Jetstar takes off in NZ with $1 fare

THE gloom in the aviation industry has yet to dampen the spirits of Jetstar executives as the profitable, low-cost Qantas offshoot continues its ambitious expansion, moving into the New Zealand domestic market this week.

While acknowledging that the slowing economy was hitting business markets and that a rise in unemployment would hurt the airline, Jetstar chief executive Bruce Buchanan predicted his airline would continue to do well.

He said lower fuel prices were giving low-cost carriers a boost by increasing their comparative cost advantages against full-service airlines and allowing them to offer lower fares that stimulated the market.

He also believed discretionary spending on low-cost travel would continue to be driven mainly by lower interest rates and low petrol prices and said he remained "very confident" about the airline's prospects.

"Our profitability is strong, our forward bookings are strong and we're seeing very strong demand for our product," he said in Auckland.

Jetstar's arrival in the New Zealand market has sparked a much-anticipated fare war with a $NZ1 launch special and a multi-million-dollar advertising campaign featuring comedian Dave Hughes.

Air New Zealand and Pacific Blue responded quickly and vowed to compete vigorously against Jetstar, with AirNZ touting its own low-fare credentials and greater frequency on routes targeted by its competitors.

Jetstar, which recently axed all fuel surcharges on its flights, estimates that every 1 per cent fall in fares produces a 1 per cent increase in travellers.

"If you can take 10 or 20 per cent off the airfares -- or 30 per cent -- there's huge room to stimulate air travel," Mr Buchanan said. "It's good for us, it's good for the airports, it's good for tourism, it's good for broader business.

"So we're going in very confident that we can actually deliver the growth and we can deliver that on a profitable basis."

Jetstar's $250million expansion into the domestic NZ market comes as the airline prepares to add trans-Tasman flights to Auckland in April. It already flies between Australia and Christchurch.

The airline plans to base six 177-seat Airbus A320s in New Zealand, with the fleet split between Auckland and Christchurch. Flights will begin on June 10 with two A320s operating between four city pairs, increasing to 84 weekly return services between Auckland, Christchurch, Wellington and Queenstown.

The changes will include improved timing of the daily Auckland-Los Angeles service to allow a better connection with the carrier's New York services.

It is also eyeing off Pacific Island markets but faces some regulatory hurdles.

The operation will employ about 250 people and increase the number of seats offered on domestic routes by the Qantas Group from around 20,000 to about 29,000 weekly.

Qantas unit Jetconnect, which had been operating domestic operations in New Zealand, will transfer its older Boeing 737s to trans-Tasman operations and replace them over about 18 months with six B737-800 aircraft featuring 12 business class seats and a 156-seat economy cabin with on-demand, in-seat video.

Qantas will offer more than 140 trans-Tasman return flights a week from June 10 and increase Melbourne-Auckland flights from two to three a day and Sydney-Auckland flights from four to five a day. However, it will axe a weekend Wellington-to-Brisbane service.

"Once we get the first 737-800s in later this calendar year, we'll be operating an almost identical number of seats to what we're operating today," said Qantas regional general manager New Zealand and the Pacific, Grant Lilly. "And then, as the the other 737-800s come a little bit later, there will be some growth in capacity."

The New Zealand move is part of a wider Jetstar strategy. It is expanding narrow-body jet services into southeast Asia through Darwin and Perth and, ultimately, spreading its wings to North America and Europe. New Zealand has the potential to play a key role in that strategy. Along with Fiji and Honolulu, it is one of three hubs being investigated as jumping-off points for Boeing 787 flights to North America.

The airline now expects to receive its first 787 in May 2010, and put it into service in the second half of that year.

"What we want to do is drive our growth rates into North America -- into Canada for instance," Mr Buchanan said. "We can't get there non-stop out of Australia, so we need to find points in between where we can actually service it more effectively."

The airline is still investigating five Asian hubs -- Singapore, Kuala Lumpur, Bangkok, Ho Chi Minh City and Hong Kong -- as jumping-off points for services to Europe.

"We're experimenting with all those different points at the moment, talking to all the airports, working out what sort of network opportunities we can gain from those points," he said. "And as we get a feel for that and we get closer, we'll start to experiment with some of them. We'll be quick and nimble, and if things work we'll grow them aggressively, and if they don't work we'll move them elsewhere."

There is still some nervousness in the Jetstar camp about whether Boeing can meet the revised 787 delivery schedule.

The Jetstar boss believes that if Boeing can stay on track with its first-flight program, scheduled for some time in the next quarter, the airline will see its planes in May.

However, the delays have not all been bad news, allowing Jetstar to undertake projects it would have been unable to do if it had been concentrating on the 787 introduction.

"The good thing about this is the delay of the 787s has really given us the breathing room for the Darwin expansion, the Perth expansion and this domestic New Zealand and Auckland base," Mr Buchanan said. "So we've been able to come back into the marketplace and put in a lot of narrow-body growth."

He said Darwin was working well and it enabled the airline to serve a number of thin markets out of Australia with one-stop services. This gave Jetstar a price advantage and saved passengers having to transit through Asian hubs.

The airline effectively operates two banks of flights -- one into Darwin from east coast cities and another flying out to southeast Asian destinations about two hours later.

Recent approval for an airport expansion in Darwin will give the airline the flexibility to put more aircraft through the hub.

"We're looking at adding some new destinations through Darwin at the moment," Mr Buchanan said. "We think there's a great opportunity to really build the Darwin hub."

Some of Jetstar's other Asian strategies have been more problematic. Jetstar Pacific, in which the Qantas Group has an 18 per cent stake, is trying to find homes for two A320 aircraft originally slated to join its fleet.

Mr Buchanan admitted that the Vietnamese airline, the first privatisation in Communist Vietnam, was proving a challenge.

"The regulatory environment makes it incredibly tough," he said.

Singapore-based Orangestar, in which Qantas has a 45 per cent stake, faces increased competition on its Indonesia routes but this year moved into the black. But Mr Buchanan sees the Singaporean investment as being on "a really good trajectory".