1. Business environment surrounding Japanese airlines since the COVID-19 pandemic

Japan is an island nation surrounded by sea on all sides and home to numerous remote islands. Given these geographical characteristics, the domestic aviation network in Japan serves not merely as a means of transportation, but also plays a vital role in sustaining the daily lives of local residents and supporting regional economies and tourism industries. However, the business environment for Japanese airlines supporting this domestic aviation network has reached a turning point in the aftermath of the COVID-19 pandemic.

According to the Ministry of Land, Infrastructure, Transport and Tourism's report titled Current State of Domestic Aviation (May 2025), the overall business performance of Japan's major airlines is on a recovery trend, although conditions differ depending on carrier size. All Nippon Airways (ANA) and Japan Airlines (JAL), which operate both domestic and international services, have seen their operating profit margins almost recover to pre-pandemic levels due to the recovery and expansion of international routes. In contrast, mid-sized airlines specializing in domestic operations (Skymark, AIRDO, Solaseed Air, and Star Flyer) remain at roughly half of their pre-pandemic levels. Other regional airlines (Fuji Dream Airlines, IBEX Airlines, Oriental Air Bridge, New Central Airservice, and Amakusa Airlines) face even more severe circumstances. Excluding policy support measures such as reductions in airport usage fees and aviation fuel taxes, the profitability environment for domestic flight operations remains challenging, and operating profit margins for mid-sized and regional airlines specializing in domestic routes continue to fall substantially below pre-pandemic levels.

In addition, ANA and JAL have not only benefited from the recovery of their core aviation businesses, but have also leveraged the extensive customer bases accumulated over many years to diversify into non-aviation businesses such as finance and commerce (retail and e-commerce) centered on mileage programs. As a result, they have established robust business portfolios capable of generating revenue through customers' everyday payments and shopping activities even during periods of restricted mobility for travelers. By contrast, mid-sized and regional airlines remain structurally dependent on air transportation for most of their revenues. Lacking the broad economic ecosystems enjoyed by the major carriers, these airlines are more vulnerable not only to fluctuations in passenger demand, but also to rising fuel prices and the depreciation of the yen.

2. Current state and challenges of domestic aviation

According to the same report, the number of domestic air passengers in fiscal 2023 was up 0.9% compared with fiscal 2018, effectively recovering to pre-pandemic levels. However, due to the entrenchment of telecommuting and the suppression of business travel triggered by the pandemic, demand from business travelers, who generate relatively high unit revenues, has not yet returned to pre-pandemic levels. In addition, operating costs for domestic flights have risen sharply because of global instability, inflation, and the depreciation of the yen. These factors have increased foreign currency-denominated costs such as fuel and maintenance expenses.

As a result, while unit revenue has remained flat, unit costs have increased, leading to a severe earnings environment. At a time when costs continue to rise and high-yield business demand has diminished, maintaining the domestic aviation network will require stronger air travel demand through tourism and the creation of new forms of mobility-related value. In considering future aviation demand, it is important not only to rely on the recovery of tourism demand, but also to take into account changes in the demand structure for domestic aviation resulting from population decline.

3. The impact of population decline on regional transportation and expectations for "related populations"

When working to maintain the domestic aviation network, population decline in the hinterland directly connected to demand is an unavoidable issue. The National Institute of Population and Social Security Research issued a report titled Regional Population Projections for Japan (2023 revision), which forecasts population decline in all 46 prefectures outside Tokyo between 2020 and 2050. Population decline not only weakens regional economies, but also triggers a negative chain reaction involving deteriorating management conditions for transportation operators, ultimately leading to route discontinuations and service reductions.

Against this backdrop, the concept of "related populations" is likely to become a key factor in future aviation demand. Given the current difficulty of completely halting declines in the resident population, it is necessary not only to increase the exchange population associated with tourism, but also to expand the related population; in other words, people who maintain diverse forms of involvement with specific regions. Airlines are therefore expected to serve not merely as providers of transportation, but also as a platform cultivating people from outside the region into professionals for community building. To achieve this, it is important not only to maintain existing routes, but also to adopt the perspective of reconstructing networks that facilitate interregional travel.

4. Competition and cooperation between aviation and railways

Aviation and railways exist in a competitive relationship in Japan's intercity transportation system. However, this competitive relationship changes depending on whether transfers are required. Manaka et al. (2024) demonstrate that aviation gains strong market advantages on routes where rail travel requires transfers. For example, on journeys between regional cities where rail travel requires transfers, airlines may be able not only to shift existing demand, but also to stimulate latent demand by introducing direct flights.

The relationship between aviation and railways generates not only competition, but also coordination and cooperation. In cases where aviation alone cannot bring passengers directly to their destinations, coordination with railways becomes crucial to travel convenience. Drawing on examples of air-rail partnerships such as Germany's Rail & Fly and France's TGV Air, Japan likewise requires strategies in which not only airlines but all transportation operators work in concert to improve airport access and enhance travel convenience. The realization of such integrated mobility services would not only transportation, domestic aviation in an era of population decline is expected to serve as a network that supports interregional exchange and fosters related populations.

Taking into account both competition and cooperation with other modes of transportation, domestic aviation in an era of population decline is expected to serve as a network that supports interregional exchange and fosters related populations.

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References

• Current State of Domestic Aviation (May 2025), Ministry of Land, Infrastructure, Transport and Tourism
• Regional Population Projections for Japan (2023 revision), National Institute of Population and Social Security Research
• Manaka, K., Hashimoto, S., and Goto, T. Analysis of the Competitive Relationship Between Airlines and High-Speed Railways Considering Railway Transfers. (2024), the Japanese Journal of Transportation Economics, Vol. 67, pp. 101-108.

Kyoko Manaka／Associate Professor, Faculty of Economics, Chuo University
Areas of Specialization: Public Policy and Transportation Economics

Kyoko Manaka was born in Tokyo in 1990. She completed the Graduate School of International Management at Yokohama City University and received a Ph.D. in Economics. After serving as a Researcher at the Institute of Transportation Economics, a Full-Time Lecturer in the Department of Transportation at Tokyo College of Transport Studies, and an Associate Professor in the Faculty of Economics at Ryutsu Keizai University, she assumed her current position in 2025. Her research focuses primarily on transportation behavior and safety, as well as regional transportation policy, and involves empirical studies concerning people’s travel choices and transportation policy. By understanding human behavior in the transportation field, she aims to contribute to the realization of a sustainable and safe transportation society.
Her edited publications include Infrastructure Resilience (Chuokeizai-sha, 2025), and her major papers include Competition Between Airlines and Railways in Japan Focusing on the Travel Time (Asian Transport Studies, 2022) and more.

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