Asia Pulse
Friday December 5, 4:34 PM AEDT
QANTAS Shares Rise on Announcement of Budget Carrier Jetstar
SYDNEY, Dec 5 Asia Pulse - Amid the hype surrounding the release of the brand and livery of its new low cost carrier, JetStar, Qantas shares jumped two per cent on Wednesday alone, finishing the week comfortably in positive territory.
The flying public is also set to benefit from the week's developments, with a barrage of cheap domestic fares likely to hit the market before JetStar takes to the skies in May next year.
Qantas chief executive Geoff Dixon also gave his most upbeat commentary since the SARS pandemic hit Asia earlier this year, forecasting a record profit for the airline's domestic operations and talking up its international division.
Flights to Hong Kong will move beyond their pre-SARS levels by next April, while low cost international subsidiary Australian Airlines will soon add Darwin as its 12th destination in a growing network.
But analysts remain concerned over Mr Dixon's assertion that JetStar will run with a cheaper cost base than that of competitor Virgin Blue and won't cannibalise its existing mainline operations in any meaningful way.
Airlines such as British Airways and Dutch carrier KLM have failed in the past to make money from their own low cost carriers, amid strong pressure from several discount airlines in the European market.
Regardless, Qantas will press on with its JetStar plans, announcing it had placed an order for $A1.6 billion ($US1.17 billion) worth of Airbus A320s to take on the growing success of Virgin Blue.
The move represents one of the biggest risks ever undertaken by the Flying Kangaroo.
Qantas aims to control pricing at both ends of the market, with JetStar doing away with complimentary food on flights, designated seating and priority baggage.
Chief executive Alan Joyce said JetStar aimed to gather more than 70 per cent of its bookings online, with tickets set to go on sale in February next year.
"The launch of JetStar may well become one of the most important events in the airline's 82-year history," Citigroup analyst Jason Smith said this week.
"Either way, whether JetStar is an unmitigated disaster or a major success for Qantas - we believe the latter - the launch of JetStar does not appear to be good news for Virgin Blue's prospects."
Richard Branson's upstart airline has cornered 28 per cent of the domestic market over the past three years and may be worth as much as A$2.3 billion when it floats on the share market on Monday.
Mr Smith says the aim of JetStar is simple, to profitably offer the lowest airfares on new and existing leisure routes where Qantas cannot, and to do so by offering the lowest airline cost base in Australia.
To do this, JetStar must take advantage of lower wages for pilots, more seats per plane, faster turnaround times and better fuel efficiency.
JetStar aims to use the structure of Impulse Airlines - acquired by Qantas in 2001 - which as Mr Dixon put it this week, has since been in mothballs waiting for a rainy day.
The low cost carrier will at first use Impulse's fleet of Boeing 717s before taking delivery in June of the first of 23 new Airbus A320s.
"JetStar's cost base, when you take in the efficiency of the aircraft, the current Impulse deal, the product innovations they have, will without a doubt be lower than Virgin's," Mr Dixon said.
But Shaw Stockbroking research director Scott Marshall believes it is still uncertain whether the Impulse model will prove cheaper than that of Virgin Blue.
"In this competitive environment, it would be difficult for Qantas to have a substantially cheaper price than what Virgin Blue could offer," Mr Marshall said.
Virgin Blue Head of Commercial Operations David Huttner is more emphatic, saying the airline remains "quite confident" it would continue to have the lowest cost structure in the country.
He also said Virgin Blue was well prepared for a price war.
"We've got enough cash to run this airline for six months, which actually makes us more viable than Qantas - its cash wouldn't last anywhere near that time," he said.
"So we believe we can outlast - especially after the upcoming float - any attempt by Qantas to engage in anti-competitive behaviour."
Cost base aside, the other major concern of aviation analysts remains the issue of cannibalisation.
Credit Suisse First Boston analyst Greg Ward believes JetStar's route network and fare structure, to be released in January, remain the critical component needed to assess the new strategy.
"We believe there remains a healthy dose of scepticism in the market regarding Qantas management's ability to successfully manage the co-existence of a (low cost airline) ... without cannibalising the margins of the premium carrier," Mr Ward said.
While analysts expect Qantas will not introduce JetStar services in peak times on its major business routes, risks nonetheless remain.
The new airline could also lead to industrial strife, with Qantas' mainline enterprise bargaining agreements to be cast aside in preference to the one controlling Impulse's 600-strong workforce.
While JetStar will employ about 1,400 new workers - 1,000 of them in its home state of Victoria - the prospect of an all-Airbus fleet has also raised concerns that maintenance contracts might soon head offshore.
ASIA PULSE
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