion of double tracking and even triple tracking not in accordance with the previous demarcation of trunk routes and local routes, but rather corresponding to the size of the demand of individual routes and status of progress at airport facilities and so on.” On the other hand, the report also points out the difficulty in increasing the number of flights due to restrictions on the capacities of major airports, indicating a manner of thinking which states that, “it is necessary to attempt to further expand air traffic capacity through improvement of air transport facilities and the air traffic control system.”

With respect to domestic aviation, the Ministry of Transport changed over to a policy which promotes competition (such as in the form of double tracking and so on) based on quantitative standards, in 1986. According to these standards, new entries were judged on the number of passengers carried in the previous year. Since that policy change, double and triple tracking routes have increased gradually. In 1993, about 65% of total air transport passenger flied in either double or triple tracking routes, although the number of these routes counts for only 19% of the total.

In addition, a related bill was passed in September 1987 pertaining to the complete privatization of JAL, which led to the realization of its transformation to a private corporation in November of the same year. $ ^{5} $

However, it should be noted that the new policy did not give enough freedom for airlines to change themselves. This new policy seeks “promotion of competition” within the range of administrative operation without altering the previous systematic framework stipulated by the Civil
Aeronautics Law. In other words, the licensing system for new entry and the approval system for setting fares remained unchanged. On the contrary, some have criticized that the new policy enhanced administrative discretion, and that in some respects the regulation was strengthened, because they have to decide which route would become a double track or a triple track, and which carrier would enter. As is pointed out by the report itself, these conditions greatly differ from the United States, where deregulation was implemented through legal reforms without the discretion of the bureaucracy.

From the consumers’ view point, the new policy did not bring about substantial benefits. This is far from the case of deregulation in the United States. Many researchers showed that the deregulation of domestic air transport markets in the United States increased consumers’ surplus dramatically, and that the main factors of this benefit are price and flight frequency change. $ ^{6} $ Concerning fares, the most important effect of the deregulation was that it made air fares much more diversified and lowered them on average in real terms (“diversify” refers to the availability of many fares with different conditions). Airlines introduced many discount fares for the purpose of their yield management, while the discount fares benefit consumers who otherwise would not use air transport or pay more for the same service. It is reported that now more than 90% of passengers are making use of discount tickets.

Ito [1992] compares fares in Japan and the United States (Table 1). In the table unit fares are passenger's expenditure per kilometer. $ ^{7} $ The table shows that normal (fare basis Y) fares of the United States are higher than Japan, but that discount fares in the States are much lower than Japan. As noted above, most passengers fly with discount fares. It should be noticed that deregulation brings price diversification and not simple downward pressure on prices. From the beginning of the 1990s, discount fares have been moving toward simplification. However, since discounts rates in the States are much larger than Japan, we can say that the fare level in Japan are still higher than that of the States.

As we saw, the new air transport policy since 1986 has not brought effective competition to the market. As a result, consumers have not obtained any benefit from the policy change. Thus what Japanese government should do urgently is to make competition effective in the air transport markets. At the end of last year, the government revised the Civil Aeronautics Law to relax the conditions for introducing and setting discount fare in domestic markets, but in order to bear fruit for consumers, more drastic relaxation is needed.
## 4 The Market Structure and Performance of the Japanese Airline Industry: Descriptive Statistics

In this section we will refer briefly to the domestic market structure and performance of the Japanese airline industry, using the annual data filed in Koku Tokei Yoran (issued annually by Nihon Koku Kyokai) and Koku Yuso Tokei Nempo (by Ministry of Transport), in order to better understand the character of the Japanese airline industry.

### 4.1 The Market Structure of the Japanese Airline Industry

To begin with, we will survey the cost structure. The three major airlines' total annual cost, labor, and fuel costs (included in total cost) are shown in Figure 1 (Figure 1-1 is nominal base, and Figure 1-2 real, i.e., deflated by RPI index).

The total cost had been almost unchanged before the regulatory change, but suddenly began to increase after 1986. It is apparent that fuel costs, the share of which was around 30% at the end of 1970s, has been decreasing, and that the labor costs remained constant in real base. And Figure 2 shows that the airport charges, which are said to have been a burden for Japanese airlines, have also been decreasing. So, what have raised the total cost recently are such non-operational costs as sales and administrative costs, and commissions for travel agencies. The reason why the shares of these costs increased is thought to be that airlines' entry into new routes after the regulatory change caused airlines to spend more to attract demand. According to the context mentioned above, we may say that the ratio of fixed cost has also decreased.

Figure 3 shows changes of the big three's real average costs (operating cost per available seat kilometer). The cost trend experienced two turning points. One is 1986, the other 1990. All three companies succeeded in cost reduction in the early 1980s. Especially, JAS, the highest-cost carrier, reduced its cost greatly. The average costs remained constant or slightly increased between 1986 to 1990, and they decreased again in 1991 and 1992. As we noted earlier, the second half of 1980s boomed and the air transport policy change occurred in 1986. These are the reasons for the cost trend in that period.

In Figures 4-1, 4-2 and 4-3, the airplane size, the passengers carried by the three airlines, and the share of passengers carried are shown respectively. As noted above, Japanese domestic markets can be divided into three groups. One is what is called “triple track routes,” of which the demand in the previous year is above 700,000, where JAL, ANA, and JAS operate. Another is “double track routes,” the demand of which is above 400,000 in principle, where JAL and ANA or ANA and JAS operate, $ ^{8} $ and the other is a monopoly.

Among the 179 domestic routes in 1991, $ ^{9} $ the number of triple track ones are 10 (5.6%),
double track 24 (13.4%), and monopoly 145 (81.0%). However, the number of passengers carried in triple track was 29,484,000 (42.9%), double track 15,530,000 (22.6%), and monopoly 23,673,000 (34.4%). So the average market size of triple (double) track routes are eighteen times (four times) larger than that of monopoly. In addition, these Japanese routes are also classified into trunk routes and local routes. The definition of the former city-pair routes is that they connect Sapporo (Shin'Chitose), Tokyo (Haneda, Narita), Osaka (Itami $ ^{10} $ ), Fukuoka, and Naha, and the number of the passenger carried in 1991 in the trunk routes was 25,840,000 (38.2%), which happen to include many triple and double track routes.

Before the regulatory change, with regard to the domestic markets, JAL has been in operation only in trunk routes. Under the new policy, JAL was authorized to operate in domestically denser local routes; that is some double and triple track routes. Generally speaking, the denser the market, the wider airplanes employed tend to be. It is clear that JAL always employs the largest type of airplane. However, after the regulatory change JAL's aircraft size shrunk slightly, whereas ANA and JAS have come to employ the larger aircraft. The reason is that the markets JAL was newly authorized to enter were smaller than those which he had been in operation before the regulatory change, while, roughly speaking, in the case of ANA and JAS, it was vice versa.

On the other hand, ANA has already been in operation both in the trunk routes and in denser local routes (see the passenger share in Figure 4-2), so there has been no room left for ANA to enter the domestic market. The routes ANA has newly entered are both international (for U.S. and Europe) and domestic long haul monopoly routes newly authorized (e.g., Shin'Chitose/Okayama, etc). So the average aircraft size became larger, especially since the regulatory change.

With regard to JAS, it was authorized to enter some domestic trunk and shorter haul international routes, but the extent of entry was less than that of ANA. Figure 4-1 shows that the average aircraft size of JAS became larger in almost the same way as ANA.

Finally, let us investigate the share of departure from each airport by Figure 5. Figure 5-1 shows the situation in 1979, while Figure 5-2 shows that of 1992. As Tokyo and Osaka areas have by far the largest population, so it has been said that departures are concentrated at both Handeda and Itami, and this is as true as ever. However, as the capacity constraint at Itami Airport has been substantial, and has prevented airlines from increasing departures responding to the demand increase, the departure share of Itami has gradually decreased. The construction of Kansai International Airport was expected to relieve traffic, but due to the high landing fees and the lack of the runway, it is said that the new Kansai Airport has not yet played a great role toward solving the problem.

### 4.2 The Performance

Here we will survey the market performance of the Japanese domestic airline industry after
regulatory change, $ ^{12} $ but as mentioned in the case of the load factor, we can say that not so much the regulatory change as the boom caused the higher profit rate, because the recession from 1991 apparently lowered the profit. According to the surveys above, where we found that total cost has been increasing while yields decreased, it is said that the profit rate after the regulatory change is quite unstable, and is ruled by cyclical business conditions.

## 5 Service Competition and Demand Character in Double/Triple Track Routes

In this section we will clarify the effect of authorization of entry on airlines' competition by econometric analysis. It is generally thought that almost all kinds of competition, e.g., through price, frequency, and service quality, have been forbidden since the introduction of the old regulatory regime. On the other hand, it is pointed out that Japanese airlines have engaged in such competition as employing newer type of airplanes. $ ^{13} $ in addition it is true that the MoT in Japan intended to promote competition among airlines since the abolishment of the old regulatory regime. In effect, with respect to domestic aviation policy, the MoT authorized JAL and JAS to enter the routes where ANA already operated as incumbent, so that 34 double or triple track routes were formed by 1992 (See Table 2).
Table 2. The domestic double and triple track route in 1992, and the number of the firms in operation during the period 1989-92.

City Pair Route	92	91	90	89	Firms	City Pair Route	92	91	90	89	Firms
1. Tokyo/Sapporo	3	3	3	3	17. Tokyo/Nagasaki	3	3	2	2
2. Tokyo/Osaka	3	3	3	3	18. Tokyo/Kumamoto	3	3	2	2
3. Tokyo/Fukuoka	3	3	3	3	19. Tokyo/Oita	2	2	2	2	ANA, JAS
4. Tokyo/Naha	3	3	3	3	20. Tokyo/Miyazaki	2	2	2	2	ANA, JAS
5. Osaka/Sapporo	3	3	2	2	21. Tokyo/Kagoshima	3	3	3	3
6. Osaka/Fukuoka	2	2	2	2	JAL, ANA	22. Osaka/Sendai	2	1	1	1	JAL, ANA
7. Osaka/Naha	2	2	2	2	JAL, ANA	23. Osaka/Matsuyama	2	2	1	1	JAL, ANA
8. Fukuoka/Sapporo	2	2	1	1	JAL, ANA	24. Osaka/Kochi	2	2	2	2	ANA, ANK, & JAS
9. Fukuoka/Naha	2	2	2	2	JAL, ANA	25. Osaka/Kagoshima	3	2	2	2
10. Tokyo/Kushiro	2	2	2	2	ANA, JAS	26. Nagoya/Sapporo	2	2	2	2	JAL, ANA
11. Tokyo/Hakodate	2	2	2	2	JAL, ANA	27. Nagoya/Sendai	2	2	2	2	ANA, JAS
12. Tokyo/Akita	2	2	1	1	JAL, ANA	28. Nagoya/Fukuoka	2	2	2	2	JAL, ANA
13. Tokyo/Kanazawa	3	3	2	2	29. Nagoya/Nagasaki	2	2	2	2	ANA, JAS
14. Tokyo/Hiroshima	3	3	3	2	30. Nagoya/Kagoshima	2	1	1	1	JAL, ANA
15. Tokyo/Takamatsu	2	2	2	2	ANA, JAS	31. Nagoya/Naha	2	2	1	1	ANA, JAL & JTA
16. Tokyo/Matsuyama	2	2	2	2	JAL, ANA

Note: (1) The route where ANA and ANK or JAL and JTA operates is not regarded as double track, because they are horizontally integrated.

(2) Firms which operate for less than 6 months in a year are not included.

(3) JAL, ANA, and JAS operate in all the triple track routes.

(4) The following local routes are excluded, because of their apparently smaller market size.

Fukuoka / Kagoshima, Kagoshima/Amami, and Naha/Ishigaki

However, it is quite obscure what kind of competition MoT intends to introduce. In the following parts, the regression model referred in Douglas and Miller $ [1974b] $ will be constructed in order to verify the null hypothesis that a kind of service competition (like frequency competition) did not exist in double or triple track routes as a result of regulatory change. And through the analysis, we will clarify the demand character in the area.

### 5.1 Service Competition Model

According to Douglas & Miller [1974b], if the additional demand increase of an individual firm i due to the additional increase of frequency $ \frac{\partial PAX_{i}}{\partial FRQ_{i}} $ is greater than that of the market, i.e., $ \frac{\partial PAX_{i}}{\partial FRQ_{i}} > \frac{\partial PAX}{\partial FRQ} $ , then airlines are supposed to choose the frequency competition as their strategy to increase their passenger share. Indeed one may say it is inappropriate to apply Douglas & Miller's theory to the Japanese airline industry, where the airport capacity is limited, but
it is possible to think that the knowledge of demand character mentioned above induces Japanese airlines to apply to the Japanese MoT for entry into double or triple track routes in order to increase their traffic share. This will be further accelerated when the capacity limitation in airports is loosened in the future.

In addition, let us suppose the other hypothesis inherent in the case of the Japanese airlines; that is, if $ \frac{\partial PAX_{i}}{\partial EQ_{i}} > \frac{\partial PAX}{\partial EQ} $ , then the airline are supposed to choose the equipment competition. The reason for supposing this hypothesis is that Japanese airlines, especially JAL and ANA, are said to have been in competition to employ the newer type of airplanes than the other since the 1970s.

Here let us construct the log linear regression models (1) and (2) in order to test these two hypotheses.

$$ L n\left(\frac{P A X_{_{i}}}{\displaystyle\sum_{j=1}^{n}P A X_{_{j}}}\right)=\alpha_{_{1}}+\sum_{k=89}^{91}\beta_{_{1k}}A D_{_{k}}\left.+\left(\gamma_{_{1}}+\sum_{k=89}^{91}\delta_{_{1k}}A D_{_{k}}\right)L n\left(\frac{F R Q_{_{i}}}{\displaystyle\sum_{j=1}^{n}F R Q_{_{j}}}\right)+\upmu\right. $$

where n is the number of firms in operation in a route, $ PAX_{i} $ is the total annual traffic carried by the i th firm in a city pair route, $ FRQ_{i} $ is the total annual departures of the i th firm in a city pair route, and $ \mu $ is the error term.

$$ L n\left(\frac{P A X_{_{i}}}{\displaystyle\sum_{j=1}^{n}P A X_{_{j}}}\right)=\alpha_{_{2}}+\sum_{k=89}^{91}\beta_{2k}A D_{_{k}}\left.\displaystyle+\left(\gamma_{_{2}}+\sum_{k=89}^{91}\delta_{2k}A D_{_{k}}\right)L n\left(\frac{E Q_{_{i}}}{\displaystyle\sum_{j=1}^{n}E Q_{_{j}}}\right)+\upmu\right. $$

where $ EQ_{i} $ is the number of seats per flight of the i th firm in a city pair route.

In addition to the models above, we suppose that each firm is to increase its demand share by increasing its total seat supply (i.e., $ S_{i} = FRQ_{i} * EQ_{i} $ ) share. In this case the carrier is supposed to choose the mixed strategy of increasing departure and widening bodies optimally in order to increase its own demand share under the circumstances or constraints (e.g., slot constraint) the carrier faces.

$$ \frac{PAX_{i}}{PAX}=\alpha_{3}\Bigg(\frac{S_{i}}{S}\Bigg)^{r}=\alpha^{3}\Bigg(\frac{FRQ_{i}}{FRQ}\Bigg)^{\gamma^{3}}\Bigg(\frac{EQ_{i}}{EQ}\Bigg)^{\phi^{3}} $$

$ (r = \gamma^{3} + \phi^{3} $ if profit exists for firm i, r > 1). Here we construct a multiple regression demand share model where the share of departure and that of seats are dependent variables (See equation (3).