Australia's two major airlines are increasingly looking to the wider Asia-Pacific region for new opportunities

Australian domestic business has been booming over the past year for local carriers Qantas and Virgin Blue. The market has grown thanks to the emergence of Virgin Blue and, more recently, Qantas's low-cost carrier Jetstar. But that is not enough for Qantas and Virgin Blue, which have money to spend in the wider Asia-Pacific region.

Qantas transferred its attention to Asia after its proposed alliance with Air New Zealand (ANZ) failed to win regulatory approval. When the partners gave up on their alliance dream after the final regulatory knock-back, they said they would pursue co-operation within Australian and New Zealand competition requirements. But so far this has failed to materialise.

"Both companies have been too busy to do a lot in the last two or three months," says Geoff Dixon, chief executive of Qantas. "I've talked generally with Ralph [Norris, chief executive of Air New Zealand] and we have the desire to work co-operatively together, but the issue is how we can do it in the scope of the competition laws," he says. "We will continue to look at Air New Zealand, but we will look at everywhere else as well."

Low-cost template

Instead of putting its money into ANZ to secure a 22.5% stake as planned under the proposed alliance, Qantas has invested money in low-cost carriers. It tested the low-cost waters with its domestic Jetstar operation, which launched services in May 2004. Jetstar has been a success for the airline, helping it to regain market share previously taken by Virgin Blue. The low-cost carrier contributed earnings before interest and tax (EBIT) of A$19 million ($15 million) to Qantas's half-year profit before tax of A$601 million – ahead of expectations.

At a recent Centre for Asia Pacific Aviation conference, Dixon described low-cost airlines as probably the greatest thing that has happened to the airline industry in the past 30 years. Qantas likes the low-cost formula so much that it followed the launch of Jetstar with a Singapore-based low-cost carrier, Jetstar Asia. Qantas spent S$50 million ($30.5 million) for a 49.9% stake in the carrier, Singaporean businessmen Tony Chew and Fong Fui Wong own 21.1% and 10% respectively, and Singapore government investment company Temasek Holdings owns the remaining 19%.

Jetstar Asia launched services from Singapore to points throughout Asia last December. The airline plans to grow its Airbus A320 fleet to eight aircraft this year and to more than 20 of the type over the next few years. The airline entered a highly competitive market and its growth has been constrained "quite a bit" by a lack of flying permits from some countries, despite it having rights from the Singapore authorities, says Dixon. Despite the setbacks, Jetstar Asia holds a strong appeal strong for Qantas – providing access to one of the world's largest travel markets of more than 3 billion people and to the Singapore hub.

Last year also saw Qantas invest in a 49% stake in Bangkok-based cargo airline Thai Air Cargo. Thai company CTI Holding owns the remaining 51%. The cargo operator plans to launch services in the middle of this year with Boeing MD-11 freighters, serving points 5-6h flying time from Bangkok, including China, Hong Kong, India and Singapore.

Qantas's involvement in Asia is unlikely to end there. Chief financial officer Peter Gregg is heading a team looking at new business opportunities, and Dixon says that the group is "actively looking at the moment". New developments are likely to include extending the low-cost airline business model and, with Dixon predicting that long-haul low-cost airlines are likely to emerge soon that could be the airline's next project. "We will look to do it [the low-cost airline] elsewhere," says Dixon. The airline is eyeing opportunities "all over the sub-continent and possibly China", he adds.

Further investments by Qantas in the Asia-Pacific region are inevitable, believes Peter Harbison, managing director of Sydney-based aviation consultants Centre for Asia Pacific Aviation. "There are government limits on establishment, but the environment is loosening up. It's best to do it early, before others get too established," he says. In particular, he expects Qantas to make moves in the main growth markets of China and India. The Australian domestic market, where most of the airline's revenue and profit comes from, will only grow at a rate of 4-5%. "These other markets are good for 10% for some time to come," he says.

Making waves

But some of Qantas's overseas moves are causing waves at home, in particular the airline's plans to base more personnel offshore – reportedly as many as 7,000. "We have no desire to put jobs offshore, but we have a desire to produce a commercially competitive company," says Dixon.

Qantas is not alone in its Asian moves, with Virgin Blue also expanding into the wider region. The company's first foray outside Australia was Pacific Blue, which launched services from New Zealand to Australia, Fiji and Vanuatu in 2004. That operation is going "better than expected and is operating profitably for us after one year", says Virgin Blue chief executive Brett Godfrey. Pacific Blue has grown from one to three aircraft in a year, carried over 300,000 passengers and operates to seven destinations, with Auckland and Rarotonga to be added shortly.

Pacific Blue has been planning domestic New Zealand services for some time, but that no longer appears such a priority in the face of Qantas and ANZ competition and access problems at Auckland. "We are still conducting feasibility studies," says Godfrey, but the focus is now on expanding its profitable international services.

Virgin Blue's business development team is looking at a number of growth opportunities. "We are obviously looking at the most attractive markets first and it happens that many of these are in the Asia-Pacific region. There is a huge array of aviation-related business, but it's fair to say the more closely they are related to operating a low-cost airline, the more we feel we have to contribute and to gain," he says.

The next international development for Virgin Blue will see it establish a joint venture in Samoa to take over the jet routes of Polynesian Airlines. The airline was selected as the preferred bidder and has been in discussions with the Samoan government since December on the details. Godfrey says the aim is to more profitably operate the jet routes of Polynesian, which has been unable to achieve economies of scale with a single Boeing 737-800 – the same type operated by Virgin Blue. Polynesia's aircraft will be integrated with Virgin Blue's fleet, although the Australian carrier will remain largely invisible in the operation, save for providing support. The deal will allow Virgin Blue to extend its existing Pacific coverage from Fiji and Vanuatu into Samoa and Tonga and the Cook Islands.

Virgin Blue is also reported to be on the verge of announcing a new Macau-based low-cost international airline, which would provide access to the Chinese market. Godfrey declines to comment on the speculation, saying: "We have talked to interested parties in many countries and there is probably a Macau stamp or two in the passports of the business development unit."

He does not deny, however, the appeal of China. Singapore and the rest of South-East Asia is getting increasingly crowded, says Godfrey, but "China and India on the other hand are relatively virgin territory as far as low-cost carriers are concerned, and are the largest and the fastest growing markets in the region, so at face value they are both attractive." But both countries have regulatory and governmental issues, he concedes.


The airline is also looking further afield, with Virgin Group boss Sir Richard Branson already saying he wants to operate from Australia across the Pacific – either through Virgin Blue or with a separate operation. Godfrey describes transpacific expansion as "certainly an opportunity worthy of close attention".

But Virgin Blue's international ambitions are dependent on the outcome of the battle for control of the carrier now under way. In January, Patrick Corp, which owns 45.95% of the carrier, launched a bid for the remaining shares. Virgin Group rejected the takeover offer as too low and responded by buying more shares, increasing its share to 25.1%. The Patrick move is an effort to gain more control over the future direction of the carrier, with Patrick chief executive Chris Corrigan criticising Virgin Blue for failing to adequately respond to competition from Jetstar. Control by Patrick could see Virgin Blue abandon some of its international ambitions and concentrate on its domestic operations.


Source: Flight International