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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Qantas’ Chinese connections

EVERY airline looking east (or westwards or northwards depending on where they are based) wants a foothold in China, that huge market with a growing population of air travellers.

Three years or so ago when Australian flag carrier Qantas announced a transformation program, chief executive Alan Joyce identified Asia, in particular China, as the answer to the airline’s woes in the international arena. The rising wealth of Asia’s most populous country makes good reason for Qantas to consider an Asia-based premium carrier near enough to tap into that market, and to set up a budget carrier in Hong Kong, the gateway to China, jointly with China Eastern Airlines and a local conglomerate owned by casino magnate Stanley Ho. While the former proposal was aborted, the latter is awaiting regulatory approval – against the wishes of Cathay Pacific – with ordered planes parked at the Airbus factory awaiting delivery. That, Mr Joyce had said, was not unusual for start-up airlines.

Courtesy Qantas

Courtesy Qantas

All that did not stop Qantas from building up its Chinese connect ions through codeshare services. In a recent agreement with China Southern Airlines, Qantas customers can gain direct access to four destinations within China including Guangzhou from Sydney, Melbourne, Brisbane and Perth. China Southern customers will similarly gain access to domestic destinations across Australia as well as beign able to fly between Sydney and Auckland.

Qantas International CEO Simon Hickey said: “Partnerships are at the core of our strategy in Asia and together with our airline partners, we’re pleased to now offer customers access to 179 flights to 12 cities in Asia each week, with fares available to over 120 additional Asian cities.” He added: “The Qantas Group has never had a stronger presence in Asia. More than one sixth of our total revenue now comes from flights to and within the region, and we plan to keep opening up new travel opportunities.”

This can only mean high alert for rival airlines, particularly those which by fifth and six freedom rights have been routing travellers through their home bases.

Qantas already has a codeshare arrangement with China Eastern Airlines between Australia and China via Singapore.

None of the mainland China-based airlines are members of the OneWorld alliance to which Qantas belongs. That may be of little consequence, considering that codeshare partners Chna eastern and China Southern are both SkyTeam members. Air China and Shenzhen Airlines are members of the Star Alliance. Out of Hong Kong, Qantas` Jetstar may face stiff competition from Hong Kong Airlines and Hong Kong Express, both carriers owned by the Hainan Airlines Group, besides Cathay’s Dragonair. Note however that Hong Kong Airlines and Dragonair are by definition regional and not budget carriers.

If there is any indication of China’s growing demand for air travel, it is Shandong Airlines’ recent order of 50 Boeing 737 aircraft to the tune of US$4.6 billion. At the same time, however, Air China warned that its first quarter profits would be 65 per cent lower compared with that last year because of the falling yuan. A statement issued by the airline said: “The financial expenses of the company substantially increased as compared with the corresponding period of 2013 due to the exchange losses.” Fellow competitor China Southern issued a similar warning on falling profits. These are but minor blips that will not deter foreign airlines from connecting with the China market.

HK Express expands as Cathay fumes over Jetstar Hong Kong

Who says Hong Kong is no place for low cost carriers? If it works for Singapore, it should also work for Hong Kong, which is situated at the doorstep of the large China market.

300px-Hong_Kong_Express_Airways_Logo.svgSo while Cathay Pacific Airways rallies to stop Jetstar Hong Kong – a consortium of Qantas, China Eastern Airlines and a local investor – in its track, Hong Kong Express is not wasting time to expand its network. (See Ryanair and Cathay Pacific face the same woe: Competition, Sep 12, 2013) The low cost carrier will commence daily operations in October to Kunming in mainland China, Taichung in Taiwan, Tokyo (Haneda) and Osaka (Kansai) in Japan, Chiang Mai and Phuket in Thailand, and Kota Kinabalu in Sabah, Malaysia.

Cathay probably finds less ground to oppose HK Express, whose parent is Hainan Airlines, than Jetstar Hong Kong, whose main driver is Qantas, a foreign entity. Besides, Hong Kong Express is already headquartered in Hong Kong before its transition into a low cost carrier. Ultimately it is about competition. However, the competition is likely to be more direct between HK Express and Jetstar Hong Kong. Of course, Dragonair – the regional arm of Cathay – may too feel the pinch.

Take a leaf from HK Express deputy chief executive officer Andrew Cowen, who said: “Competition is not an issue for us. We welcome competitions and though there are issues slots and airport constraints, we have no issue with that.”

Is there room for budget carriers in Hong Kong?

Cathay Pacific Airways has said there is no room for budget carriers in Hong Kong, following the announcement of a joint-venture between Qantas’ Jeststar and China Eastern Airlines, to be named Jetstar Hong Kong. Cathay has also made it clear that its subsidiary Dragonair is not a low-cost carrier but a regional airline. Now that Hong Kong Express is also diving into the budget market, will Cathay be proven wrong?

Courtesy Wikipedia Commons

Courtesy Wikipedia Commons

Inevitably the demise of Oasis Airlines in 2008 is often quoted to support Cathay’s argument, but there is a critical difference here: Oasis was a daring long-haul venture that could not be sustained by the traditional budget model, and at a time when fuel prices were spiralling. But there is no reason why both Jetstar and Hong Kong Express cannot succeed if they stick to regional routes within the 4 to 5 hours radius, although it is to be recognized that the competition can only get more intense – perhaps the real reason behind Cathay’s apparent skepticism.

Hong Kong Express, controlled by the HNA Group, already operates to regional destinations in mainland China, Taiwan and Southeast Asia. Its transformation into a low-cost operator means it already has an existing market and network to its advantage, while it plans to add destinations such as Kunming and Chongqing in China and Kota Kinabalu in Malaysia. Deputy CEO Designate Andrew Cowen said: “Some of our lowers fares will be 30% below the existing lowest fares in the market.” Now, Cathay and Dragonair should be concerned.

With the large and growing hinterland population of mainland China, the demand for seats is almost a given. While the budget market may have developed its own niche of travellers more concerned about stretching the dollar than with the frills and comfort of travel, increasingly as the aviation landscape changes with the vicissitudes of the global and regional economies, the choice of air travellers is fast becoming one of between airlines as to which offers the best value for money rather than strictly between budget and full service airlines.

Budget carriers no longer need to operate solely from exclusive budget airports to compete. In fact, being away from the main stream may limit its reach especially when the mode of some travellers may involve a mix of operators. Hong Kong, very much like Singapore for its land size, may not find it feasible to designate a separate airport for budget carriers. The solution may be a separate terminal within the same airport just so that budget operators, as they are so designated, may similarly avail themselves of “budget” facilities for lower ground costs. Even then, some budget carriers in Singapore were reluctant to be so isolated, and today Changi Airport has relocated budget carriers previously handled at the Budget Terminal to the main terminals as the facility makes way for the construction of an additional terminal to the airport’s existing three main terminals.

It may then be said that the Hong Kong authorities are not themselves sufficiently convinced of Hong Kong’s propensity to fan the budget airline growth, or that they somehow have not been encouraging enough the way that Singapore goes about spearheading that drive that has seen in recent years the budget business growing at a higher rate than legacy airlines. Hong Kong International Airport is an expensive airport, so it is said, and that in itself is not an inducement for potential budget operators. In spite of that, Jetstar and Hong Kong Express may yet have the clout to slowly shift the market, to the dismay, of course, of Cathay and Dragonair which realistically should not fear the competition.

The race for Chinese connections as Qantas increases Asian presence

Courtesy Qantas

Courtesy Qantas

Qantas took another step forward to increase its presence in the Asian market, which it has recognized as a key strategy in returning the international operations of the airline to profitability. Just last week, it expanded its codeshare agreement with China Eastern Airlines.

“We said we would expand Qantas’ Asian network through our airline partnerships and we’re now delivering on that promise,” said Qantas General Manager Andrew Hogg.

The codeshare will provide greater access to China, offering a choice of 17 direct weekly flights between Australia and mainland China on either airline, and onward connections via Shanghai to 11 other Chinese destinations domestically. Qantas already has a codeshare service with China Eastern between Shanghai and Singapore.

It is inevitable that the competition will zoom in on the rivalry between Qantas and Asia’s leading airlines Singapore Airlines (SIA) and Cathay Pacific Airways. Although Qantas reiterated the importance of Singapore as its Asian hub – after moving its hub for Europe-bound flights to Dubai following a mega-alliance arrangement with Emirates Airlines – it is clear that Qantas will tackle the Asian market in more ways than just relying on transit connections as there will be more direct flight options between Australia and Asian destinations. That reduces the importance of Singapore and Hong Kong as the go-between.

Additionally, Qantas is pushing the low-cost subsidiary brand of Jetstar across the region through Jetstar Asia based in Singapore, Jetstar Hong Kong pending approval, and Jetstar Japan based in Narita.

If China is where the aviation pot of gold is, Qantas is not wasting time. Cathay, though unhappy with Qantas’ proposed Jetstar operations based in Hong Kong, already has a stake close to 19 per cent in Air China and a stake of 49 per cent in Air China Cargo. Its wholly-owned subsidiary Dragonair operates an extensive network connecting Hong Kong and other Chinese destinations.

That leaves Singapore Airlines to work on its Chinese connections. Five years ago, it failed in a bid to buy a stake in China Eastern, but it has not ruled out the possibility of reviving that bid now that it has divested in Virgin Atlantic – a lacklustre acquisition it made more than decade ago. There is also the possibility of it looking at China Southern Airlines.

Plunging Cathay profits: What went wrong?

Photo courtesy Cathay Pacific Airways

Photo courtesy Cathay Pacific Airways

WITH Cathay Pacific Airways – one of the world’s leading airlines – announcing an 83-per-cent plunge in annual profit, one must begin to wonder what went wrong.

Almost five years since the onset of the global economic crisis, the fortunes of the airlines can be best alluded to the unpredictable movements of the yo-yo. It was only at the end of last year that the International Air Transport Association (Iata) could with some confidence finally revise its profit forecasts upwards instead of downwards: from US$4.1 billion to US$6.1 billion for 2012, and from US$7.5 billion to US$l4 billion for the current year.

Could Cathay be an exception to the rule? For all the hype about product improvement all round including the new Premium Economy class and a new regional business class, the Hong Kong-based airline posted a net profit of HK$916 million (US$118 million), down from HK$5.5 billion a year ago.

Cathay has attributed its poorer performance to a number of factors.

First, higher fuel costs. Cathay reported that throughout much of 2012, fuel prices were at sustained high levels and the Cathay Group’s fuel costs increased by 0.8 per cent compared to 2011. What’s new anyway, when this should similarly affect all airlines across the industry? Yet, in spite of that, some airlines such as Japan Airlines are reporting improved performances. The volatility of the fuel price has been an easy target to blame no matter what degree its impact is on performance. It may not apply to Cathay, but in fact the average jet fuel price had been falling from Sep to Dec 2012 before rising again.

What is more of a concern is the reason for the decline in the fuel price, as explained by Iata chief Tony Tyler: “The reduction in fuel prices is a great thing for the airline industry but they are coming down because of concerns over world economic activity. If the world enters an economic slump, that will be even worse for the industry than the higher fuel price was on its own.”

Second, a drop in demand for corporate travel. This is a more cogent argument as the industry continues to be hard hit by the economic stagnation or slow recovery if at all it is happening, particularly in Europe and the United States. Cathay, which banks on its premium product, is naturally affected more than other airlines that thrive on the low-end traffic.

In a statement issued by the airline, Cathay chairman Christopher Pratt said: “Premium class yields were affected by travel restrictions imposed by corporations.”

Again, this is not a new lesson gleaned only yesterday but widely recognized during the global financial crisis which all but favours cheaper alternatives. Cathay is not alone in this predicament; rivals such as Singapore Airlines (SIA) and Qantas face the same threat.

In a counter-move, Cathay introduced the premium economy class to retain downgraders and attract those who are prepared to pay a little more but not that much more to upgrade to enjoy the frills of an in-between class. It is tempting to conclude that this strategy – perhaps to the relief of SIA which has until now snubbed the idea – is not working judging by the results posted by Cathay, but its full impact is yet to be realised. If the global economy continues to weigh down, it may well prove to be Cathay’s lifeline.

That brings us to the third point as to what went wrong then. Cathay attributes it to increased competition. Mr Pratt said: “An increasingly competitive environment added to the difficulties.” That may be true, but when an airline such as Cathay which is among the world’s most successful carriers resigns to that, it comes across as being somewhat less plausible and lame, and smacks of something amiss.

Competition is a given in this industry. So what has Cathay done or is doing to check the competition? To be fair, it has done much more than most airlines. It has rolled out new product improvements and improved its in-flight service. The airline is ranked consistently among the industry’s favourites, particularly its business class, by air travellers. By all account, its strategy should place it in the forefront of the competition, so what is missing that it should ascribe its falling performance to increased competition? If there’s such a thing as a success formula to suit different environments, has it got the equation not quite right?

Fourth, the weak cargo demand in major markets, particularly from Asia to Europe. No doubt this has affected Cathay’s overall profitability. If it is any consolation, close rival SIA is also similarly afflicted. There are no clear signs that the situation will improve substantially in the near term. In light of the weaker outlook, Cathay has cancelled an order for eight Boeing 777-200 freighters but instead placed an order for three Boeing 747-8 freighters which will carry 16 per cent more revenue-producing freight than predecessor Boeing 747-400. Cathay chief executive John Slosar said the larger airplane would result in fuel savings for the revamped fleet.   

Fifth, high operating costs, especially of the long haul routes that according to Mr Pratt were dominated by “older, less fuel-efficient Boeing 747-400 and Airbus A340-300 aircraft”. Last year, the company announced plans to accelerate retirement of the less fuel-efficient 747-400 as it continues with the fleet upgrading programme for both airlines in its fold – Cathay and Dragonair. In January, Cathay ordered 10 Airbus A350-1000 and converted 16 of its existing order for A350-900 to the larger A350-1000. These 350-seaters will ply high-density routes which include non-stop flights to Europe and North America.

The future should look rosier. Mr Slosar said: “This is an important strategic development for Cathay Pacific. The A350-1000 aircraft will bring us world-beating fuel efficiency.” 

Last, incommensurate cost-cutting measures that include offering unpaid leave to crew and reducing capacity on some routes which unfortunately, according to Mr Pratt, “were not enough to offset in full the effects of high fuel prices and weak revenues.”

And we have come one full circle. So what makes one airline more likely to succeed than another when almost every one of them alike ascribes its failed performance to the same factors?

Mr Pratt said: “Our core strengths remain the same ever: a superb team, a strong international network, exceptional standards of customer service, a strong relationship with Air China and our position in Hong Kong. These will help to ensure the success of the Cathay Pacific Group in the long term.”

Sounds familiar, you may say, except for specific references applicable only to Cathay.

Cathay posts first-half loss, full-year outlook unclear

Cathay Pacific Airways posted a first-half loss of HK$935 million (US$121 million) for 2012. Chief executive John Slosar, who had in May warned investors of disappointing results, blamed it on the “triple whammy” of soaring fuel prices, weak cargo demand and pressure on passenger yield.

But what’s really new in a landscape of common woes for most airlines? Cathay’s closest rival, Singapore Airlines (SIA), is similarly afflicted. And as they all go into overdrive to implement cost-saving measures, it becomes so easy to lose sight of their individual strengths that give them their competitive edge.

Expectedly, Mr Slosar would capitalise on the 2012 Skytrax award that Cathay won for World’s Best Business Class – an award that for many years has been exclusive to SIA. Middle-east airlines such as Qatar Airways and Emirates Airlines have also increasingly garnered praise for their premium brand. It is understood that Cathay’s new regional business class will be equipped with flat beds by Oct this year.

Like SIA, Cathay is expanding its network in the region. This has boosted Dragonair’s operations; the regional carrier added eight new destinations this year, with more in the pipeline. Meantime, SIA inaugurated services of its new budget arm Scoot to Australia and announced that its regional subsidiary, SilkAir, has placed a record aircraft order of 68 jets, to the tune of S$6.1 billion (US$4.9 billion) for 54 firm orders. Ironically, parent airlines are hitching a ride on their subsidiaries.

Mr Slosar maintained that “the outlook for the rest of the year is still unclear, and short-term uncertainties and challenges certainly remain.” The real challenge lies in how Cathay can continue to brandish its brand in spite of the sluggish global economy and not become just another one of the undifferentiated airlines.