Qantas switches the flight plan

Alan Joyce's Plan B might be on hold indefinitely but Plan A, the regional expansion of the low-cost Jetstar brand, received a major boost today with the announcement of a Hong Kong-based joint venture with China Eastern Airlines.

Plan B, which had some synergistic links with the Asian strategy of expanding the Qantas group's low-cost model throughout Asia through a series of alliances was, of course, to establish a new separately-branded premium carrier in the region.

That plan was put on hold earlier this month after discussions with Malaysia Airlines ended partly because of Malaysia Airlines' financial stresses and partly because Qantas has cut back heavily on its capital expenditures and is again slashing costs to protect its credit rating.

The strategy of creating a regional brand and hub in a low-cost jurisdiction was independent of, but allied with, the established push by Jetstar into the region. Jetstar Asia already has a base in Singapore, Vietnam and Japan and has made it clear that it was keen to expand its coverage within the region in the midst of something of a skies-grab by low-cost-carriers keen to stake out positions in the world's fastest-growing aviation market.

The alliance with China Eastern, China's second-largest carrier, will give the Jetstar Hong Kong brand access to north Asia, including Greater China, with plans for a short haul network that will also service Japan, South Korea and South East Asia.

With each partner contributing half the initial capital budget of $US198 million, and only three A320s in service when Jetstar Hong Kong launches next year, the new airlines will have a relatively modest launch. By 2015, however, Qantas and China Eastern plan to have a fleet of 18 A320s.

China Eastern is a full-service international and domestic carrier, so bringing a low-cost carrier next to its operations creates the kind of complementary relationship that Qantas has successfully established between its Qantas-branded services and its low-fares subsidiary.

The airlines said the new airline would be the first low-cost carrier based in Hong Kong and only the second within Greater China. With plans to under-cut the full service carriers operating in the region by 50 per cent, the new partners hope to tap into the enormous growth expected in travel within Asia as living standards continue to rise.

Joyce's original vision was to capitalise on the growth of Jetstar in the region, and address the strategic threat to Qantas' international business created by its status as an ‘end-of-the-line' carrier based in a uncompetitive high-cost jurisdiction, by developing a premium service and regional base to create the capacity to do within the region that it has been able to successfully do in Australia.

The premium brand was designed to try to tap into the growing affluence and mobility within the region but that vision is now on hold, probably for some years, after the failure of the talks with Malaysia and Singapore.

The appeal of Malaysia was that it proffered a capital-light solution at a time when Qantas doesn't have a lot of spare capital to throw around on higher-risk expansion. The failure of the discussions means the Joyce is now focusing even harder on improving the weak economics of the Qantas international business by rationalising the group's maintenance operations, lowering costs within the non-aviation businesses and withdrawing from unprofitable and marginally profitable routes.

The inability to land an Asian beachhead for a premium carrier almost inevitably means that Qantas will now focus even more intensely on expanding Jetstar's footprint throughout the region.

The alliance with China Eastern, like the earlier alliance with Japan Airlines, offers a lot of upside in markets where the penetration of the low-cost model remains relatively low, particularly within the Greater China market, where Jetstar's Bruce Buchanan said low-cost carriers had less than five per cent of the market.

While the penetration rate for the model might be low, there are nevertheless a range of existing low-cost players in the markets Jetstar Hong Kong plans to attack and the partnership will be relying on China Eastern's position and connections within the north Asian market and Qantas' experience of operating a dual brand strategy to establish the new carrier.