A new Asian flight menu for Qantas

New developments in Japan brings much-needed sunshine for Qantas' critical, disrupted Asian budget strategy. And in China there’s now also a tempting fallback option for the airline.

It passed without much attention outside of the trade press but one leg of Qantas’ stalled Asian strategy has had a significant breakthrough.

Only a couple of weeks ago Jetstar Japan, in which Qantas and Japan Airlines each hold 45.7 per cent interests (Mitsubishi Corporation and Century Tokyo Leasing Corporation split the remainder) gained regulatory approval to open a second base at Osaka.

Jetstar Japan was established with a two-base strategy but has been operating out of only one, Narita, while waiting for approval to open the second at Osaka Kansai.

The two-year setback relative to its original plans has hurt the carrier because its fleet planning was predicated on the two-base strategy, which left three aircraft grounded pending the approval.

The significance of the second maintenance and engineering base is that Narita is subject to a curfew but Osaka, one of the ports to which Jetstar Japan flies, isn’t. Gaining the approval creates more flexibility, will enable increased frequencies and will have a positive impact on aircraft utilisation and unit costs.

In the past few weeks Jetstar Japan, already the biggest domestic low-cost carrier in Japan, has significantly boosted its schedule and its capacity on its existing routes. It had been showing significant capacity growth and improvements in its yields even before the breakthrough with regulators.

The approval’s timing is useful as Air Asia, whose previous joint venture with Japan’s All Nippon Airways failed, has announced plans to re-enter the market in a curious partnership with an online retailer, a cosmetics company which also leases aircraft and a sport equipment and resort-management group. It is hoping to begin operations – which would connect to the Air Asia regional network, next year.

Jetstar Japan has separately sought approval to fly outside Japan, which would allow it to connect to Jetstar’s own network of Asian joint ventures, generating significant network benefits for all the ventures.

Qantas’ Alan Joyce has been very bullish about Jetstar Japan’s potential, saying in the past that he could sell Qantas’ stake (if he wished to) for a profit already despite its start-up losses and that he believed it would eventually be worth more than Jetstar’s Australian business.

The Japanese domestic market is about six times bigger than Australia’s and, after a slow start, low-cost carriers are experiencing accelerating growth in the market share, with close to 20 per cent of the market today.

While the Japanese joint venture is developing some momentum, one of the new Jetstar-branded businesses it hoped to link to remains frustratingly grounded.

Jetstar Hong Kong, in which Qantas has partnered with China Eastern and Hong Kong conglomerate Shun Tak, is still waiting for approval to begin operations and the nine-plane fleet it had acquired for the business – which has remained parked at Airbus’ main French plant -- is being sold down.

Apart from Cathay Pacific’s influence within its home market, the tension between Hong Kong residents and mainland China’s authorities probably makes it unlikely that the venture will get off the ground any time soon.

There could be an interesting fall-back option. China Eastern announced this week that it has converted its Beijing-based full-service subsidiary, China United, into a low-cost carrier and plans to more than triple China United’s fleet over the next five years. It also said it was looking for a strategic investor.

It wouldn’t have to look far. Qantas, via Jetstar, would be an obvious partner given their existing relationship.

Qantas itself would, one would expect, normally be very interested in getting an exposure to a mainland China-based low-cost carrier but it does have some issues of its own, with the market expecting it to report underlying losses of more than $700 million for the year to June – along with hundreds of millions of dollars of restructuring costs and writedowns.

It has frozen the expansion plans of Jetstar in Asia to conserve cash and capital and therefore may not be inclined, despite the longer term strategic appeal, to sink new capital into another start-up in the knowledge that it takes two or three years at least to get these venture into the black.

While there is some scepticism about Qantas’ Asian investments, the truncation of its international network in the face of the competition from new lower-cost carriers with more modern and efficient fleets, primarily out of the Middle East, means that if it can’t develop a regional presence via Jetstar its international presence will ultimately become too insignificant to be relevant.

The pause in the Asian strategy, however, may have to be prolonged until Qantas completes the radical transformation of its cost base now underway and, perhaps in a more rational domestic market with less over-capacity, it is sustainably profitable again.

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