(1) History of Kansai International Airport Concession
Kansai International Airport (from now on referred to as “KIX”), which opened in 1994, struggled with business management due to the slump in the aviation industry. Since it was built on the sea off Izumisano, which wasn’t the initial plan, the construction costs and heavy debt burdened the project due to compensation for fishing rights etc. Seki Maehara and Minister of Land, Infrastructure, Transport, and Tourism planned the privatization of KIX during the Democratic administration to reduce the heavy debt burden. Based on that, in 2012, Kansai International Airport Co., Ltd., a former operating company of KIX, sold the working rights of KIX and Osaka International Airport (ITM, Located in Itami, Hyogo Prefecture) under Japan’s first concession system (selling the operating rights to a private enterprise for public facilities with toll collection such as airports, water and sewage, while leaving the ownership of the facility to the public institution), and formulated a mid-term business plan.
Then in 2014, the private enterprise chosen by public offering announced the implementation policy of the project, which would integrally run KIX and ITM for 44 years, as a large airport project in Asia’s economic powers and Japan. Airport operators from around the world have begun contacting the Japanese government and private contractors for the consortium. This was because the conditions for bidding was to be partnered with a Japanese company. Initially, foreign operators such as Heathrow Airport (BAA), Paris Airport Public Corps, Avi Alliance, and Manchester Airport were interested because of the growth of Asia market and the geographical location of the 24hr operating airport.
On the other hand, Japanese companies that form a consortium with these overseas operators were also led by “Sumitomo Shoji”, and several general trading companies and major real estate companies such as “Mitsui Real Estate”, “Sumitomo Real Estate”, and “Marubeni.” They have set up an in-house project team. However, “Japanese companies with no experience in airport management have shown that they are unwilling to invest in a huge project totaling 2 trillion yen for 44 years of integrated management of KIX and ITM. They dropped out of the plan one after another. Because of this, overseas operators who were trying to form a consortium with these Japanese companies were forced to give up their bids, “he said.
That said, “even if it was a somewhat difficult scheme, it was ORIX who was boldly taking risks and continuing to raise hands at the KIX concession” (Financial journalist). However, all the overseas operators wished to work with the classy real estate company and general trading company. Therefore, “there was no foreign operators that were willing to join with ORIX, who was notorious for being bad and greedy. However, a French operator Vinci teamed up with ORIX. Vinci was a newcomer to the airport operation business, and in 2014 it operated only the “Nantes Airport” in France and an airport in Cambodia. Both the overseas operators and Japanese companies didn’t pay attention to Vinci. Many businesses perceived this as two mediocre companies joining hands.
In June 2015, only the consortium of ORIX and Vinci out of the three applicants passed the first screening. It passed the second screening and signed a basic agreement in November of the same year. In December of the same year, ORIX and Vinci had a 50/50 joint venture to establish Kansai Airport Co., Ltd., a new company that operates KIX. After that, the company made a third-party allotment, and 26 companies including “Hankyu Hanshin Holdings,” “Nankai Electric Railway” and “Panasonic” invested. The financial industry officials mentioned earlier said: “Participation in the KIX concession (of the ORIX) was originally decided by Mr. Miyauchi. His word was the law. Therefore, ORIX didn’t have an option to back down, and it kept pursuing aggressively. That attitude drew Vinci closer to ORIX, who was also another mediocre company trying its best.
However, there are various theories about why Mr. Miyauchi stuck in the management of KIX. According to several executives of ORIX, “Mr. Miyauchi wanted to contribute,” and “He wanted to give back to the Kansai economy, which is his hometown” and it seems that there is no other intention.
However, it is said that improvised consortium between ORIX and Vinci did not happen smoothly, and the negotiations between the two had run aside for a while. The parties mentioned above continue.
“At that time, it was the executive officer, Irie (Shuji, current CFO) who reorganized the consortium that became a rattling. Since he intervened, the relationship between the two were forcefully fixed within the conditions presented by each other to complete the project.”
(2) The feud between ORIX and the Kansai business community that occurred in the KIX concession and subsequent airport management
Regarding the background of the KIX concession, a megabank official stated:
“Initially SMBC (Sumitomo Mitsui Banking Corporation) was interested in the control of the airport. However, both Sumitomo Shoji and Mitsui Real Estate stepped down.
Although both companies were interested in the management, they were too scared to take on the risk (Total of 2 trillion yen project that integrally manages Kansai and Itami for 44 years). This meant that the top representative of the “Kansai business world,” SMBC, stepped down. However, since ORIX is a company that doesn’t care about risks 44 years in the future, quickly scooped up the opportunity.
After that, the Kansai Business Federation, who did not want to take risks, but wanted to squeeze into the management of KIX, called for Kansai Airport to participate in attracting small-scale investment. ORIX agreed to establish regional cooperation. “
As a result, Kansai Airport’s ownership ratio is 40% for ORIX, 40% for VINCI, and 20% for Osaka companies. Concerning this ownership ratio, there was a concern that if ORIX ended up holding 50% or more and became the majority shareholder, if the airport ended up incurring massive debt, ORIX would become the consolidated target of the company and affect the stock price.
And according to this megabank official, the Kansai business community felt that ORIX “Had terrible manners and until now, created no business relationships with the Kansai business world”, and they were “withholding information about Kansai Airport and future airport operations, etc., which lead to the unsatisfaction and distrust of Kansai business community for ORIX.”
However, on the other hand it was also stated that “in consideration of the internal circumstances of the ORIX side at the time, it is true that they were incredibly busy with coordinating with VINCI and did not have time to negotiate the investment ratio with the companies in Osaka.” (Same as before).
(3) Mistrust in ORIX re-emerged in “air-function dysfunction” during Typhoon 21 in 2018
The new Kansai Airport, established by ORIX and VINCI, had been growing steadily due to the growth of LCC and the increase of inbound tourists due to the weak yen. Business performance was only getting better without any real management effort.
However, internally, it is said that there was a big problem in its operation. The editor of a major aviation industry magazine explains:
“Kansai Airport has a 40%, 40% dual management system between ORIX and Vinci, with the divisional head of each division clearly divided from the two companies. Each division had a cross-vice system: this means that when field personnel in each department were to discuss new operations with the higher-ups, they would have to gain approval from either ORIX or Vinci representatives. However, there were frequent occurrences of ideas being overturned by Vinci or ORIX representatives creating a stand-still.
Moreover, because the two companies adopted the so-called French style “colonial management,” all executives came from two companies. For this reason, it is said that the original Kansai Airport officers and executives who devoted their entire lives to the airport had been demoted.
The editor continued and said that:
“Although many of the original employees of the airport were graduates of Kyoto University and Osaka University, knew airport operation very well, and were fluent in English, this French “colonial management” style meant that they became underutilized. On top of that, the new ORIX and VINCI airport management team that was assigned were utterly new to the industry and knew nothing about how to operate an airport. Being bossed around by amateurs led to a considerable drop in the morale of the original members in the blink of an eye. I know about at least 20 great original employees who retired in the two years (2016 and 2017) after privatization.”
However, due to factors such as the growth as mentioned above of LCC and the increase of inbound tourists, it seemed as if ORIX and VINCI were doing an excellent job in management and the administration ignored much of the frustration.
The situation completely changed after “Typhoon 21”, which hit the Kansai area last September (2018).
The typhoon hit a tanker on a bridge, causing the airport to malfunction and forcing it to shut down affecting the entire Japanese economy. The shutdown especially hurt the Kansai economy. [Reference article: Airspace closed due to typhoon 21, recovery of rapid pitch is also affected by the Japanese economy (20180916 Sankei Shimbun) https://www.sankeibiz.jp/business/news/180916/bsd1809162123002-n1.htm]
The editor mentioned above continued:
“When the crisis hit, Mr. Yamatani, (Nobuyuki, President & CEO of Former “ORIX Real Estate,” former Vice President of ORIX”) the president of Kansai International Airport, was on a business trip overseas. The remaining management team simply panicked and didn’t know what to do. Fortunately, thanks to the efforts of the hard-working original KIX employees, they were able to solve the crisis. Behind the scenes, VINCI complained to the ORIX side about how ORIX did not report the situation in English, and both parties became increasingly more hostile towards each other. According to private information, both the board of directors of the ORIX and VINCI officers threatened that they would take each other out with a dismissal motion. ”
[Reference article: “Document” outflow management company Japan and France executives at Kansai Airport deal with typhoon damage, the malfunctioning passenger is isolated (20190128 AERA dot. (Aera dot) https://dot.asahi.com/dot/2019012800036.html]
The incompetent ORIX and VINCI management team who was not accustomed to operating airports was not able to cope with the crisis and could not draw up a recovery plan in time. Luckily, the Ministry of Land, Infrastructure, Transport, and Tourism dispatched staff and quickly drew up a recovery plan from scratch.
It is essential to also mention that the ORIX and VINCI consortium continues to show a desire for the privatization of seven more rural airports such as Chitose Airport. The plans of both companies had already passed the primary screening because of the misunderstanding that they were able to show positive results in KIX. However, this being said, the Ministry of Foreign Affairs and Communications, who was furious about the poor crisis management, disaster response, and functional failure of the airport forced them to withdraw. They withdrew from the Hokkaido’s airport privatization plan in December.
The economic damage that the Kansai business community suffered from “KIX Shutdown” caused by this typhoon No. 21 was substantial. Kansai business circles saw this poor management and stated that “There is no problem with ORIX obtaining the rights to manage the airport with Vinci. However, it is utterly ridiculous that after obtaining the rights, there was no effort in managing this large institution called an “airport.” There was absolutely no thought into crisis management.” (stated by the same Megabank official)
Past upper management of the airport has shown disdain for the current management. Shinichi Fukushima, who was once the vice president at Panasonic, served as president and representative director of the airport from 2009 and served as chairman from 2012 to 2016. He is held as one of the most influential people in the Kansai economy and is currently president of the “Osaka International Congress Center.” Many of the original workers that served under him continue to look up to him, and there are rumors that many of them have been complaining to him about the “colonial management” style as well as the lack of crisis management when it came to handling the typhoon.