Jetstar Hong Kong’s long and costly wait to fly

Courtesy Jetstar

Courtesy Jetstar


Twenty-one months after Qantas announced the birth of its fifth Jetstar venture in March 2012, initially in partnership with China Eastern Airlines, the airline (Jetstar Hong Kong) has yet to receive approval from the Hong Kong authorities to fly. No doubt it is a costly affair waiting, with three remaining Airbus A320 aircraft sitting in Toulouse after six of the orders have since been sold. But prime mover Qantas is confident that Jetstar HK will eventually take to the sky, expecting its case to be heard some time next year although no firm date has been set.

Qantas chief executive Alan Joyce said: “We are confident that Jetstar Hong Kong’s case is solid for the approvals. The process has taken longer than anyone expected, it’s taken longer than any jurisdiction hat we’ve seen in the world, but this is going to be a good business venture which we believe will make good profits.”

If you detect any hint of frustration at the lumbering approval process, you may be right. Yet could you blame Mr Joyce for running out of patience? Indeed it is surprising that Hong Kong as a thriving air hub is taking so long to reach a decision.

Cathay’s objection

Courtesy AIRBUS

Courtesy AIRBUS

It is widely believed that Cathay Pacific’s objection to Jetstar HK is in no small way attributive to the delay. Cathay remained confident that the Hong Kong authorities would not rule in favour of the budget carrier, the argument being that it is foreign controlled, effectively from Australia. That runs contrary to Hong Kong law. In a move to make the carrier more Hong Kong in character, Qantas and China Eastern inducted a third local partner, Shun Tak, whose managing director Pansy Ho assumed appointment as Jetstar HK chairman. Shun Tak would have the majority 51 per cent shareholder voting rights, reducing that of the other partners to 24.5 per cent each. Presumably the authorities will now have to decide whether that is enough, notwithstanding Mr Joyce now saying that the new airline is more local than Hong Kong’s other airlines.

But is there a bigger issue than one about ownership, which by its legality should be indisputable? Right from the beginning, Cathay has made its objection heard, arguing that such a business model does not have a place in Hong Kong. While many of its rivals such as Singapore Airlines (SIA) and Japan Airlines besides Qantas have spawned budget offshoots, Cathay has pooh-poohed the idea. Cathay may deny it, but its opposition to Jetstar HK is an issue of competition. Though in name a budget carrier, Jetstar HK backed by strong parents with international connections will compete with not only Dragonair but also Cathay, the same pressure that other mainstream airlines such as SIA, Air France and Lufthansa are already experiencing. The likes of Ryanair and easyJet in Europe, Southwest and JetBlue in the United States, and AirAsia and Jetstar in Asia are the new threat to the legacy business as the global economy continues to flounder. The market has become that less clearly demarcated.

Is there a case for Jetstar HK?

To say that budget carriers cannot thrive in Hong Kong is a supposition without much experiential evidence to support it. With the large China market at its doorstep, the potential cannot be overplayed. By comparison, the growth of budget traffic outstrips that of full service traffic in Singapore; the low-cost business makes up 30 per cent of Changi’s throughput. It is higher in Indonesia and India. Asia in particular has seen an increased number of budget carriers in recent years to cater to the growing number of travellers responding to the offer of affordable fares. It is no exception that Cathay together with Dragonair which account for almost half the seats sold out of Hong Kong will want to protect their dominant market share.

So, are Hong Kong air travellers worse off than their counterparts in the region, being denied cheaper alternatives? Jetstar group chief executive Jayne Hrdlicka would like to think so. She said: “The travelling public in Hong Jong have clearly signalled that they are fed up with paying high fares relative to their colleagues around the region.” That at best is an assumption, though not entirely baseless. At the same time it does not mean Cathay and Dragonair will immediately lose chunks of their business to Jetstar.

The onus on Jetstar HK is to show that its entry will not diminish the market size but will instead generate an increase in demand for seats, something that all airport authorities like to hear. Almost always that is the wistful thinking that goads airports to open their doors to more carriers. Then there are the arguments for competition to grow the airport. Hong Kong cannot be the air hub it is today without the competition.

Qantas CEO Alan Joyce/Photo courtesy bloomberg.com

Qantas CEO Alan Joyce/Photo courtesy bloomberg.com

Lest anyone thinks that Jetstar HK would not survive the competition even if given the go-ahead, Mr Joyce cited the success of Singapore-based Jetstar Asia, which had been profitable in the four years before last year. Even though it lost S$40m (US$32m) last year, it outperformed SIA’s Tigerair which lost S$200m. The losses were the result of market overcapacity. However, with Tigerair cutting back, Mr Joyce said: “We see a path through for that business to go back into profit like it was in the previous four years. I’m comfortable it will get there.” Now, is not excess capacity the very apprehension of Cathay and Dragonair? Indeed, many airlines are returning to profitability on the back of reduced capacity, the short supply helping to hold up airfares. It is equally valid to ask if Hong Kong as a major regional hub airport is already facing that issue.

At some point Jetstar HK partners will have to reflect on the worthiness of waiting indefinitely for the sanction to fly. No pun intended, if you think of sanction’s other meaning of being punitive. Questions are being asked if Qantas was putting in money chasing a rainbow that seems too far out of reach. And one is apt to ask too: Is the prolonged delay intended to allow time to resolve the issue, one possibility being a stillbirth?

This article was first published in Aspire Aviation.

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About David Leo
David Leo has more than 30 years of aviation experience, having served in senior management in one of the world's best airlines and airports. He continues to maintain a keen interest in the business, writes freelance and provides consultancy services in the field.

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