Jetstar Asia to drop ST Aero and use Qantas' MRO contracts

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Jetstar Asia has decided against renewing its total support maintenance contract with Singapore Technologies (ST Aero) as part of an initiative to better align its operation with Australian sister carrier Jetstar Airways.

Jetstar Airways CEO Bruce Buchanan says the two Jetstars have identified A$20 million ($18 million) in annual savings that can be realised by bringing their two operations more closely together. This includes maintenance and engineering as well as procurement of aircraft, spares and airport services.

Since Jetstar Asia launched services in 2004 the carrier has been aligned commercially with its larger Australian sister carrier. But operations remained separate, which Buchanan says resulted in higher costs for items such as maintenance and spares.

"The deals we get are much better than the deals you get when you have only seven aircraft," Buchanan explains.

While Jetstar Asia operates seven Airbus A320s, Jetstar Airways now operates 38 A320 family aircraft. Jetstar Airways is wholly owned by Qantas Airways, giving the low-cost carrier even larger economies of scale when it comes to maintenance and procurement. Qantas also owns 49% of Jetstar Asia.

In late 2004 Jetstar Asia signed a five-year "total support" maintenance contract with ST Aero. Aimed at start-ups and smaller operators, ST Aero's "total support programme" includes the entire gamut of maintenance services including line maintenance, heavy airframe checks, engine overhauls and component repairs.

Buchanan says Jetstar Asia is now in the process of transitioning out of this contract with ST Aero. He says the carrier has decided to in-source line maintenance and is now in the process of recruiting engineers that will be licensed to work on both Singaporean and Australian-registered aircraft.

Buchanan says Jetstar Asia's engines will be added to Jetstar Airways' existing contract with IAE covering V2500 maintenance. He says components and avionics from the Jetstar Asia fleet will similarly be brought into existing Jetstar contracts, providing a more economical solution due to the economies of scale.

For heavy maintenance Buchanan says "we'll probably outsource some heavy checks in Singapore," where he points out they are multiple maintenance providers. But he says some Jetstar Asia heavy checks will likely also be done in New Zealand and Australia, where Jetstar Airways A320s are now overhauled, as the group has the flexibility to rotate aircraft around the entire Jetstar network.

Buchanan says the opportunity to more closely align operations at Jetstar Airways and Jetstar Asia was made possible in part by a recent ownership change in Jetstar Asia. Earlier this year Qantas increased its shareholding from 45% to 49%. At the same time Singapore businessmen Dennis Choo took over the remaining 51% as Singapore government investment firm Temasek Holdings and several minority shareholders exited.

"We took out all the minority shareholders and changed the capital structure entirely," Buchanan says, explaining the new structure made it easier for the two carriers to pursue more synergies.

Buchanan adds the two carriers a couple of months ago also started interlining on some routes. He says additional routes and destinations are now being added to the interline and Jetstar Asia is also now "looking at" codesharing with Qantas "where it makes sense".

Jetstar Airways already codeshares with Qantas and Japan Airlines and interlines with about 10 other carriers. Buchanan says these interline arrangements have been set up to also include Jetstar Asia.

He adds there is no need for a Jetstar Airways-Jetstar Asia codeshare because the two already are commercially aligned with one brand and one reservation system. "We already get all the benefits from a commercial sense," Buchanan says.

He adds of the A$20 million in annual cost savings identified from the new synergies, the two carriers should be enjoying a "run rate" of about two-thirds by the end of 2009 and a 100% run rate by the end of 2010.