Inside running?

Firstly China Eastern’s record of consummating deals with foreign airlines is not good as any Singapore Airlines executive will attest and there is little doubt that matters aviation are controlled by Air China and Beijing.

Add to that the fact that Air China is a major shareholder in Cathay Pacific and its assocaietd airline Dragonair, whose home base will be, as its name suggests, Jetstar Hong Kong’s there could be turbulence ahead.

While Cathay Pacific’s has consistently turned its back on the LCC phenomena it has never had an LCC with Jetstar’s reputation and market power on its home turf.

According to Jetstar Hong Kong it will operate short-haul routes within Asia, including mainland China, from 2013 with an initial fleet of three A320s, building to 18 A320s by 2015.

The Centre for Asia Pacific Aviation sees the move as a “key stepping-stone for the Qantas Group as it grows its Jetstar brand across the region.”

CAPA believes that the “Jetstar group will bring considerable low-cost experience to the new venture, which will become the first short-haul low fares airline to be based in Hong Kong.”

“The LCC model is a new concept for China Eastern, which is following the pattern of several of its full service counterparts in Asia in working with an experienced partner in the establishment of a LCC offshoot,” CAPA noted in a special report.

According to Qantas Jetstar Hong Kong is to be underpinned by a maximum capitalisation of up to US$198 million. The shareholding percentage in Jetstar Hong Kong will be equally held by China Eastern Airlines and Qantas Group, which will be equal partners in the Joint Venture. The maximum exposure for each partner is US$99 million over a three year period.

At the announcement Chairman of China Eastern Airlines, Liu Shaoyong, said the airline was pleased to be extending its 20 year relationship with the Qantas Group.

“We believe there are huge opportunities for the Jetstar low fares model throughout Asia, including Greater China, and are excited to be the first major Chinese carrier to bring this travel option to the region,” said Mr Liu in a statement.

“Cooperation with Qantas Group is a key step in China Eastern Airlines’ international expansion strategy and an excellent opportunity for China Eastern Airlines to develop low cost carrier operations to complement its existing business model.

“Jetstar Hong Kong’s low fare model will enable people to fly more often for less and will help to stimulate the Hong Kong tourism industry and the broader economy,” said Mr Liu.

Qantas Group Chief Executive Officer, Alan Joyce, said the new agreement would build a strong platform for accessing the world’s largest, fastest growing and most profitable aviation market.

“We see tremendous potential for the Qantas Group in Asia and we’re looking forward to working more closely with China Eastern Airlines to deliver on it,” Mr Joyce said.

“Establishing Jetstar Hong Kong in the heart of Asia and on the doorstep of mainland China is a historic opportunity to continue the successful expansion of the Jetstar brand in this region. We know from our experience with Jetstar in Australia and in the setup of Jetstar Japan the benefits of both a premium and a low cost airline operating in the same market. This will also apply to Jetstar Hong Kong, which will leverage the local knowledge and scale of China Eastern Airlines with the successful low cost model of Jetstar,” added Mr Joyce.

“Establishing Jetstar Hong Kong in the heart of Asia and on the doorstep of mainland China is a historic opportunity to continue the successful expansion of the Jetstar brand in this region.”

Chief Executive Officer of the Jetstar Group, Bruce Buchanan, said “Jetstar Hong Kong’s fares will be 50 per cent less than existing full service carriers [read Dragonair our oneworld partner] , which we’ve seen create new travel demand in our markets across Asia because it enables people to take more trips, more often.”

According to Qantas Hong Kong’s passenger throughout is around 40 million passengers a year from a population base of around 7 million with the Greater China travel market at almost 300 million passengers per annum, forecast to grow to 450 million by 2015.

There is no doubting the success of the Jetstar Group is Asia Pacific with operations in Singapore, Japan, Vietnam, Australia and New Zealand.

It operates up to 3,000 flights a week to almost 60 destinations, including 30 in Asia and eight in Greater China and the Jetstar Group is on track to carry more than 20 million people in FY12.

However despite all the motherhood statements CAPA warns that Jetstar Hong Kong “has stopped short of delivering the knock-out blow that most airline groups in the region, including Qantas, are seeking: unfettered access to China’s massive domestic market.”

CAPA points out that Hong Kong is a “regional” market and governed by a separate aviation access regime than Mainland China.

“However, if the Hong Kong experiment proves successful with China Eastern, Qantas will have the inside running,” says CAPA
But if Qantas thinks Jetstar Hong Kong will have the market to itself they ought think again says CAPA.

“Not far behind Jetstar will be AirAsia and potentially other Asian LCC groups. China Eastern’s move will also be closely watched by China’s three other main airline groups – China Southern, Air China and Hainan Airlines – as well as some of China’s smaller carriers, in particular leading Chinese LCC Spring Airlines.”

CAPA also believes that the Jetstar Hong Kong initiative could prompt response from Hong Kong Airlines and Cathay Pacific.

“Hainan Airlines in particular will be monitoring developments closely as the launch of Jetstar Hong Kong will likely impact its Hong Kong-based subsidiary, Hong Kong Airlines. Hong Kong Airlines late last year unveiled plans to convert its Hong Kong Express unit into an LCC although it is believed in recent months that Hong Kong Airlines has been reconsidering this plan as its largest shareholder is against the concept.”

Jetstar actually looked at a potential LCC joint venture with Hong Kong Airlines/Hong Kong Express but in the end decided to instead pursue a joint venture with larger China Eastern says CAPA.

The Sydney based think tanks believes that if Hong Kong Airlines decides to go forward with its LCC plans, it may now end up partnering with another leading Asian LCC group such as AirAsia.

But the giant in this equation is Cathay Pacific.

It is almost the last major airline in Asia not to follow the LCC path and now it has the fastest growing in its backyard.

For years the Cathay line has been that it would – and has – discounted the last rows in its 777-300s as a counter to the LCC threat.

That has worked well when the LCCs have not been based in Hong Kong but Kuala Lumpur.

But Jetstar Hong Kong is different – very different.

According to CAPA Cathay and its regional full-service subsidiary Dragonair now account for 49.7 per cent of total capacity in the Hong Kong market.

“As LCCs, which now account for only 5.5 per cent of total capacity in Hong Kong according to Innovata data, finally begin to penetrate the Hong Kong market the pressure will mount on Cathay to respond,” says CAPA.

In November last year during the CEO panel discussion at the Association of Asia Pacific Airlines (AAPA) assembly of presidents in Seoul, Cathay Pacific CEO John Slosar pointed out that bringing a new brand to market is a “huge expense”. He told delegates that
different segments of the market can be more efficiently managed through one main brand. Mr Slosar suggests that its regional subsidiary Dragonair can be positioned to meet the needs of price-conscious travellers without having to establish a separate brand specifically for the budget sector.

According to CAPA Mr Slosar sees all Full Service Carriers catering to both ends of the market regardless if the FSC has an LCC subsidiary or brand. “We think the focus has to be on what’s happening in the market, not establishing a bunch of companies,” Mr Slosar said.

Of course these comments were made before Jetstar Hong Kong emerged.

CAPA believes that the Jetstar Hong Kong launch could have huge implications for Mainland China’s LCC market
“Of more strategic importance, there are numerous potential LCC partnership opportunities in Mainland China. Like Hong Kong, the Mainland Chinese market currently only has an LCC penetration rate of about 6 per cent. In comparison, most major markets in Southeast Asia currently have LCC penetration rates between 25 per cent and 60 per cent,” says CAPA

“For now domestic LCC growth opportunities in China is limited but as LCCs from outside the mainland, including from Hong Kong, gradually expand their operations in China the pressure will mount for the market to open more domestically. If and when this occurs, Jetstar and China Eastern will likely be the first to benefit as they will already have a joint venture LCC up and running in Hong Kong,” suggests the think tank.