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Jetstar a cunning plan

Qantas has cunningly positioned its low cost subsidiary Jetstar, launched in Melbourne on February 25, to achieve a number of objectives.
It will start operations on May 25 with flights from Brisbane, Sydney and Melbourne initially to leisure destinations such as Queensland’s Whitsundays, the Gold Coast, Sunshine Coast, Cairns and Tasmania.
It will operate up to 88 flights per day – more than 600 per week – increasing up to 116 flights a day, or around 800 flights a week, by August 2004.
By November, Jetstar says it plans to “expand progressively” with flights to Broome and Perth in Western Australia; Alice Springs, Ayers Rock, and Darwin in Australia’s Northern Territory; Townsville, Queensland; and Adelaide.
Avalon breakthrough
A major indicator that Qantas is serious about Jetstar operating as a genuine low cost airline on the European model (rather than just a “spoiler” subsidiary) is the decision to operate many services from Avalon Airport near Geelong in Victoria.
From June, Jetstar will operate 42 flights a week between Avalon and Sydney and 28 flights a week between Brisbane and Avalon, as well as 246 flights a week between Melbourne’s Tullamarine Airport and six other destinations.
This will provide saving on its airport costs compared to Virgin Blue at Tullamarine, reduce Jetstar’s attractiveness to full fare paying Qantas passengers, and put pressure on Melbourne Airport to contain its charges and moderate its public criticisms of Qantas.
Avalon, which is 55km from Melbourne’s CBD, will offer much cheaper parking than Melbourne Airport. Skybus will service Avalon, with a $13 adult one way fare from Melbourne and an $8 fare from Geelong. Lindsay Fox acquired the government owned Avalon seven years ago on a discounted 99 year lease, and the Fox organisation is expected to provide baggage services for Jetstar’s Avalon flights. Jetstar chief executive Alan Joyce said Linfox was putting up $3m for an express terminal, car parks and security lighting at Avalon.
Joyce said: “The Fox group is investing over time and was not looking for significant fees up front.”
The City of Greater Geelong will spend $500,000 upgrading airport access roads.
The council will also give the airline a five year rate holiday and spend $250,000 subsidising Jetstar advertising.
Qantas chief executive Geoff Dixon said Jetstar also received some financial assistance from the Victorian State Government, but it was insignificant compared to the help Virgin Blue got from Queensland. The Federal Government rejected outright any Jetstar attempt to operate some of its Sydney flights out of RAAF Richmond, northwest of Sydney, which is near Coalition marginal seats.
Meanwhile, the Transport Workers Union protested that the union’s agreement with Jetstar did not involve running the service out of Avalon, 55km west of Melbourne.
“We cut the deal on the basis that Jetstar was going to be serviced out of Melbourne Airport,” TWU federal secretary John Allan said.
Operations economies
Jetstar will squeeze 125 seats onto its Boeing 717s where travellers will pay for their meals, drinks and headsets while its A320s will be among the most cramped in the region with 177 seats at a 30 inch pitch.
Qantas says the cost of running the new discount airline will fall from 8.25c per passenger kilometre to 7.8c – about 11% below Virgin Blue’s disclosed cost base – as it moves to A320s. A major saving with ramifications for the whole Qantas operation is that former Impulse pilots, now flying Qantas 717s, reportedly agreed to fly A320s for the same money. Under the deal with the 143 pilots, the standard rate for a Jetstar A320 captain is $125,000 a year. The standard rate for a Qantas captain flying a slightly larger Boeing 737-800 is between $200,000 and $240,000.
The Qantas pilot union has asked for coverage of Jetstar and is reportedly prepared to accept the lower rates when they fly its planes. But they reportedly want seven out of every 20 commands at Jetstar to go to Qantas pilots in an effort to maintain their overall pace of seniority advancement to command. Dixon reportedly will only agree to that as long as Jetstar pilots can advance to Qantas commands (on Qantas seniority and pay rates) – on which the Qantas pilots are baulking.
Even Dixon acknowledges that Virgin Blue’s market share is likely to remain the same at between 30 and 35%. This means Qantas’s capacity may be reduced and some routes dropped entirely as Jetstar brings in more A320s. Qantas pilots will then have this choice: switch to the discount airline on half the pay or lose their jobs as Jetstar hires new pilots from somewhere else (refer Recce, p4).
Even if Qantas loses marketshare to Jetstar with loss of revenue, profit would rise because Qantas will make a greater profit margin on every discount passenger who transfers from Qantas to Jetstar, thanks to its lower costs.
There will inevitably be some cannibalisation but, as Dixon has said, if Qantas is going to be cannibalised it might as well cannibalise itself rather than watch its business flow to others.
Joyce believes he can get up to 1000 hours a year flying time from the pilots, as opposed to Virgin Blue’s 700 hours a year (and Qantas’s much less) through faster terminal turnarounds – 25 minutes on average, compared with 30 minutes for Virgin Blue and 35 minutes for Qantas. There will be no fixed seat allocation on Jetstar planes and flights will be closed 30 minutes before takeoff.
Over time, Jetstar will almost certainly become the sole Qantas group carrier on some routes – allowing the offspring to exclusively target leisure travellers. This will free up more Qantas aircraft to increase frequency on the more lucrative trunk routes – and therefore pressure Virgin. Dixon also announced a 10% increase in Qantas capacity on its key trunk routes and made it clear that he and the Qantas team would make the decisions on where and when Jetstar’s capacity was deployed.
Dixon said Qantas would –
• boost frequencies on its Sydney-Melbourne and Sydney-Brisbane routes from May 2004;
• take its total Boeing 737-800 fleet to 26 by mid 2005;
• streamline its core domestic fleet, operating only two types of aircraft – Boeing 737-400/-800s and Boeing 767-300s, phasing out its older 737-300s and progressively transferring its A330s to international flying;
• offer a two class jet operation on all Qantas domestic routes; and
• add four new 50 seat Dash 8 turboprops to the QantasLink regional fleet, in addition to the three already delivered from January 2004.
“Qantas and QantasLink will continue to operate on all their current routes with the exception of Maroochydore and Proserpine,” he said.

All in the family
Qantas will also cross-use resources and marketing points where it suits. Qantas frequent flyers can use their points on Jetstar, but flights on the low cost carrier will not earn new points.
While Jetstar is responsible for all Jetstar only bookings, the Qantas website, Qantas Telephone Sales and Qantas Travel Centres can handle any bookings involving mixed itineraries of Qantas and Jetstar flights in the one trip.
Dixon said initial start-up costs for Jetstar, set up by Qantas to try to fend off the challenge posed by Richard Branson’s Virgin Blue, were about $80m, excluding aircraft.
“Most of the low yielding leisure market that Qantas now finds it difficult to make a profit on will eventually be covered by Jetstar,” Dixon said.
“That doesn’t mean Qantas is quitting all those routes. We are fully expecting quite robust growth in the domestic market.”

No fare war
Jetstar launched by offering 100,000 seats at a promotional fare of $29, deluging its website with three million hits in one day as it sold tickets at a rate of about 200 bookings per minute.
Virgin Blue quickly retaliated by putting 200,000 tickets on sale at the same price, but admitted the fares were unsustainable and stressed no price war would ensue between the country’s main airlines. Joyce said the $29 fares were a one-off introductory offer and there was no intention of entering an unsustainable fare war.
“Our aim is in the first year to break even, or close to break even, and that we make money in the second year.
“Our intention is certainly to become sensible in the marketplace,” he said. “There’s got to be stability there and both carriers will recognise they shouldn’t do things that are extremely stupid. We think there is room for us and Virgin Blue.”
Jetstar will normally offer only two types of fares – a Jet Flex fare, and a Jet Saver fare – both offered for one way travel. Jet Flex fares allow changes up to 30 minutes prior to departure through Jetstar Telephone Reservations for no fee. Jet Saver fares allow time, date and name changes up to 24 hours before departure for a fee.
The Virgin Blue team and its major shareholder, Patrick Corp, are very commercial. They want to make profits and won’t engage in a destructive battle for market share.
In one way, Virgin Blue will welcome the emergence of Jetstar.
Qantas and Virgin Blue can both compete and be highly profitable within a sensible duopoly. A third, lowest cost, player would destabilise the sector and undermine Virgin Blue’s ability to price rationally against Qantas.
After taking delivery of its first 177 seat Airbus A320 on top of its fleet of 14 former Impulse 717s, Jetstar said it expected to increase its services to 800 flights a week by August. This compares with Qantas mainline’s 2500 services each week and Virgin Blue’s 1600. Joyce said he expected the budget airline to capture about 12% of the domestic aviation market by mid 2005.
Jetstar executives include two who held key posts with Ryanair. With Joyce’s team of 20 key start up staff are Colin McCarthy who, for many years, was second in charge of Ryanair, and Gerry Turner, Ryanair’s ex-deputy director of engineering.

Low cost base
Qantas said Jetstar will begin operations with a cost base of 8.25c per available seat kilometre compared with the 8.72c per ASK quoted in Virgin’s prospectus late last year.
Dixon said this was based on certified agreements with its staff and unions and contracts signed with suppliers. “When Jetstar has an all A320 fleet, we expect its cost base to be 7.8c per ASK.”

Qantas offers rebates
Qantas is offering $20 rebates to about 50,000 people potentially bumped from Qantas to Jetstar flights from May 25 to Proserpine and Maroochydore.
All 14 of QantasLink 717s will switch to Jetstar on that date, prompting a rescheduling of services to destinations such as the Gold Coast and Hobart. The airline is offering affected passengers the choice of a Jetstar flight and rebate on their ticket, a full refund or a transfer to the nearest available Qantas flight.