Start-up costs, competition sap Jetstar earnings

Jetstar is experiencing growing pains as it pays the cost of setting up offshoots in Japan and Hong Kong and braces for stiffer domestic competition from Tigerair.

Jetstar is experiencing growing pains as it pays the cost of setting up offshoots in Japan and Hong Kong and braces for stiffer domestic competition from Tigerair.

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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