Internet Millionaire’s Airline Bet Turns Sour on A380s

By Chris Cooper and Kiyotaka Matsuda

Internet entrepreneur Shinichi Nishikubo turned around the unprofitable Japanese budget carrier Skymark Airlines Inc. (9204) after taking a stake in 2003 and becoming its president the following year. Now he faces another crisis as a plan to buy Airbus Group NV (AIR) A380 jets turns sour.
Skymark shares lost a quarter of their value in two days after Airbus decided to cancel the airline’s order for six of the superjumbos. The stock plunged 14 percent to 216 yen at the 3 p.m. close in Tokyo, adding to yesterday’s 13 percent slump. Nishikubo said yesterday the carrier had been in talks with Airbus since April after telling the aircraft maker it needed to alter plans to introduce the plane because of a weaker yen and competition.

Skymark has paid 26.5 billion yen ($260 million) in deposits for the double-decker planes -- more than the airline’s market capitalization -- and may risk losing those payments, according to Timothy Ross, a Singapore-based analyst at Credit Suisse Group AG. The carrier could face demands from Airbus for as much as 70 billion yen in penalties, Kyodo News said, citing people familiar with the situation whom it didn’t name.
“It looks like the damages could balloon,” said Shinichi Yamazaki, a Tokyo-based analyst at Okasan Securities Group Inc. “Concerns about the airline’s finances are coming to the fore with the news of Airbus’s cancellation.”

Photographer: Tomohiro Ohsumi/Bloomberg

Skymark Airlines Inc. President Shinichi Nishikubo.

Nishikubo, who took flying lessons and became a pilot after purchasing his stake in Skymark, said yesterday he still wanted to buy A380s.

International Flights

The two-day drop in the airline’s share price reduced the value of his holding by 2 billion yen, according to a calculation based on data compiled by Bloomberg that shows he owns a 31 percent stake in the company, which now has a market value of $193 million.
‘There are concerns about their profitability,’’ said Nicholas Cunningham, an analyst at Macquarie Capital Securities (Japan) Ltd. “If you look at the balance sheet now, they are reaching a point where there are potential concerns about their future viability.”
A graduate of Japan’s Kobe University, Nishikubo made his fortune through the Internet company Zero Inc., which listed on the Nasdaq Japan-Standard stock market in 2000. He was president of the company through its listing until May 2002, according to data compiled by Bloomberg.
The 59-year-old replaced Skymark’s fleet of double-aisle Boeing 767s with single-aisle 737s after becoming president, helping the airline post record profits.

International Flights

He announced a decision to buy double-decker A380s and start an international business-class service in 2010, breaking from the company’s model of low-fare travel using single-aisle Boeing Co. 737s. He said at the time he planned to win market share by charging less than half the price of rivals.
Skymark initially signed a firm contract for four A380s in 2011 and later came back for two more. The four aircraft, the biggest and most expensive commercial airliner, have a current total list price of $1.7 billion, though customers typically get discounts and the jet would have been cheaper in 2011.
“They had rocks in their heads when they ordered it, quite frankly, and fortunately, reality has caught up with the company before it was too late,” said Credit Suisse’s Ross. Starting international flights “would have meant a huge step up in fixed costs, a major marketing campaign and lead-in fares that would have crippled profitability,” Ross said.