Qantas, China Eastern Plan Cheap Flights for Asia Middle

Qantas Airways Ltd. (QAN) teamed with China Eastern Airlines Corp. to form a budget carrier in Hong Kong, the Australian airline’s fourth Asian hub, as it taps faster growing overseas markets.

The two carriers will invest as much as $198 million in equally-owned Jetstar Hong Kong, which will begin flights with three Airbus SAS A320s next year, according to a statement today. The fleet will grow to 18 planes by 2015, it said.

Qantas Chief Executive Officer Alan Joyce will challenge Cathay Pacific Airways Ltd. in Hong Kong as he targets Asian markets to help turn around unprofitable international operations. The new venture will let the carrier bolster services in Greater China, where annual passenger numbers may double to 800 million by 2020, said Bruce Buchanan, chief executive officer of Qantas’s Jetstar Group.

“The opportunity in China is unlimited,” Buchanan said on a conference call today. “The market potential is huge and those people are looking for affordable air travel.”

About 80 cities in Greater China are big enough to support budget flights and that may climb to about 200 by the end of the decade, he said. He didn’t elaborate on where Jetstar Hong Kong will fly. Fares will be half the price of full-service carriers, according to the statement.

Hong Kong Costs

The new low-fare Hong Kong carrier will have to contend with high airport charges and wages that have helped limit budget flights to about 5.5 percent of the local market, among the lowest levels in the Asia-Pacific region, Citigroup Inc. analyst Vivian Tao said in a note to investors today.

“Although the low penetration can be viewed as an opportunity, the high landing, route and staffing costs in Hong Kong make it really challenging for a low-cost carrier to succeed,” she said.

No budget carrier has a hub at Hong Kong Airport, which was used by 54 million passengers last year. Hong Kong Express, an affiliate of Hong Kong Airlines, has said it will convert to a low-cost model. Oasis Hong Kong Airlines Ltd., which operated budget long-haul flights, collapsed in 2008 after racking up losses of about HK$1 billion ($129 million) in less than two years.

Profit Forecast

Jetstar Hong Kong will probably make profit in third year of operation, Liu Shaoyong, China Eastern (670)’s chairman, told reporters in the city today.

“The venture will use the same aircraft model to reduce maintenance costs and it will focus on boosting non-ticket sales,” Liu said. “It will also lay the foundation for our future development in Hong Kong.”

Qantas, Australia’s largest carrier, rose 2 percent to close at A$1.765 in Sydney trading, the biggest gain since March 13. The carrier has risen 21 percent this year, surpassing the benchmark S&P/ASX 200 index’s 5.1 percent advance.

China Eastern, the nation’s second-biggest carrier, fell 1.1 percent to close at HK$2.60 in Hong Kong. The Shanghai-based airline separately said yesterday that net income fell 7.7 percent last year as fuel prices rose. Cathay Pacific (293) also dropped 1.1 percent in Hong Kong trading.

Jetstar Hong Kong will be able to work with the up-coming Jetstar Japan and possibly a future venture in South Korea, said Peter Harbison, chairman of CAPA - Centre for Aviation, which advises airlines.

“We see that international triangle as very valuable,” he said. Qantas is “extraordinarily well-positioned.”

JetStar Asia Push

Jetstar’s Japanese venture is due to begin flights later this year, building on operations in Singapore and Vietnam. Qantas has no plans for a Jetstar venture in mainland China, Joyce told reporters in Hong Kong.

The Australian carrier also plans to set up a premium airline in Southeast Asia. That plan has been delayed as long as three years after the breakdown of talks with Malaysian Airline System Bhd. (MAS) The carrier has no plans for a premium airline with China Eastern, Joyce said on the conference call.

The new Hong Kong business probably won’t deter Joyce from pursuing the premium unit, said David Fraser, an analyst at Nomura Holdings Inc. in Sydney.

China’s biggest low-cost carrier, Shanghai-based Spring Airlines, flies more than 50 routes, according to its website. The carrier has slowed expansion plans because of a shortage of pilots and it now expects to have as many as 50 planes by 2015, Chairman Wang Zhenghua said in July. It had 24 planes then.

Budget flights make up less than 5 percent of the Chinese aviation market, according to Qantas. That compares with about half in Europe, based on Bloomberg Industries data.

Qantas is attempting to turn around international operations which lost about A$200 million ($209 million) in the year through June 2011. Joyce is also contending with labor opposition to restructuring, which prompted him to ground the carrier’s main fleet last year in order to force a showdown. The carrier is now in arbitration with two unions after reaching an agreement with engineers.

To contact the reporters on this story: David Fickling in Sydney at dfickling@bloomberg.net; Jasmine Wang in Hong Kong at jwang513@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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