Jetstar Pacific

For despite Asia’s size and potential, history in Europe and the US shows that only a small number of dominant low cost players will survive, and Jetstar, like Tiger and AirAsia, wants to be one of them.

The plans for Jetstar Pacific, currently 18 per cent owned by the Qantas Group, are very ambitious. Relaunched on April 14 and due to become operational from May 23, Jetstar Pacific is being remodelled as a low cost carrier and grown aggressively from its current fleet of just four Boeing 737-400s to have as many as 30 leased Airbus A320s in operation by 2014. The agreement also sees Jetstar Pacific adopting Jetstar corporate branding and livery, Jetstar-style uniforms for flight attendants, and the rollout of a Vietnamese language version of the Jetstar website.

“I think it’s got a very good first starter advantage and it’s got a pretty cashed up parent,” remarked Qantas CEO Geoff Dixon at the Jetstar Pacific launch in Ho Chi Minh City (the former Saigon).

“Our future success will be achieved through this innovative and unique partnership with Jetstar via a proven low cost airline business model and our ability to expand through the strong Jetstar brand,” Jetstar Pacific CEO Luong Hoai Nam said.

Qantas reached agreement to acquire an 18 per cent stake in Ho Chi Minh City based Pacific Airlines, Vietnam’s second largest airline, in July last year, and has now confirmed plans to increase this holding to 30 per cent in 2010. Alan Joyce and Jetstar chief financial officer (CFO) David Hall now sit on the Pacific Airlines six-member board, and Jetstar and Qantas staff fill key management roles at the airline including chief operating officer Daniela Marsilli, CFO Tristan Freeman and chief pilot Jeremy Schmidt.

In all Qantas is spending about $50 million on its Jetstar Pacific stake, with that cash being put into the airline to fund its growth and transformation.

Cooperation between Jetstar and Jetstar Pacific is defined under a ‘business services agreement’, with Pacific Airlines/Jetstar Pacific paying service fees for Jetstar’s seconded managers and expertise, and a small percentage of revenue for use of the Jetstar brand, logo and livery. This is the first arrangement of its kind for Qantas/Jetstar, but AirAsia uses similar instruments for its partner airlines in Indonesia and Thailand.

In guiding Jetstar Pacific’s growth, the Qantas Group and Jetstar can draw on its experiences with its investment in Singapore based Jetstar Asia, which has arguably not lived up to expectations.

“We always learn lessons,” remarked Geoff Dixon. “Jetstar Asia is certainly profitable now but of course we’re learning lessons. But it is a different animal, for want of a better word, altogether, it’s a different airline. Vietnam has got 85 million people and our growth initially will be domestically. That wasn’t the case with Jetstar Asia, who are always relying on bilaterals and other countries to approve (traffic rights). ” Dixon feels it was the Qantas Group’s depth of experience and knowledge that contributed to it being selected by Pacific Airlines’s majority shareholder, the State Capital Investment Corporation, as the airline’s strategic partner, ahead of Singapore investment company (and fellow shareholder with Qantas in Jetstar Asia) Temasek.

“I’m assuming the interest in Qantas was not just money, I’m assuming the interest also involved our long history in aviation and the expertise we can bring. ” Initially Jetstar Pacific’s expansion will focus on domestic services, but from the end of the year Jetstar Pacific will begin expanding into markets likely to include Thailand, Singapore, Malaysia and Cambodia once the A320s start arriving.

The first A320 is due to enter service this August, and the expansion plans for the Vietnamese airline are highlighted by the fact that in barely five years it should have grown to the size almost that of Jetstar’s Australian operation today.

The plans are also put into perspective by main competitor Vietnam Airlines, which operates a fleet of around 40 or so aircraft on domestic and international routes.

“The priority this year is to continue to build up the domestic network, and to have more destinations and to build up frequency,” Alan Joyce said before the formal Jetstar Pacific launch. He points to Vietnam’s biggest airline route, between the commercial capital Ho Chi Minh City and the government capital of Hanoi, as an example of the Vietnammarket’s growth potential. “There’s eight million people in the greater area here (Ho Chi Minh City) and six in the Hanoi area – so it’s bigger than Melbourne- Sydney in terms of population. And it doesn’t have the surface transport alternatives that are really viable – the train can take a few days to get down. ” As a developing country, flying is beyond the financial reach of most of Vietnam’s 85 million citizens (GDP – gross domestic product – per capita is about a tenth that of Australia’s), but that is changing as the country enjoys record levels of foreign investment and economic growth (about eight per cent a year) continues apace, so the long term prospects for Jetstar Pacific look very promising. “I know the economic activity is not the same as Australia yet, but eventually it will grow,” Joyce said.

“But you see here on the streets that wealth is appearing,” Joyce said. “It’s (also) a huge international tourist market, it is one of the biggest international tourism growth markets. And that’s people coming into the country who are also travelling around the country, and again that’s something that we’re tapping into. So you look at (who is flying on) our flights, our Pacific flights, there’s a lot of locals but there is a growing amount of overseas travellers coming into the network. ” Many of those travellers will come to Ho Chi Minh City on Jetstar’s three times a week A330 service from Sydney, and Jetstar Asia’s 18 A320 flights a week from Singapore. These services begin to highlight the expansion and interconnection of Jetstar’s operations. For example, someone living in Melbourne could fly from Avalon to Sydney on Jetstar’s Australian domestic operation, then fly from Sydney to Ho Chi Minh City on Jetstar long haul, fly side trips inside Vietnam with Jetstar Pacific, hop down to Singapore on Jetstar Asia, drop into Bali on Jetstar Asia subsidiary Valuair, then fly from Bali back to Melbourne/ Tullamarine on Jetstar’s long haul unit.

Jetstar Pacific’s existing and planned new ports will join a Jetstar network across Australasia and Asia that will span 40 ports.

Ho Chi Minh City could also be selected as Jetstar long haul’s Asian hub for its operations into Europe. Hubbing into Ho Chi Minh – other candidate cities are Singapore, Kuala Lumpur, Bangkok and Hong Kong – would provide even further feed for Jetstar Pacific operations.

When Jetstar Pacific starts flying internationally in its own right from the end of this year, assuming it meets performance targets, it will provide links to other Jetstar and Jetstar Asia destinations like Bangkok and Kuala Lumpur, further driving the network effect.

International flying will become increasingly important to Jetstar Pacific.

Jetstar CFO David Halls said Jetstar Pacific’s mix of domestic to international flying will then ramp up so “it probably could well be 50:50 in a few years. ” Jetstar Pacific’s four leased 737-400s will be the first Boeing aircraft to wear Jetstar colours, but they will be replaced in time by the A320s.

“A lot of those aircraft (the 737s) are on variable leases from five to seven years, so it will take us some time to roll out the fleet. ” Joyce said. But, “we weren’t going to keep the 737s, it’s just very hard to get the ‘classic’ (737) aircraft. ” Instead, the Jetstar Pacific fleet will be standardised on the A320, in common with Jetstar in Australia. Jetstar Pacific will even use operating manuals and procedures common to Jetstar in Australia, allowing pilots to be swapped between the two airlines.

Where the A320s will be maintained has yet to be decided, with a decision on where heavy maintenance will be undertaken pending, although it is likely to be in Asia.

Maintenance and safety standards were a key consideration in partnering withPacific, with the Vietnam airline now expected to meet Qantas Group safety standards. “A Qantas Group audit was undertaken as part of a broad due diligence process surrounding the decision to brand and to enter the commercial and strategic relationship with Pacific Airlines, including its re-brand and future association to the Qantas Group,” said Jetstar spokesman Simon Westaway. “Qantas Group executives are currently based within Jetstar Pacific to assist with its maintenance processes and introduction of the A320 into Jetstar Pacific’s existing fleet. ” Inside, the A320s will feature the same leather seats as in Jetstar Australia’s A320s, but seating will be for 180 passengers, three more than Australian configured Jetstar A320s, with a tighter 29in (74cm) pitch. Onboard, passengers will be able to buy meals, and seating will be allocated, just like Jetstar in Australia.

Jetstar Pacific’s fare structure will also be in line with Jetstar’s, including the recently introduced Jetsaver Lite fare for passengers without checked baggage.

Interestingly, because labour costs in Vietnam are so low, fuel currently comprises 55 per cent of Pacific Airlines/ Jetstar Pacific’s cost base. Because fuel is such a high proportion of the airline’s cost base, cost savings in other areas of the business have a lesser effect than they would for airlines in developed countries.

But that too suggests that Jetstar Pacific could offer some extremely low fare levels compared to western standards.

At the upper end of the air fare scale, Vietnam currently imposes a fare cap on the maximum price that can be charged for a domestic ticket (currently US$103).

“The fare cap is a continuous process we have to go through to get fares raised,” Joyce said. “It’s unique that you have an upper limit on the fares that you can charge, but there’s no lower limit, and what will happen as a consequence of the competition it’s likely that the government will feel there’s no need to maintain the fare cap regime, which we think is the sensible way, because then the market can regulate itself. With the amount of capacity we’re talking about, the growth we’re talking about, it’s going to be very competitive anyway, and I don’t think it needs a fare cap.

“The thing that we’d like to do is that if on peak seasons you hadn’t got the fare cap and you could charge (more) for when demand is really high, but it means for other periods of time there could be a dramatic amount of low air fares out there. ” Aside from the fare cap, another challenge of the Vietnam market is the looming spectre of a range of new startup carriers planning to launch in the short term, but Alan Joyce points out the plans for Jetstar Pacific to operate up to 30 aircraft will give it scale and hence a significant competitive advantage over smaller startup airlines.

“There’s a number that are being announced, there’s a number that have submitted their dossiers to the Civil Aviation Authority (of Vietnam),” said David Hall. “The challenge for them will be getting aircraft, the infrastructure here, and getting good people. So there’s a lot of people wanting to start up, there’s a good four or five that believe they can make money out of it, but we think there’s some natural barriers to entry at the moment. ” Further afield it will be interesting to see where Jetstar’s next venture will be.

“We’re looking around, but there’s nothing active out there at the moment, we continue to look around,” Geoff Dixon said. “We’re on the record as looking for any sort of investment we believe that will add value to the group, that will allow us to get a better positioning within this region. ” But even without further investments, Jetstar Pacific places the Qantas Group very nicely to take advantage of mooted airline liberalisation within the ASEAN trading block of South East Asia. If full deregulation was agreed to it could lead to an explosion in airline travel growth of the scale seen following deregulation in the EU and United States.

The low cost airline market in Asia is anything but mature, and the race to establish marketshare and scale will be fascinating to watch.

“I know there’s room for us,” the Qantas CEO said of Jetstar’s Asian plans.

“I think that without a doubt we have the expertise and the scale to be one of the more successful players. ”