Jetstar chief: Budget airline market will shrink

Travelers can expect more niche players to disappear from the low-cost airline market as they either fail or are absorbed by bigger carriers, Jetstar chief executive Bruce Buchanan has predicted.

Jetstar chief: Budget airline market will shrink

Travelers can expect more niche players to disappear from the low-cost airline market as they either fail or are absorbed by bigger carriers, Jetstar chief executive Bruce Buchanan has predicted.

Speaking after the grounding of Air Australia, Mr Buchanan said larger airlines such as Jetstar and AirAsia, with first-mover advantage and the scale to keep reducing costs, would emerge as the winners in the battle for Asia’s skies.

Mr Buchanan said fragmentation in the low-cost carrier market had been encouraged by the national championing of the sector, which did not bode well for success.

He said low-cost carriers had advantages of scale in areas such as purchasing power, spare parts, operations and marketing.

“I think we’ll see some further consolidation,” Mr Buchanan said. “Whether that’s more carriers collapsing or whether it’s people getting together, is hard to predict, but I think what we’re seeing in Air Australia, what we’re seeing in the financial results of Tiger (Airways), what we’re seeing with some of the carriers in Southeast Asia that have disappeared over the past few years, is just the tip of the iceberg.”

The Jetstar boss’s comments came as the low-cost Qantas offshoot posted record half-yearly earnings before interest and tax of $147 million, up $4m from the previous corresponding period despite a $138m rise in fuel costs.

Mr Buchanan said the increased fuel expenses had been offset by a 3 per cent reduction in unit costs and a 35 per cent boost in ancillary revenues to $29 per passengers from sales of services and onboard extras.

He said Jetstar was a clear global leader in the area of ancillary revenues, with most of its peers at about half that level.

“We’re actually operating close to $31 at the moment, but we finished the half just over $29, and most of our competitors are sort of $12 to $17 or $18,” he said. “That has been our saving grace — that we’ve been able to drive that, and that’s why we’ve seen the complete divergence in performance in Singapore from Tiger.”

Mr Buchanan said negatives during the first half had included the ongoing impact of natural disasters in New Zealand and Japan, although these had been offset by the grounding of Tiger Airways Australia and, to a lesser extent, Qantas.

Looking ahead, Mr Buchanan said the strong growth of the Jetstar brand in Asia would continue even as it slowed in the more mature Australian market.

Jetstar estimates the low-cost sector in Asia will increase from about 500 aircraft today to 2000 by the end of the decade, with markets such as Japan, China and Korea the main focus.

The airline has said it wants to maintain its 20 per cent market share in the Asian low-cost space by entering more joint ventures.

This will require a compound growth rate of 15-17 per cent and lead to Jetstar-branded overseas operations growing as a percentage of total operations from the current level of about 66 per cent.

Mr Buchanan said the airline retained a strong position in Australia and was continuing to build on a robust outbound market. But the airline was expecting annual growth rates of about 8 per cent to fall to about 5 per cent.

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