Start-up costs, competition sap Jetstar earnings
Qantas' budget offshoot reported a 32 per cent fall in underlying pretax earnings to $138 million for the year to June 30 due to "the competitive domestic market and additional start-up losses".
The result for Jetstar included a $29 million hit from the federal carbon tax and $50 million in start-up losses in Japan and Hong Kong. The start-up losses rose by $31 million from a year earlier.
The airline declined to split out the losses for its Japanese and Hong Kong joint ventures.
Jetstar Japan began flying just over a year ago and now has 12 A320 planes, while Jetstar Hong Kong is still awaiting regulatory approval.
Qantas chief executive Alan Joyce said the airline maintained that the businesses in Asia were long-term investments and would take a number of years to turn a profit.
He emphasised growth potential in Japan, whose aviation market was six times the size of Australia's, yet low-cost carriers accounted for only 5 per cent of airline capacity.
"We also expect strong demand growth for low-cost travel in Vietnam and Hong Kong," he said.
Despite opposition from Hong Kong's flag carrier, Cathay Pacific, Qantas expects its budget offshoot to launch services from the Asian city by the end of this year.
Jetstar also faces stiffer competition in Australia from Tigerair Australia, which plans to double in size by 2018 following Virgin taking a controlling stake.
But Mr Joyce said Jetstar had the benefit of scale and had a "significant cost advantage" over both Virgin Australia and Tigerair.
Jetstar chief executive Jayne Hrdlicka said the airline was facing the pressures of weak consumer confidence, which was most noticeable in the fourth quarter.
She said consumers were less willing to spend, but Jetstar was hopeful confidence would improve after the federal election.
Macquarie Equities analyst Russell Shaw said Jetstar was facing more pressure but holding up well.
"Jetstar's domestic profitability has halved since [the 2012 financial year]," he said. "However, encouragingly there appears to have been an improvement in the performances of the international and Jetstar Asia business units."
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Jetstar reported a 32% fall in underlying pretax earnings to $138 million for the year to June 30. Management attributed the decline to a tougher domestic competitive market and additional start-up losses from its Asian offshoots, alongside one-off impacts such as a $29 million federal carbon tax charge.
The Jetstar result included $50 million in start-up losses related to its ventures in Japan and Hong Kong, with those start-up losses rising by $31 million from a year earlier. The airline declined to split out the individual losses for the Japanese and Hong Kong joint ventures.
Jetstar Japan began flying just over a year ago and now operates 12 A320 aircraft. Jetstar Hong Kong is still awaiting regulatory approval, although Qantas expects the budget offshoot to launch services from Hong Kong by the end of the year despite opposition from Cathay Pacific.
The company recorded a $29 million hit from the federal carbon tax, which was included in the reported result and contributed to the fall in underlying pretax earnings.
Qantas CEO Alan Joyce described the Asian businesses as long-term investments that will take a number of years to become profitable. He highlighted the growth opportunity in Japan — a market six times the size of Australia where low-cost carriers currently represent only about 5% of capacity — and said the company expects strong demand growth for low-cost travel in Vietnam and Hong Kong.
Jetstar is facing stiffer domestic competition, notably from Tigerair Australia which plans to double in size by 2018 after Virgin took a controlling stake. Despite this, Qantas management says Jetstar benefits from scale and has a significant cost advantage over both Virgin Australia and Tigerair.
Jetstar CEO Jayne Hrdlicka said the airline was feeling pressure from weak consumer confidence, particularly in the fourth quarter, with consumers less willing to spend. She expressed hope that confidence would improve after the federal election.
Investors should note that short-term earnings have been hit by start-up costs in Asia and a carbon tax, while management is focused on longer-term growth in larger Asian markets. The business faces tougher domestic competition but management points to scale and cost advantages. Analysts say domestic profitability has weakened since 2012, though international and Jetstar Asia units appear to be improving.
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