China Eastern Airlines and Qantas are to set up a regional low-cost carrier, marking the first move by a big Chinese mainline airline into the growing but overcrowded low cost sector in South East Asia.
China Eastern, China's third-largest airline by market value, and Qantas will invest some $198 million over three years in the equal joint venture, which will start in mid 2013 with three A320s. If all goes to plan the fleet will expand to 18 aircraft by 2015.
The new venture, called Jetstar Hong Kong, will meet China Eastern's aspirations in the low-cost market while sharing the risk and investment cost with Qantas, leaving the Chinese airline to focus on its growing domestic network and learn some low-cost operating tricks at the same time. The deal allows China Eastern to rationalize its fleet and capacity allocation to the joint venture.
Qantas on the other hand gets access to China, the fastest-growing airline market, and enables it to take advantage of Asia's lower operating costs (it says), as it looks to turn around its international business which lost A$200 million in 2011.
Under the deal, Qantas will lend its brand, commercial management, maintenance and IT systems, while China Eastern will give access to Chinese demand.
"We believe there are huge opportunities for the Jetstar low-fares model throughout Asia, including Greater China, and are excited to be the first major Chinese carrier to bring this travel option to the region," said Liu Shaoyong, chairman of China Eastern.
Jetstar Hong Kong's fare will be half that of full service carriers, the two said in a joint statement.
Qantas shares were up 2.4% while China Eastern shares were down half a percent.
This news follows the abandonment of talks between Qantas and Malaysia Airlines to set up an Asian premium airline last month.
The JV is a great one. It should look to transit some of the 40 million passengers going through the Hong Kong International airport each year and in so doing tap into the greater China market that Qantas says is set to see 450 million passengers by 2015. The key is that Qantas is now able to move into a market that only has around 8% of capacity allocated to low cost carriers – It should make a killing…
Jetstar with its JV operations in Singapore, Japan, Vietnam and now China, as well as its own operations in Australia and New Zealand, makes it a terrifically strong player in the APAC region and credit needs to go to the Qantas management especially CEO Mr Joyce who has had to put up with so very much over the past year.
Tony Fernandez and his mighty Air Asia brand is looking about him and is no doubt worried at the on-coming proliferation in his core market. Tony is no fool though and if he can overcome political uncertainties in Malaysia then a deal with MAS is on the cards, indeed his deal with Qatar is the most interesting as reported here in January, this is targeting Haj traffic and this could be a growth market second to none – A low cost link-up between South East Asia and the Middle East would take Tony Fernandez and his brands out of the direct line of fire in this overcrowding space.
One problem with all these low-cost airlines popping up in the APAC region is of where they are all going to fly to? At the moment the overlaps are going to be considerable as infrastructure upgrades are behind schedule and/or non-existent.
Capitals such as Kuala Lumpur, Jakarta, Bangkok and Manila are the places to watch as overcrowded airports and outdated infrastructure are twinned with a huge spike in the number of aircraft in the region. Southeast Asian carriers have ordered $47 billion worth of aircraft for the coming decade but the deals could be under threat as airlines wake to the fact that airports are not able to keep pace with the growth. Airlines worst hit by this could well be Lion Air and AirAsia – to date at any rate. Low-cost structures of course depend on quick turn-around times, as things are that is not going to be possible. Infrastructure investment is required at speed.
With pressure from AirAsia and scenes of chaotic check-ins and immigration, government-linked operator Malaysia Airports is rushing to complete another budget terminal that is due to be up and running by April 2013 but this will only buy time the way the airlines are expanding. In addition new terminals are nothing without new road and rail connections. The clock is ticking.
Meanwhile on the investment front it is worth looking to the Chinese airlines: China’s big three carriers are expanding long-haul flights by offering cheap fares on international routes to gain additional market share, this should mean short-term loss of revenue for long term gain so share prices are at this time depressed. The domestic networks of these carriers are not big earners so any additional moves to improve international markets are a very good thing.
Meanwhile check out Air Canada and ask yourself: How can an airline be worth less than one of its aircraft. Does Air Canada really carry that much debt?
Qantas and China Eastern create Jetstar Hong Kong – Another LCC joins the fight but where is the infrastructure?
