Despite the setbacks, Japan takes off for Jetstar

The $120 million of new capital that Qantas and its key partner Japan Airlines have injected into the fledgling Jetstar Japan joint venture reflects both the surprising initial success of the low-cost-carrier and the teething problems it is experiencing.

Jetstar Japan, launched only 16 months ago, already has 18 planes in its fleet flying at about 80 per cent capacity. It's not only the biggest low-cost carrier operating within Japan, but is now the biggest of the domestic carriers operating out of Tokyo’s Narita airport.

Qantas said today the carrier expected to grow its fleet to 24 aircraft, growth that was already funded.  Jetstar Japan’s fleet is based on 180-seat A320s.

Alan Joyce has said previously that, given the size of the Japanese market (it is about six times that of the Australian domestic market), Jetstar Japan could ultimately be a bigger business than Jetstar’s Australian business, with a fleet of perhaps 60 aircraft. There are analysts who believe it could be a lot bigger.

Given that it launched virtually at the same time as two rivals, AirAsia Japan (a joint venture between AirAsia and All Nippon Airways, or ANA) and Peach (another ANA joint venture with Hong Kong’s First Eastern Investment), Jetstar Japan’s growth has been phenomenal.

AirAsia has already been burned off, exiting the market. ANA is re-branding the carrier as ‘’Vanilla Air’’ and refocusing it on international routes, which should have some positive impacts on the competitive intensity of the domestic market.

At an operational level, Jetstar Japan is succeeding and adapting to the different nature of the Japanese market. Initially it offered only online bookings, but has now added a unique distribution channel via ATM-like ticket machines in Japan’s largest convenience store network. But there have been some setbacks.

The most obvious relates to the Japanese government’s determined and large-scale efforts to weaken the yen, which has had a materially negative impact on fuel and equipment costs.

The other relates to regulatory delays. The original plan was to establish two bases in Japan: the Narita base in Tokyo and another at Osaka. Narita is subject to a curfew whereas Osaka isn’t.

Jetstar Japan appears confident that, while it is taking longer than expected to get regulatory approval for Osaka, it will be granted. That would have a meaningful impact on aircraft utilisation and unit costs.

It is also awaiting regulatory approval to add international flights to the carrier’s domestic presence, which would allow it to connect into the wider Jetstar network in the region. It is particularly interested in linking the Japanese operations with its planned Jetstar Hong Kong operation, which is also awaiting regulatory approvals. Jetstar Hong Kong is a joint venture with China Eastern to which Hong Kong conglomerate Shun Tak was recently added.

Qantas said today that its planned equity investment in the Hong Kong business of $US99 million had been reduced to $US66 million because of Shun Tak’s entry to the venture – a reduction that would equate to about half the new commitment to the Japanese business.

The Japanese venture isn’t profitable, but Qantas has high expectations that it will be solidly profitable within a few years.

The departure of the highly-credentialed low-cost carrier operator AirAsia from the market won’t hurt. If it can get its second base up and running and add a modest international dimension (using its existing planned fleet) to the business, Jetstar will have established something more than a beachhead in the Japanese market. The additional investment underscores its belief that it will.