First mover?

These leased aircraft, like the previous commitment for the nine leased A320s currently entering service, gives Jetstar the flexibility to grow reasonably quickly, but leasing also has its limitations.

“We saw for the A320s an issue that we were facing when we went back to the marketplace trying to get aircraft for this year,” Jetstar CEO Alan Joyce toldAustralian Aviation in a recent interview.

“We hadn’t had an order in (for additional aircraft), we hadn’t had slots dedicated with Airbus, but we knew we had to grow quite dramatically in the Australian and Asian markets. ” So it was in a competitive environment, where finding good quality A320s to lease is quite tough, that Jetstar reached agreements with sister carrier Jetstar Asia, Spirit Airlines and leasing company ILFC.

“Let’s take a long term view and make sure we have enough orders to meet our growth potential, and to build some ‘smarts’ into how we manage our fleet. ”

But, “that to us wasn’t a very effective way of doing it. We got good prices, but some of the aircraft like the Jetstar Asia aircraft have variations that make them different to the rest of the fleet,” Joyce continued. “As you know, low cost carriers don’t like uncommon fleets. ” Jetstar felt a more effective approach was needed.

“We said, well let’s take a long term view and make sure we have enough orders to meet our growth potential, and to build some ‘smarts’ into how we manage our fleet to make sure we can manage upsides and downsides going forward,” Joyce said. “And also with the development of our pan-Asian strategy with the potential of doing more flights into the Asian market we said that there were a number of business opportunities that we didn’t have fleet on order for. ” Joyce said the new orders and options gives the airline A320 Family delivery slots through to 2014-15.

“That allows us to have firm fleet plans to meet all of those growth objectives, and to have some flexibility with the options with open dates to grow even further if the potential is there in the marketplace. ” Some of the A320s coming from Jetstar Asia are leased for 30 months, “and they roll out when new aircraft come in,” Joyce said. “But this is some of the ‘smarts’ built into it, each of these leased aircraft have the option to extend, so it depends how much we want to grow in individual years whether you roll (return) them or whether you extend them. ” Given the size of the order and lease commitments, Jetstar’s growth plans look very big. Jetstar only began flying in 2004, so it’s staggering to think the airline could have as many as 150 Airbus narrowbodies, plus 15 or more 787s, in service a decade later.

So where will the growth come from? “We see four major areas with the narrowbody fleet where there is potential and we see it now as a portfolio of different assets and different combinations that you could direct the fleet towards,” Joyce said. “The first, which is the biggest part of our business, is still the core domestic market. We are still seeing considerable growth. Last year there was still double digit growth, this year we’re going to have a 14 per cent growth in our capacity, and we see that as a good opportunity for us going forward.

“Secondly there is obviously the trans- Tasman. The Christchurch operation has been a major success for us, and we think there are other opportunities across the Tasman that we haven’t tapped into yet.

“Thirdly is what we’re calling the short haul hubs out of Darwin and Perth into Asia. From Darwin we’ve announced the Melbourne-Darwin- Singapore route from April 17, which is the start of the development of services through Darwin into Asia, and we think there is a lot of potential in making a regional hub work there. Similarly for Perth . . . the A320 fleet has the range from Perth into places like Bali, Jakarta, Kuala Lumpur and Singapore, and we think there is definitely an opportunity in grabbing market share back (for the Qantas Group). ” The airline’s fourth key area of growth is its partnerships with its Asian affiliates. “We’re doing a lot of work with Pacific getting them ready for A320s,” Joyce said. “That market is a huge market with 89 million people in Vietnam. ” Joyce says “some” of the A320s on firm order eventually will be placed in Asia.

But initially, domestic expansion is the biggest focus, with the new-to-Jetstar A321 a key plank in the airline’s plans.

Of the aircraft on order from Airbus Jetstar has the flexibility to switch types between the A320 and A321, but at least 17 will be A321s. For some time Alan Joyce has expressed an interest in the A321, which offers crewing and maintenance commonality with the A320 but adds greater seating capacity and slightly better operating economics per seat, with similar payload-range performance.

“The big criteria for me has been that you will only go to a sub fleet if you think that there are the scale benefits,” Joyce said. “I was always concerned about going to the A321 because as a stand-alone aircraft it is very good, but we needed a minimum fleet. We thought for narrowbodies somewhere between the 15 to 25 aircraft is the minimum (cost effective) size. So we’ve committed to that because we do believe that there’s sufficient markets and opportunities to have that number of A321s, and a smaller fleet would have been just too hard to manage, and that’s something a low cost carrier wouldn’t want to go to. ” Joyce cites the important Melbourne Gold-Coast and Melbourne-Cairns routes as examples of the A321’s utility.

The airline currently flies eight times a day between Melbourne and the Gold Coast, but as it is mainly a leisure route, there’s little advantage in adding extrafrequencies. “It means that there is a real benefit in scaling up to the A321s, it gives a cost advantage with the bigger aircraft, and allows us to offer lower airfares and gives us a cost advantage over our competitors on that route,” Joyce said.

One disadvantage with a bigger aircraft is longer turn-around times on the ground. Short ‘turn’ times are something of a holy grail for low cost carriers (the quicker the turn-around time, the more flights an airline can squeeze in per aircraft per day, increasing operating efficiency). Jetstar operates its A320s on a 30 minute turn-around time, and initially is aiming for an A321 turn-around time of 45 minutes or less. New arrangements with Jetstar’s pilots and cabin crew means that with a 45 minute turn the same crew can fly an A321 from Melbourne to the Gold Coast and return in the one day, which allows the most efficient utilisation of the crew and aircraft.

Payload-range performance is another benefit the A321 brings over the smaller A320. “With the auxiliary tank the A321 has really good range, better than the A320, so out of Darwin it can get into more destinations in Asia. ” Most of south east Asia is within reach of an A321 flying from Darwin.

“I wouldn’t preclude that we could have overlap with some direct services with the 787 into markets like Ho Chi Minh”, possibly being complemented with hubbed A321 services through Darwin. “In some cases we may, out of Darwin, start some markets like maybe Lombok with A320s/A321s, build up the volumes, see what the connecting profiles are like from Sydney and Melbourne, and then fly in direct with the 787s if there’s sufficient market. ” The product on these Airbus narrowbody flights will differ from that on the Jetstar International A330 flights and planned for the 787s, but will be a level above that offered on domestic flights. “We have the digEplayers, we have a meal service, we’re using the Jetstar Asia aircraft (on Cairns-Darwin- Singapore) which has four galleys, and the A321 eventually could operate (internationally), that has a bigger galley space than the A320. So that gives you the ability to deliver a different product to pure domestic. ” Seat pitch will also differ, with the 787s, like the current A330s, to be configured at 31in (79cm) pitch in economy, compared to 30in (76cm) pitch in the airline’s narrowbody Airbuses. That space difference doesn’t particularly concern Joyce, “as you’re splitting the flight with two shorter sectors, rather than a single 12 hour sector. ” He also notes competitors such as Tiger offer 28 and 29in (71 and 74cm) seating pitches in their aircraft.

Hubbing does mean passengers can get off the aeroplane to stretch their legs, but it can mean twice the airport charges as airports typically charge for passenger arrivals and departures.

“If you get transit passengers with one set of charges, not dual charges, then the economics of going through a hub with narrowbody aircraft is a lot better. ” This means the airline can offer competitive fares.

“So you give people the choice of taking a one-stop of getting to a range of destinations (rather than flying non-stop to a fewer number of destinations). It may also allow more frequencies because the aircraft is obviously smaller, and with a successful hubbing strategy you could operate daily flights to a destination that with a 787 you could only have three or four flights a week. We think both markets are absolutely there. That’s why we’ve got both strategies being developed, itgives passengers choice, and it gives us flexibility in growing routes that have more customer demand. ” The flights through the Darwin hub will be aimed at both inbound (to Australia) and outbound passengers.

The Asian services and the hubbing operation should prove a boon for Darwin and the Northern Territory, although the city’s population of about 100,000 won’t provide too much feed into the Jetstar network.

Joyce highlights that Jetstar already has a good network of flights from the southern capitals flying into Darwin, and also points to Jetstar’s experience in operating Cairns- Darwin-Singapore, which suggests it will attract a lot of cost conscious passengers, particularly from Europe, already travelling in Asia.

“There’s a large amount of European traffic on that, connecting from Qantas and international services in Singapore coming into Darwin and Cairns. We think Melbourne-Darwin- Singapore will be the same, with lots of European connectors. ” In fact Jetstar won’t be the first airline to offer Melbourne-Darwin-Singapore, as Tiger Airways already markets the route. However, presently Tiger’s passengers have to change aircraft in Darwin. Further, Tiger is unable to use Darwin as a hub to other Asian destinations. As a foreign owned airline it cannot apply for international traffic rights beyond Australia, except to its home country of Singapore.

Lion Air Australia though looks to be pursuing a similar strategy to Jetstar’s, announcing an ownership structure that will see it majority owned by Brisbane based SkyAirWorld, so with its 737‑900ERs it will be able to operate beyond Australia to a number of destinations.

“But certainly before Lion Air announced this we had made our plans clear that we were going to do Darwin and Perth hubs,” Joyce said. “Because we do see the opportunity there, as is always the case if you are the ‘first mover’ you have a chance of grabbing that marketshare before somebody else does. ” Joyce also speaks of the ‘first mover’ advantage in Jetstar’s overall Asian strategy, which sees growing ex Australia Jetstar services to Asia, the equity shares in Jetstar Asia and Vietnam’s Pacific Airlines, and the exploration of other possible franchising alliances in Asia. He points out that the market penetration of low cost carriers in Asia is at very low levels compared to Europe, North America and Australia, and so the potential is enormous.

“That (first mover advantage) is very important in Asia, we see that potential (for Jetstar). Asia has got the lowest penetration of low cost carriers of any region. ” Joyce points to the success of airlines like Southwest in the US and Ryanair in Europe as examples of airlines that were quick to take advantage of deregulation in their respective marketplaces to become low cost market leaders. “They got the timing right, and they’ve become pan American and pan European brands. ” Of course, Jetstar is not the only airline to see potential in Asia, as evidenced by the meteoric rise of AirAsia (see April edition AA) and big growth plans from Tiger Airways (see p25 this issue). He says that the aircraft on order for AirAsia, Tiger and Jetstar seem “like huge orders, but it is a huge market and if the experience of the American and European markets are anything to go by, there’s huge potential growth for the carriers that get it right. ” Building brand awareness will be key to Jetstar’s expansion, as will offering a common and seamless product across the Jetstar operating entities and brands.

“There is a real benefit in getting your brand recognised and getting the penetration there. We’re trying to pull all the parts of the jigsaw puzzle (together),” Joyce explained. “In a market like Kuala Lumpur, which could be a market that we serve from Darwin, having the marketing strength to market Jetstar Asia to Singapore, Pacific to Ho Chi Minh, Jetstar to Sydney, Jetstar to Darwin, and putting all that in one ad . . . is a lot more efficient, cost effective. It gets a bigger bang for your buck because we all probably spend the same on marketing, but (jointly) you’re marketing a range of destinations and you’re more relevant in that market than three or four separate carriers. ” Nonetheless, despite Jetstar’s Asian plans, its biggest focus remains Australia. “Our direction and growth is growing the Australian market, because we see it as a profitable market and we see we can make decent returns out of it. Even if Tiger hadn’t have come here we’d have done this (domestic capacity expansion) because we see this as our core market and we certainly want the capacity to go where the profits are. ” Figures bear that out. Jetstar contributed $113m in operating profit to Qantas’s record earnings for the six months to December 31, while this year Jetstar expects to carry no fewer than nine million passengers.

“We’re a sensible business, we’ll only add capacity if we think there is a good business case, and we think we have the right products for the market, and in Australia at the moment that’s definitely the case and that’s something we’ll keep on building on. ”