Measures for a Sustainable Domestic Air Network: Japan’s Policy Response

By Yukiko Nakamura

1. Background

How to maintain and develop air service networks is an important issue for airlines, the communities served, passengers, and governments from the standpoint of ensuring connectivity and economic vitality. Under airline deregulation, when airlines determine that a route is unprofitable, they are more likely, in accordance with market principles, to reduce or discontinue service in order to reallocate resources to more profitable routes. This is particularly an issue for domestic routes serving regional cities and remote islands. While such routes constitute essential infrastructure for local residents and communities, some are difficult to maintain because airlines face challenges in achieving sufficient profitability.

In the United States, the Essential Air Service (EAS)^*1 program helps preserve air links that would be difficult to sustain through market forces alone, using public subsidies to ensure a minimum level of air service on certain regional routes. Separately, the Small Community Air Service Development Program (SCASDP)^*2 supports small communities in attracting new air service, improving existing service, and stimulating demand through measures such as marketing.

Turning to Japan, the profitability of the domestic operations of major airlines has deteriorated since the COVID-19 pandemic due to changes in demand patterns. In response, the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) established the Expert Panel on the Future of Domestic Aviation in May 2025 to consider how to ensure a sustainable domestic air network. After six meetings, the Panel published its final report on May 29, 2026.

This article provides an overview of the changes in the demand and cost structures of Japan’s domestic airline business that prompted the establishment of the Panel, their impacts, the key points discussed by the Panel, and the specific measures adopted.

^*1 A U.S. program under which the U.S. Department of Transportation (DOT) ensures access to the national air transportation system for communities that meet the eligibility criteria. Where airlines would not operate service on a commercial basis between a regional airport and a large- or medium-hub airport, DOT provides subsidies to airlines to secure a specified level of service.

^*2 A DOT grant program designed to address air service and airfare issues faced by small communities. Grants may be used for measures including minimum revenue guarantees to attract new air service, demand stimulation through marketing, support for start-up costs, and air service studies.

2. Current State of Japan’s Domestic Airline Business

Japan recorded more than 111 million domestic air passengers in 2025, compared with 103 million in 2018, before the COVID-19 pandemic. In terms of passenger numbers, domestic demand has therefore already recovered beyond its pre-pandemic level. Nevertheless, the profitability of airlines’ domestic operations has deteriorated despite the recovery in demand.

The following changes in demand and cost structures have been identified as contributing factors:

• Decline in high-yield business demand due in part to the widespread adoption of online meetings

• Decline in weekday demand

• Higher costs for aircraft, parts, and overseas maintenance due to the depreciation of the yen

• Higher fuel, maintenance, and personnel costs

In particular, the increase in costs has been characterized not as temporary but as irreversible, reflecting a structural change that makes it difficult for airlines to secure profitability through their own efforts alone. The deterioration in airline profitability also affects the viability of regional routes, raising concerns that it may become increasingly difficult to maintain networks essential for local mobility, regional revitalization, and attracting inbound visitors to regional areas.

3. Overview of the Expert Panel on the Future of Domestic Aviation, Key Discussion Points, and Policy Measures

Against this backdrop, the Expert Panel on the Future of Domestic Aviation was established. As a result of its discussions, Japan maintained competition among airlines—the principle that has underpinned airline deregulation—as the basic rule, while adjusting its policy framework to make it easier, where necessary, to pursue coordination, restructuring, and aircraft sharing among airlines in areas where competition alone may make it difficult to sustain routes.

The Civil Aviation Bureau of MLIT served as the secretariat for the Panel. Its members included university professors specializing in transport economics and aviation policy, as well as experts from consumer organizations. Japan’s six major airlines^*3 and airline industry organizations participated as observers. Over the course of six meetings, the Panel also held hearings with airlines and the Japan Fair Trade Commission. The final report consolidated the issues discussed, and necessary revisions to related systems and regulations were implemented concurrently. The principal measures decided through the Panel are outlined below.

^*3 All Nippon Airways (ANA), Japan Airlines (JAL), Skymark Airlines (SKY), AIRDO (ADO), Solaseed Air (SNJ), and StarFlyer (SFJ)

(1) Enabling Coordination among Airlines on Individual Routes

On routes experiencing declining demand, there is concern that competition among airlines could ultimately make it difficult to sustain the routes themselves. Accordingly, a certain degree of coordination among airlines is permitted, depending on the characteristics of each route, as follows:

• Schedule coordination: If certain requirements are met, airlines operating on the same route may coordinate their schedules, including changes in flight times, reductions in service by individual airlines, or the withdrawal of one airline from the route.
  

• Capacity adjustments and consolidation of operations: For routes that are essential to residents’ daily lives or important to their economic activities, options may also include capacity adjustments among airlines or consolidation of operations under a single carrier. Since coordination of capacity among airlines could ordinarily raise issues under the Antimonopoly Act, the conditions under which the existing antitrust exemption under Article 110 of the Civil Aeronautics Act may be used have been clarified, and new guidelines have been established accordingly.

(2) Abolition of the “20% Investment Restriction” on Major Airlines’ Investments in Mid-sized Airlines

The four “specified incumbent airlines” (SKY, ADO, SNJ, and SFJ), which had grown with policy support including preferential allocation of Haneda Airport slots^*4, had effectively been subject to a 20% cap on investment by the major airlines (ANA and JAL). This restriction was abolished through a revision to a Civil Aviation Bureau Director-General circular dated May 29, 2026. The change expands airlines’ strategic options by enabling greater cooperation and business integration, including capital alliances and M&A. At the same time, to safeguard the competitive environment, a mechanism was introduced under which up to 10% of the Haneda slots held by an airline receiving an investment may be withdrawn when an investment exceeding 20%, or an equivalent transaction, takes place.

^*4 Preferential allocation of Haneda Airport slots: A measure implemented from 1997 through 2011 to promote competition by supporting the entry and development of new airlines through preferential allocation of Haneda Airport slots (88 slots in total).

(3) Facilitating Aircraft Sharing among Airlines

The Panel set out a policy direction encouraging the active use of regional jets, turboprop aircraft, and aircraft sharing among airlines, and clarified the criteria for approving wet leases,^*5 which require authorization from the Minister of Land, Infrastructure, Transport and Tourism.

^*5 An arrangement under which an airline leases from another airline not only the aircraft but also the crew, maintenance, and insurance required for its operation.

(4) Strengthening Airfare Monitoring

At the same time, the Panel called for stronger airfare monitoring by MLIT to prevent cooperation, coordination, and business integration among airlines from weakening competition and harming passenger interests through unjustified fare increases, as shown in the table below. In particular, MLIT will continuously monitor and publish changes in actual fares, focusing on routes where cooperation and coordination are progressing, monitor whether inappropriate fare-setting practices are occurring, and consider appropriate measures when necessary.

(5) Increasing the Use of Domestic Flights by Inbound Visitors

Beginning in FY2026, the scope of subsidy programs funded by the International Tourist Tax was expanded to include domestic air services; support was also made available for initiatives such as joint promotions involving regional airports. The Panel stated that this expanded framework should be actively utilized.

4. Future Policy Direction

The next stage will be to implement the measures set out in the final report while continuously monitoring their effectiveness and their impact on the competitive environment. In particular, as coordination and cooperation among airlines progress, the Panel framework will continue to be used for periodic follow-up of fare levels and the competitive environment to ensure that passenger convenience and fair competition are maintained.

The Panel also identified issues on which no sufficient conclusion was reached and which therefore require continued consideration. These include the division of roles between aviation and railways, including the Shinkansen, as well as the sustainability of regional aviation, particularly remote-island routes and services operated by smaller airlines. Further consideration of these issues is expected to continue.

Airlines themselves will also be expected to continue adapting to changes in the business environment. This includes developing new demand by encouraging inbound visitors to use domestic flights, while optimizing capacity and improving efficiency by adjusting aircraft types, flight frequencies, and operating patterns to match demand. Examples include greater use of regional aircraft, service on selected days of the week, and seasonal or temporary frequency reductions.

5. Conclusion

Japan has long implemented measures to support regional air services, including subsidies for purchasing and operating aircraft for remote-island routes, reductions in public charges such as landing fees, demand-stimulation initiatives in cooperation with local governments, and the Haneda Slot Policy Contest.^*6 The latest Panel, however, went further by reviewing the institutional framework to enable airline coordination, capacity optimization, capital alliances, and other forms of cooperation in response to structural changes in the business environment affecting the domestic airline industry as a whole.

Striking an appropriate balance between maintaining air routes as essential infrastructure and preserving competition based on market principles is a perennial challenge given the nature of aviation infrastructure. No single measure is likely to provide a complete solution; rather, a combination of measures is needed, supported by cooperation among the national and local governments, airlines, airports, and other stakeholders. The effects and impacts of the measures adopted following the Panel’s discussions will be assessed through future monitoring, and further improvements and adjustments are expected to be considered in light of those results.

^*6 A program under which local governments and airlines jointly propose measures to promote the use of regional routes, with Haneda Airport slots allocated for a specified period to selected proposals.

Sources

Publication of the Final Report of the Expert Panel on the Future of Domestic Aviation ※Japanese only

https://www.mlit.go.jp/report/press/kouku04_hh_000291.html

Essential Air Service (EAS) (DOT)

https://www.transportation.gov/policy/aviation-policy/small-community-rural-air-service/essential-air-service

Small Community Air Service Development Program (SCASDP) (DOT)

https://www.transportation.gov/policy/aviation-policy/small-community-rural-air-service/SCASDP

Enhancement of the Air Transport Network – Initiatives for Domestic Air Services (MLIT) ※Japanese only

https://www.mlit.go.jp/koku/koku_tk1_000020.html