Asia to fuel Jetstar's next expansion phase

Washington DC
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Australia's Jetstar is kicking its pan-Asian expansion strategy into the next gear as the low-cost carrier launches several new services from Singapore and looks at possible kangaroo routes to southern Europe.

The Qantas subsidiary has had franchises in Singapore since 2004 and in Vietnam since 2007. But unlike Melbourne-based Jetstar Airways, which has been consistently profitable and pursued rapid expansion over recent years, Singapore-based Jetstar Asia and Ho Chi Minh-based Jetstar Pacific have been generally unprofitable and slow to expand.

Jetstar chief executive Bruce Buchanan says both franchises, which he helped set up while he was chief commercial officer, have significantly improved their financial performance. He says Jetstar Asia in particular is benefiting from a decision earlier this year to more closely align its operations with Jetstar Airways, providing A$20 million ($18 million) in annual cost savings across the two carriers. "When I became CEO one of my key things was to sort out our pan-Asian strategy," says Buchanan, who replaced Alan Joyce last October when he moved back to the parent company to replace longstanding Qantas head Geoff Dixon.

"Singapore is now doing pretty well and even Vietnam was profitable in July. The general business is doing very well, our business model is very robust and we've done lots to reduce costs."

Record profits

Jetstar turned a record A$137 million group pre-tax profitfor the year to March 2009 and Buchanan says "we see the trends continuing" in the current fiscal year. In addition to the recent profits at Jetstar Asia and Jetstar Pacific, he says Jetstar Airways is "one of a few profitable domestic Australian carriers" and its new domestic operation in New Zealand, launched in June, has been profitable from the first month.

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Buchanan says the toughest challenge this year has been dealing with H1N1 virus, which had a major impact on Jetstar's long-haul business. He says the swine flu outbreak drove down bookings on Australia-Japan routes by 50% from mid-May through August, resulting in an A$15 million to A$20 million drop in monthly revenues. "Now that's subsided and the rest of the business is doing well," he says.

As a result Jetstar has accelerated its Airbus A320 delivery schedule, taking over delivery slots abandoned by other carriers during the recession, and agreed to lease five additional Airbus A330-200s. Buchanan says Jetstar will now take 11 A320 family aircraft during the second half of the current fiscal year and 10 more next fiscal year. Six of the 11 to be delivered this year will be operated by Australia's Jetstar, which is expanding by taking on trunk routes previously only operated by Qantas such as Sydney to Perth and Melbourne. The other five A320s will go to Singapore, including three growth aircraft and two replacements for the A320s now operated by Jetstar Asia subsidiary Valuair. Jetstar Asia plans to use the aircraft to launch new routes to China, India and Thailand plus add frequencies to Manila.

Buchanan says Jetstar plans to keep Valuairas it is still needed to operate Singapore-Indonesia services due to bilateral restrictions but the group is looking at branding the new Valuair aircraft Jetstar. "The Valuair business will stay. It's a valuable business. We're working on the branding issue," he says.

Jetstarwill take delivery of a seventh A330 in December and five more follow over the next three years. Buchanan says Jetstar has opted for the new higher gross weight option for all five additional A330-200s, enabling the carrier to potentially launch services to Europe before it begins taking Boeing 787s in 2013.

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Jetstar had been waiting for its 787s, which were initially scheduled to be delivered from 2009, to open routes to southern Europe. Buchanan says with the new heavier A330-200, which provides additional range, "we can now do southern Europe very comfortably out of Bangkok, Singapore or Ho Chi Minh". But he adds the group is still weighing the potential European routes against possible new routes between Southeast Asia and North Asia. He says it has also not decided which Jetstar would operate the European services, though adds it does not make a difference because all three carriers have the same branding.

Jetstar Asia and Jetstar Pacific have always been commercially aligned with larger Jetstar Airways but the three operations until this year were unaligned. Buchanan says a change in Jetstar Asia's ownership and capital structure earlier this year allowed Jetstar Asia to pursue more operational synergies with Jetstar Airways. Qantas now owns 49% of the carrier, up from 45%, while Singapore businessmen Dennis Choo took over the remaining 51% as Singapore government investment firm Temasek Holdings and several minority shareholders exited.

Vietnam challenges

Jetstar Pacific has not yet followed Jetstar Asia in pursuing operational synergies with Jetstar Airways but this could come as the Vietnamese carrier transitions its fleet from 737s to A320s and the government further reduces its stake. Buchanan says Qantas now owns 27% in Jetstar Pacific, up from 18% originally, and its stake "is due to go to 30% early next year". Buchanan believes the carrier, previously known as Pacific Airways, has successfully been transformed into a low-cost operator and has turned the corner financially.

Buchanan acknowledges the carrier has had its challenges but says these were expected as this was the first time the Vietnamese government sold a stake in one of its companies overseas: "The Vietnam market is complicated, no question. You are talking about trailblazing like no one has ever seen. If you are not willing to take risks, how can you have a plan for a pan-Asian strategy?"

While Jestar over the years has looked at establishing a third Asian franchise in other countries including Indonesia Buchanan adds for now the strategy is to grow organically and take advantage of new traffic rights made available as the region gradually liberalises. "There's still a lot of opportunity for our existing business without starting new ones," he says.

Click here for more on Jetstar Asia's long-haul ambitions