Star Quality

Jetstar’s success owes as much to Alan Joyce’s leadership of the fledgling low-cost airline when it was launched in 2004 in defiance of Virgin Blue as it does today as the strength in Qantas’s armoury against domestic and international competitors.

In many ways, remembering that Jetstar was born – at least in part – out of the demise of Impulse Airlines, the Qantas subsidiary’s success has been founded almost entirely on extracting benefit from hardships.

A succession of global events has helped underscore the value of budget airlines in profound ways – economic downturns causing travellers to be more selective about air travel options, fuel price escalations that demand increasingly lean cost management of airlines, higher demand for domestic travel as holiday-makers’ appetite for international destinations lessens – the reasons why low-cost airlines like Jetstar are successful are manifold. Seeing how all these global challenges have impacted Qantas’s international operations, the rise of Jetstar as the shining star in the group becomes more understandable.

In recent years Qantas’s revenue has receded while Jetstar’s has grown. In the 2012 financial year, Qantas mainline revenue dropped one per cent to 69 per cent of the Group total, while Jetstar’s revenue contribution increased two per cent to 18 per cent. While these numbers for the last 12 months are not seismic, the trend is telling.

Between 2008 and 2012, Qantas Domestic mainline passenger numbers reduced albeit modestly by 309,000. At the same time Jetstar’s domestic passenger numbers grew by 3. 1 million. Although influenced by industrial unrest during the period, Qantas International numbers fell by 2. 1 million, while Jetstar’s international traffic increased by 3. 1 million. The number of international passengers carried by Jetstar in 2012 was only 1. 3 million passengers fewer than the longer-established, more internationally recognisable brand of Qantas. And these figures don’t include Jetstar’s Asian operations.

Could it be as some pundits suggest that Jetstar has become the chosen vehicle for Qantas in the international market at the expense of the mainline international product? Unpopular as that question is to the Qantas leadership, based on the simple passenger data there would appear to be more than a grain of truth in it.

Another indicator of a strategy being in play to balance market presence and economic return is seen in the marketshare statistics for the last eight years. As mainline domestic and international share within the Qantas Group declined, Jetstar’s grew across the board.

Domestically, Qantas has ceded mainline marketshare to Jetstar every year since Jetstar started services in 2004. At that time Qantas had 67 per cent of the market and now has 44. 6 per cent, while Jetstar’s share has progressively climbed to now nearly 21 per cent.

Internationally the same trend is apparent. In 2004 Qantas had 30 per cent marketshare and last financial year it had 18 per cent. During the same period Jetstar has grown to eight per cent of the total international market.

These figures, together with the fact Jetstar flies alongside Qantas on around 30 routes, suggest there is clear evidence across both Qantas’s domestic and international networks there is a deliberate transfer of business within the group to lower-cost Jetstar.

Also tellingly, last financial year the Jetstar Group earned $3. 08 billion in revenues and made an underlying profit before interest and tax (EBIT) of $203 million, the latter value being up from $131m three years ago. This is clearly a far better rate of return than the Group is deriving from mainline Qantas, which last financial year saw a $21 million underlying loss from revenues of $11. 8 billion.

These figures demonstrate with absolute clarity why the Qantas leadership has exercised Jetstar in so many dimensions. It’s a lucrative high volume revenue source with much lower unit costs that simply can’t be matched with the legacy costs carried by the mainline Qantas operation. The Group needs the cash Jetstar can bring to the group to help it remain viable and sustainable.

And with upwards of 150 commitments for 787s and A320s, Jetstar’s growth agenda is clear.

Five pointed star

Extracting maximum economic value from Jetstar has been a clear focus of Alan Joyce. He has orchestrated a strategy to construct a viable domestic network that delivers a better return through Jetstar’s lower cost structure while at the same time using that same philosophy to capture growing markets in Asia.

At any of the five points of Jetstar’s network – Jetstar Australia and New Zealand, Jetstar Pacific, Jetstar Asia, Jetstar Japan and the new Jetstar Hong Kong – the brand, philosophy and product are seamless across all five points of the network. The same livery is applied to the Jetstar fleet that now operates to 58 destinations in 16 countries, and which carried 18. 7 million passengers in 2011/12 on 340 daily departures across the network.

By any measure, Jetstar is a big – and growing – concern.

As energetic as the push into Asia continues to be, the bulk of the airline’s business is in Australia and New Zealand.

Qantas leadership has exercised Jetstar in so many dimensions.

Within its Australian domestic market, Jetstar serves 18 destinations, representing most major and secondary destinations in the country except Canberra.

Jetstar has played a prominent role not only in acting as a strategic revenue-optimising instrument for the Qantas Group, but in being a major catalyst for tourism in regional markets. As it has expanded its network and fine-tuned capacity, Jetstar’s role in boosting tourism traffic has been applauded by state and regional governments and it is seen regionally as an important stimulator of tourism activity.

Having expired most principal flying opportunities in the country, Jetstar’s new markets will be predominantly in regional areas where tourism plays a key role, such as its services to Ballina/ Byron. Competition in this sector will no doubt escalate as Jetstar vies for these marginal-volume markets with Virgin Australia and a reinvigorated Tiger, each having introduced services between Coffs Harbour and Sydney. Qantas currently operates the route with QantasLink-operated Dash 8s and it will be interesting to see whether Qantas moves Jetstar into the market as a competitive play against the two other airlines.

It would not be the first time Jetstar will have been manoeuvred in to gain competitive ground. In fact Jetstar’s inauguration was from Newcastle Airport in 2004 where Virgin Blue had set up while Qantas’s only presence at the time was Dash 8s on the Sydney, Melbourne and Brisbane runs. Port Macquarie Airport’s developments to cater for A320/737 aircraft signals its intent to attract high capacity aircraft and the region is heavily courting the three airlines for the tourism benefit they would bring.

But in the first instance how Qantas responds to Coffs Harbour will be a sizeable test of balancing route economics with sustainable presence in markets that have historically been supported only by turboprop aircraft.

With opportunities drying up domestically, if growth remains a primary consideration for the airline, Jetstar will be forced to reckon with the reduced economies of scale in regional markets outside Queensland where higher volumes have historically existed.

Jetstar representatives told Australian Aviation: “We will always look for new opportunities across our Australian domestic business. But it is crucial we stay true to our model and with that will be a focus on main trunk routes and flights to key leisure destinations around the country. ” Internationally, the airline recently reinstated nonstop services between Melbourne to Honolulu and has increased capacity to Bali and Phuket. It also recently introduced services between Darwin and Osaka via Singapore.

To the end of October Jetstar’s passenger traffic had increased 13. 6 per cent year-on-year, while its international traffic grew by 12. 2 per cent.

In New Zealand, Jetstar is experiencing growth after taking over JetConnect’s operations In June 2009, replacing the ageing 737s with eight newer and more efficient A320s between the country’s principal cities. With the recent addition of a ninth A320, Jetstar New Zealand has added 20 frequencies a week to the 90 the airline operated between its Auckland base, Wellington, Christchurch, Dunedin and Queenstown.

In 2011/12 the New Zealand operation carried 1. 6 million passengers domestically, representing a marketshare of between 22 and 23 per cent, with further growth anticipated as the airline gains a stronger capacity foothold in the market.

With traffic double that of the population, the domestic market is highly mobile and airline activity is keenly dynamic. Competition between Air New Zealand and Jetstar is persistent, more so now the lean Jetstar product can more easily match fares by Air New Zealand, itself now a lean operation having undergone its own transformation.

Jetstar continues to adjust its network and frequency in response to the dynamic nature of demand given this competition and in November, while adding capacity with its ninth aircraft, ceased flying between Christchurch and Queenstown as a result of more inbound travellers from Australia flying direct into Queenstown rather than hubbing through Christchurch. Jetstar also reduced flying from Melbourne and Gold Coast to Christchurch.

While Jetstar may be viewed a home carrier in Australia and as it vies for the right to be considered so in New Zealand, the airline is becoming equally at home in the growing Asia market.

Accessibility to lower-cost fares on intra-Asia networks for the booming middle class demographic in emerging Asian economies has presented Jetstar with formidable growth opportunities.

Jetstar’s first venture into Asia occurred early in the airline’s development, just six months after the parent airline was conceived in Australia. In April 2009 the merger of Singapore-based Valuair and Jetstar gave rise to what would become the benchmark venture for the progressive implementation of Jetstar’s pan- Asia strategy.

In 2013 Jetstar Asia projects it will carry more than four million passengers to and from its Singapore base with a fleet of 18 A320s. By comparison the airline last financial year carried 3. 3 million, an expression not only of the strategic success of establishing a low-cost airline in Singapore, but of the rapid growth of the market itself.

During the last year Jetstar Asia has ramped up capacity on key routes to Malaysia, Thailand and Burma as more aircraft arrived. Jetstar Asia operates 61 return flights a week between Singapore and Kuala Lumpur alone.

Meanwhile in Vietnam, Jetstar acquired branding rights to the former Pacific Airlines based in Ho Chi Minh City (Saigon) in 2007 through an equity arrangement with State Capital Investment Group and Saigon Tourist Holding company. In February 2012 the equity was increased to 30 per cent when shareholding arrangements changed, seeing the exit of the original partners and Vietnam Airlines come in as the controlling interest.

The fleet currently comprises three A320s and a single 737-400 inherited from Pacific Airlines. The Boeing will be replaced with a fourth A320, after which time there will be complete commonality with the rest of the Jetstar fleet and Vietnam Airlines.

Jetstar Pacific has not been free of trouble in its relative infancy, however. In late 2011 reports abounded about mounting debt, calls from the Vietnam government for Jetstar to quit the market and a full take-over by Vietnam Airlines, itself said to be in financial straits. In early 2012 Qantas responded positively by contributing $7. 5 million towards a total $25 million injection by the two shareholders to re-equip the fleet with up to 15 A320s and to underpin a renewed marketing push against growing indigenous competition.

Despite the challenges, the experience in Vietnam became a precursor to the establishment of two more Asian ventures in which partnerships with local full service airlines have been forged.

In Japan, Jetstar is establishing a low-cost business with partner Japan Airlines in what is becoming a hotly contested market segment in the country.

Of the 19 per cent overall share low-cost airlines have in the Japanese domestic market, Jetstar Japan is one of seven airlines competing in a market of high potential but conservative pace. So far it has just 1. 3 per cent of the total market, marginally better than ANA-related Peach and AirAsia Japan, each with one per cent.

Jetstar Japan is already seeing the development of new business, explaining: “For example, we know

Low-cost carriers are not there to cannibalise the existing markets. JETSTAR

that people who have never flown with us are flying for the first time because our call centre staff are being asked for the location of the airport and for instructions on what to do at the airport. ” Indeed it is the airline’s view from a group perspective that the development of Jetstar is not about simply diluting existing markets: “Low-cost carriers are not there to cannibalise existing markets, it’s about growing the market and offering fares at a price point that the majority of consumers can access. ” Jetstar and Japan Airlines have high hopes for the low-cost airlines’ success, with plans to grow the fleet from an initial three A320s to 13 by the middle of the year and to ultimately 24 by the end of 2014.

Jetstar will use its growing fleet and its partnership with Japan Airlines to operate into markets the flag carrier could not afford to do viably on its own. The arrangement will be reflective of Jetstar’s position in Australia where Qantas has ceded traffic to the lower-cost airline while earning higher margins for the Group.

Jetstar Japan will be looking to form network ties with the Group’s newest enterprise Jetstar Hong Kong when it begins operations this year under a joint partnership arrangement with China Eastern. With an initial fleet of three A320s (growing to 18 by 2015), Jetstar Hong Kong will operate to mainland China, South Korea and other points in Asia.

The airline will be the first short-haul low-cost airline to be based in Hong Kong and will hope to build on the negligible presence of budget airlines in Hong Kong.

However, the Asian network of businesses is not without complexity as a result of regulatory requirements in the countries where Jetstar has bases. Under local regulations Qantas/ Jetstar has had to form joint ventures with locally-based ventures and/or airlines in order to be able to operate in that market.

While in a positive sense such arrangements promote a degree of risk-sharing, the more limiting factor is that local interests hold majority ownership and thus control of the respective entities.

The near-seamless Jetstar network around Asia Pacific is, in reality, quite masterful especially considering it was conceived and developed at a time when Asia was only just waking up to low-cost travel. It was an arguably risky proposition, but the timing and execution of the pan-Asia strategy was well conceived from numerous perspectives.

First, each of its bases are served by Jetstar, Qantas mainline international and in most cases each of the Asia-based carriers as well. The opportunities for connectivity across the intricate web of intra-Asia services are increasingly important since the retention of revenue within the group between the different airline businesses becomes a valuable proposition.

Jetstar
fleet
Jetstar domestic:
51 A320 and
6 A321
Jetstar
international:
11 A330
Jetstar NZ:
9 A320
Jetstar Asia:
17 A320
Jetstar Japan:
7 A320
Jetstar Pacific:
3 A320 and
1 737-400
Jetstar Hong
Kong:
To grow to 18 A320
On order:
15 787-8;
110 A320 including
78 A320neo

The Centre for Aviation describes the emerging phenomenon as “low-cost carriers becoming network carriers, leveraging their wide access in multiple markets to offer connecting flights”. Despite there being little apparent marketing evidence of the total Qantas Group proposition in Asia save for recent publicity around the new services between Darwin and Osaka, Jetstar is beginning to see results from connection between its regional low-cost services and international operations to and from Australia. When announcing upgrades to capacity as new aircraft arrived, Jetstar Asia’s CEO Bara Pasupathi said the airline was seeing “an increasing number of our Malaysian customers onto Jetstar group services to Melbourne and Auckland”.

This emerging trend stands to be a potent force in the region at a time Qantas desperately needs to lift its revenue-raising – and reputational – game.

Secondly, while the businesses in Asia are stand-alone, the economy of scale the Group can derive from the combined businesses is palpable. Whether through fuel hedging, airport contracts, engineering or marketing, the scale of the Asia-based airlines gives the Qantas and Jetstar Groups a buying power that more closely resembles that of a major Asian carrier with a contiguous network.

It’s the very growth strategy of Jetstar in Asia, of course, that has earned Jetstar some vocal detractors that has played a prominent role in some of the industrial unrest that’s been plaguing Qantas in recent years.

Unions are already wary of two blocks of terms and conditions. They see the lower cost base of Jetstar employees standing to erode those of Qantas. Moreover, the establishment of offshore bases unions see as breaking their stronghold on richer entitlements for staff. It is true there are cost advantages to the airline through lower salaries and less generous conditions. It is, after all, one of the bases of a low-cost airline that makes it a viable proposition in the first place.

Despite the detraction, the reality is that Qantas simply has to be in Asia in one form or another. It cannot – and will not – abandon that market especially when it is tipped to be the fastest growing region in the world. As the director general of the Association of Asia Pacific Airlines Andrew Herdman notes: “Half of the world’s future traffic growth over the next two decades will be to, from and within Asia Pacific. ” The other important aspect of Jetstar’s value to Qantas in Asia is that it maintains a presence for the Qantas Group that it otherwise could not derive sufficient margin from with solely a full service product with its attendant cost base. It strengthens the airlines’ presence in Asia in a committed, multi-product way that assures penetration of the broader market in a way a single brand entity or product couldn’t.

Competition rising

As Virgin Blue took the ascendance to become Virgin Australia and Tiger Airways’ unstable approach into the budget market created little competitive impact, Jetstar has had an opportunity to become the dominant low(er)-cost airline in the market.

However, the planned growth of Tiger’s fleet under the astute guidance of Virgin Australia will take a bite out of Jetstar. The Qantas Group will be fighting a war on all fronts – regional, domestic and now low-cost – in a way it has never had to before. While the mainline domestic products will compete head-on with vigour, the aforementioned reliance Qantas has on the cash contribution from Jetstar means its subsidiary may well become the vehicle the Group supports hardest in the forthcoming battle.

Jetstar is the only vehicle Qantas has to match the emerging strength of Tiger Airways, which will likely be kept as a true low-cost airline. When it achieves a true economy of scale, Tiger will have a cost base lower than Jetstar. And it certainly will have a simpler business model, free of the complexities Jetstar has inherited from Qantas.

So an interesting dilemma now faces Qantas.

Should it try to do battle on a playing field of unequal cost level, adjust the Jetstar model or even seek to revert Jetstar – or a version of it – back to its true low-cost roots? If it views Tiger’s soon-to-be-renewed energy as being in any way potentially harmful, Qantas will have to act. Its teeth at the true budget end of the scale are blunted now Jetstar has put on weight.

The typical response – a fare war – will be a boon for travellers but would be unsustainable. It would harm not just the longer-term performance of the airline, but also Jetstar’s valuable profit contribution to the Qantas Group. It needs something more potent and ideally would really need to be in the form of a true reduction in unit costs.

Assuming the Virgin Australia control of Tiger is approved by regulators, Jetstar will have to react quickly. Tiger powered by Virgin is now within a year of being implemented.

Enter the 787

If one product alone will enhance brand credibility and publicity for Jetstar in 2013 it is the introduction of the 787-8 from the third quarter onwards.

The airline has 15 of the type on order and for the next three years will be the only member of the Qantas Group to operate the new aircraft after the parent airline deferred deliveries until 2016.

Jetstar explained the new aircraft will progressively replace the A330s – which will be returned to Qantas – on a “one in one out” basis and will be deployed on routes where the Airbus currently operates including to Phuket, Bali, Hawaii, Singapore, Bangkok and Japan. The principal bases for the aircraft will reflect those currently of the A330, being Melbourne, Sydney, Gold Coast, Cairns and Singapore.

Pilot training is already in place at Boeing’s Training and Flight Services facilities in Singapore for the lead technical crew team while training for pilots will take place throughout 2013.

Introducing the aircraft into operation, Jetstar explained: “We expect the 787 to initially operate on domestic routes along the east coast of Australia to provide line training opportunities for pilots and keep the aircraft close to home for the Jetstar team to gain greater familiarity with the aircraft prior to commencing long-haul services. ” The 280-seat aircraft will offer a distinctive point of difference to any other Australia-centric carrier particularly in terms of appeal and Jetstar will exercise the aircraft’s credentials relentlessly.

At the same time, the fuel efficiency of the aircraft will generate more of the margins Qantas needs. Jetstar projects the 787 will decrease fuel consumption by around 20 per cent and will offer lower maintenance costs than current aircraft.

We expect the 787 to operate initially on domestic routes. JETSTAR

These benefits will not only be felt in Jetstar’s domestic operations at least initially, but internationally where the 787 would be well-suited to network developments.

Tucked away in the corner of a page of the Qantas data book for 2012 is a reference to Jetstar’s international long-haul flying program in which it states: “… the delivery of the 787… will cement future long-haul growth in Asia and southern Europe”.

While Australian Aviation was told there was no current consideration of flying to Europe: “The arrival of the 787 does allow Jetstar to take a fresh look at our long-haul network. However, the focus will be ensuring reliability of the new aircraft on existing A330 routes and a smooth transition for our operational staff. ” By leaving open the possibility of the 787 operating to destinations in southern Europe, the idea does reinforce the potential for Jetstar to operate economically in yet more markets where Qantas International failed. If the triumphs in Australia, New Zealand and Asia are any measure, longer-haul flights to Europe may finally become a reality with the 787 in Jetstar livery.

Indeed, whether a 15-strong 787 fleet is sufficient to do everything the 787 is capable of and could deliver the Qantas group is doubtful.

The Jetstar group

Jetstar Australia Based Melbourne.

100% owned by Qantas Group Destinations: Domestic: Adelaide, Airlie Beach, Ballina, Brisbane, Cairns, Darwin, Gold Coast, Hamilton Island, Hobart, Launceston, Mackay, Melbourne (Avalon & Tullamarine), Newcastle, Perth, Rockhampton, Sunshine Coast, Sydney, Townsville, Whitsunday Coast.

International: Nadi, Honolulu, Tokyo, Osaka, Manila, Denpasar, Singapore, Phuket, Bangkok Jetstar New Zealand Based Melbourne.

100% owned by Qantas Group Destinations: Auckland, Christchurch, Wellington, Dunedin, Queenstown Jetstar Asia Based Singapore.

49% Jetstar/Qantas with Westbrook Investments (Singapore) Destinations: Osaka, Taipei, Shanghai, Ningbao, Shantou, Guangzhou, Hong Kong, Haikou, Nanning, Hanoi, Ho Chi Minh City, Phnom Penh, Siem Reap, Bangkok, Yangon, Phuket, Penang, Kuala Lumpur, Jakarta, Perth, Manila Jetstar Pacific Based Ho Chi Minh City.

30% equity holding with Vietnam Airlines Destinations: Hanoi, Hai Phong, Vinh, Hue, Danang, Nha Trang Jetstar Japan Based Tokyo Narita.

41. 7% equity holding with Japan Airlines, Mitsubishi & Century Tokyo Leasing Destinations: Tokyo, Osaka, Sapporo, Fukuoka, Okinawa Jetstar Hong Kong Based Hong Kong.

Joint operation with China Eastern Destinations: TBA

Jetstar’s rise to success has been swift, decisive and somewhat unorthodox in its evolution. Renewed competitive vigour in the domestic market alone will give the airline’s leadership cause to reflect on where the airline has come from and where it is headed in the newly-defined Australian domestic market.

Within Asia, Jetstar’s future is arguably more assured, save for the complexities of local governance arrangements that limit ownership and true control.

Notwithstanding these issues, there is certainty about the future role of Jetstar in the Qantas Group. Perhaps less certain is the role of Qantas itself in the domestic and international arenas.