Reaching across Asia

Add to this Jetstar’s expansion of its shorthaul international hubs at Perth and Darwin, which are playing a key role in linking these cities with the other markets served by these affiliates using Airbus A320s and A321s. Wider still, the company’s fleet of A330-200s are focused primarily on destinations in Japan and Thailand (as well as Honolulu), from the east coast of Australia. Overall, this has helped to build an increasingly recognised brand across the Asian region, and advancing its pan-Asian strategy.

“We’ve always had a strong aspiration of having a ubiquitous brand across the Asian markets and then bringing the Jetstar brand and Jetstar product proposition and low fares that come with that to most of the markets within Asia,” Jetstar CEO Bruce Buchanan told Australian Aviation.

He adds that a key to this is consistently delivering on the core Jetstar values. “The values that we really drive hard are low fares, and consistently being the low fares leader in every market we serve; ensuring that we deliver a safe product that customers can trust; ensuring that we consistently deliver a hassle-free experience; ensuring that we care for the customers and that they know we respect and appreciate their business. The last one is giving them an enjoyable experience.”

The three carriers have been helped by the changing conditions brought about by the global economic crisis. Now that the price of oil has come back down off its highs last year and currency movements have been favourable, input costs have come down. And while the global financial crisis is hurting other airlines, the Jetstar carriers are reporting that their business has been boosted as more travellers, especially corporate, ‘down-trade’ to their value-based offerings.

“We’re seeing demand hold up, so generally things are pretty good,” said Buchanan. “We can’t complain at the moment. Input side (fuel costs and currency particularly) is good and demand side is good.”

Jetstar Pacific

June marked just over one year since Vietnam’s Pacific Airlines was rebranded as Jetstar Pacific, and it has been a busy year for what is effectively Vietnam’s first low fare airline.

Launched amid great fanfare just over one year ago, Buchanan admits that bringing the airline into its fold has been more difficult than expected. “It’s a much more challenging environment to do business in because of the state of the development of the regulatory environment, so it’s taking a bit longer than expected,” he said.

Part of the issue has been changing an existing carrier into a new, value-based model. As chief financial officer Tristan Freeman (who is on secondment from Jetstar’s Melbourne headquarters) put it, “I certainly see we’re trying to create a Jetstar out of a Qantas, which is a difficult thing to do. In a lot of ways, Australian Airlines, which was launched out of Qantas, tried to do what we’re trying to do and failed.”

While government regulation has played some part in slowing down the pace of its transformation, the changing economic climate in Vietnam has been of some benefit to the carrier. “In some ways it’s a more flexible environment to make some of those changes, but then the speed of those changes is a real issue for us,” said Freeman. “Making quick change in Vietnam is very difficult. That’s just a fact of the environment.”

Some challenges have included dealing delays in getting medicals for overseas pilots processed, as well as problems in getting data for Jeppesens charts from the military, which still controls large sections of Vietnamese airspace.

Infrastructure is another major issue, particularly at airports. For example, at Ho Chi Minh City’s Than Son Nhat airport, the only hangar available is owned by Vietnam Airlines, although Jetstar Pacific does have an access arrangement. Nevertheless, this means that it often conducts aircraft engineering work on the hardstands which can be difficult given the tropical monsoons at certain times of the year.

As a result, the growth trajectory of the company has slowed somewhat, according to Freeman. “We’ve changed our tack from being a high growth company. We were supposed to be at 14 aircraft by now, so we’ve significantly changed our entire strategy. It’s very much a bed down the business now and focus on the core components of the business.”

Instead of those 14 aircraft, the carrier currently operates a fleet of five aircraft – four Boeing 737-400s and one Airbus A320 – with its focus over the past year primarily on the Vietnamese domestic market. Freeman explains that the core of that market are the three major cities – Ho Chi Minh City, Hanoi and Da Nang, with a few select other markets. “There are some other really strong markets – Hai Phong is a really strong market which gets you into Hailong Bay and there’s also a significant amount of international traffic coming through there,” he added.

Currently, most of the airline’s pilots are expatriates, including a number of Qantas Group pilots on secondment. “We had quite a few Qantas pilots put up their hand to come up, knowing that they’d have to take a pay cut to do it, simply to do something different,” said chief operating officer Daniela Marsilli, who is also on secondment from Qantas. “We couldn’t open it up too widely because of the 737s. When we got the first A320, about half a dozen Jetstar A230 pilots took leave without pay to come and work here for a while. We’ll continue to do that.”

Commercially, the carrier has also had to contend with challenging regulations, such as a fare cap on main routes, which in some cases has meant that Jetstar Pacific has not been able to work its yield management in the same way it does in Australia and elsewhere.

Nevertheless, the carrier still backs up its low fares offerings, and offers a similar fare price beat guarantee to that operating in Australia.
International services have also been long on the horizon for Jetstar Pacific, with the carrier first announcing its plans to launch flights to Bangkok, Siem Reap and Singapore in August 2008. This was subsequently delayed, and while it did briefly operate some services, soon pulled them when it became apparent that the economics were not favourable. Nevertheless, the company has continues to codeshare on Bangkok Airways flights to Bangkok.

“We haven’t said we’re not flying to any of these destinations, all we said was in the current situation we need to delay,” said Freeman. “And then with the global economic crisis, this meant that there are further delays. Why go out and lease expensive aircraft right at a time when traffic is going to be tough to get.”

“There really were no operational challenges,” added Marsilli. “A lot of the ports where we were going to operate to are where Jetstar or Jetstar Asia operates also, so that really helps. It was just really the market and the timing.”

The carrier has also been somewhat disadvantaged with the downgrading of the Sydney-Ho Chi Minh City A330 service last year to a one-stop A320 service. “Our feed off Jetstar has reduced since it does the one stop,” said Freeman.” A logical choice for people now in Australia is if they want to go to Hanoi to go on Vietnam Airlines where you can go all the way through.”

Despite the challenges, Jetstar Pacific has also had an important number of highlights, including recently bringing its ground handling in-house, which saves it millions of dollars each year. Buchanan also notes that the Jetstar website is also now the number one e-commerce website in Vietnam.

An emerging issue for the carrier is a greater amount of competition. Earlier this year, a new startup called Indochina Airlines began competing on the main routes, although it currently only flies one Boeing 737-800. Another long talked about threat could come in the form of VietJet Airlines, which has yet to announce a starting date but has signalled that it too will target the ‘golden triangle’ routes.
Similarly, AirAsia still has plans to start a Vietnamese affiliate which would be majority owned by state-owned shipbuilding company Vinashin, although it appears that attempts to start this have been frustrated by the government.

Looking forward, Freeman says that the carrier will continue to grow over the year ahead, albeit with a cautious eye on the prevailing economic conditions. “We’ve got one extra aircraft coming in October 2010, and to be honest at the moment we’re just looking at where the economic environment goes to determine where that expansion is. We can get aircraft fairly quickly so there’s no need to lock them in right now, but we’re certainly monitoring the situation.”

However, any expansion will also lead to greater infrastructure issues at airports, although prospects on this front are positive. “If we wanted to double or triple in size, we’d have to start looking at it more closely. The Vietnamese government recognises this as an issue,” said Marsilli.

Another foray into the international market is likely to be high on the agenda, conditions permitting. “I would think in 2010 there will be an international expansion, and there’s some key markets there that we can move into with relative ease in terms of distribution channels already being set up by the Jetstar brand,” said Freeman. “So Japan, Singapore, Bangkok, Siem Reap – it’s all sitting there. We’ll be re-evaluating and rechecking as markets develop, and seeing which ones we can actually stimulate in the same way Jetstar in Australia does.”

Jetstar Asia

While Jetstar Pacific has been focusing on consolidating its position and is eyeing growth next year, Singapore based Jetstar Asia has firmly set its sights on entering a new growth phase, aided by a recent shift in its shareholder structure as well as the liberalisation of rights in the region surrounding it.

In April, the carrier announced that a new holding company named Newstar, 51 per cent owned by Dennis Choo’s Westbrook Investments Pte Ltd and the remainder by Qantas, had acquired its previous holding company, Orangestar. Previously, this was 45 per cent owned by Qantas with the remainder held by Temasek Holdings and other private investors.

As Jetstar Asia CEO Chong Phit Lian explained to Australian Aviation, the change was a logical step due to the challenging market circumstances and its planned growth ahead. “I must say that the past shareholding arrangement has been able to go on very well which is why we have been able to grow and turn to profitability,” she said. “But because of the changing landscape of the aviation industry, things are getting more intense in terms of competition. Volume is the way of the game and the elements of risk are different.

“To us from a management point of view, it’s a good way forward. For us, there is no impact and the support that previous shareholders and directors will be continued with Dennis (Choo),” she added.

Buchanan says that this move has created some immediate benefits for Jetstar Asia and the wider Qantas Group including $20 million in cost synergies for Jetstar Asia, mostly due to using a common systems backend. The recent commencement of an interline agreement between Qantas and Jetstar Asia is another benefit of the new arrangement.

With those benefits realised, Jetstar Asia is embarking on a new growth phase over the next year, which will see its network reach extend through the region. “To us, it’s the next phase in how to grow, how to further streamline, and how to scale up and make sure the average cost goes down in that scaling up,” said Chong.

Buchanan explains that to support this growth, the carrier will take delivery of three new A320s this year, in addition to the seven currently in service, to grow its reach. “[Those] aircraft are very much targeted at Singapore, mainland China, additional services in Thailand and India are also on the cards.”

As part of this expansion, the company is reviewing its Valuair brand, which is solely used on services from Singapore to Indonesia, and Buchanan told Australian Aviation that it may look at phasing it out. Given the exposure of the Jetstar brand in ports including Denapasar and Jakarta, it would seem that there are clear brand synergies which could be exploited.

Another significant development was the announcement in June that Jetstar Asia will take over the operation of Jetstar’s Perth-Jakarta Singapore services. “By helping Jetstar Australia to do that, we actually improve our overall product from Jakarta to Singapore as well,” Chong said.

Buchanan says that Singapore remains a major strategic hub for the Jetstar brand. “We’re about to go through a big growth spurt in investment in brand advertising there again because it is an important market for us to continue to grow,” he said. “It is a hub, but it’s also a very important source market. There’s a lot of Singaporeans who travel around Asia.”

Gearing Up

While other airlines in Asia have been forced to cut capacity, Jetstar appears to see the time as ripe for expansion.

Buchanan says that this will be primarily achieved by joining the dots of cities already served by at least one of the Jetstar branded carriers. “Our real focus at the moment is joining the dots of our existing businesses and deploying the capacity we’ve got – growing Singapore, growing short haul international, leveraging off the traffic rights we have,” he said. “And then it’s really a question mark of how we roll out the brand, which is a combination of things – how much traffic rights have we got, how is liberalisation growing and can we deploy businesses in a different way.”

The latter issue is particularly key to opening up new opportunities for Jetstar to offer more services from its existing operations “There’s quite a bit of liberalisation going on at the moment and it could get to the point where you don’t even need to start any more affiliates, you just have the rights to run wherever you want to run,” said Buchanan.

With more and more A320s set to arrive in the coming months, Buchanan says that some will be allocated to expanding its presence in Asia, although there are firmly committed yet. “We’ve got the aircraft but we haven’t really committed, we’ve got a hit list of routes on each of those businesses and we will wait and see how they go before committing those aircraft.”

Services from Australia into Asian ports are also set to grow. “We’ve just upped our Perth-Indonesian flying and we’ve just up-gauged our Darwin hub flying so you’re going to see continued rollout of additional capacity,” said Buchanan. “We’re looking at taking some additional widebodies – we’ve committed to the seventh one in December and that will see us roll out some more capacity across the region for long haul.”