Jetstar Asia: A Low-Cost Airline in Trouble
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Case Code: BSTR234 Case Length: 14 Pages Period: 2004-2006 Pub Date: 2006 Teaching Note: Available |
Price: Rs.400 Organization: Jetstar Asia Airways Pte Ltd. Industry: Aviation Countries: Singapore Themes: Business Model, Regulatory Environment , Mergers, Subsidiaries |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
Jetstar Asia's Business Model
Soon after its launch in December 2004, Jetstar Asia announced an aggressive expansion plan to operate flights from Singapore to major cities like Shanghai, Taipei, Hong Kong, Jakarta, Pattaya, Manila, Surabaya, and some cities in India. According to the company, its target customers were a 'combination of business and leisure travelers.' Commenting on Jetstar Asia's route expansion plan, Con Korfiatis (Korfiatis), the COO and one of the founders of Jetstar Asia, said, "...our success will depend on our ability to grow the market, and by becoming the first low-cost carrier to serve several major population centers that support millions of people, as well as opening new routes, we're doing just that: making air travel more accessible and more affordable to more people." Jetstar Asia did not position itself as a 'typical' LCC. Generally, airlines following a low-cost model offered low fares by eliminating as many costs as possible from their operations...
Jetstar Asia's Problems
LCCs in the SEA region faced several hurdles in the early 2000s, a major one being that the air travel market in the SEA region was subject to several restrictions. Air traffic rights between most of the SEA nations were dependent on bilateral agreements between the countries. This prevented airline companies from having unfettered access to destinations across the region. Apart from this, the number of LCCs in the SEA region was increasing rapidly, resulting in severe competition. Problems like increasing fuel costs, and natural disasters like the Asian tsunami also added to the airline's troubles. The Asian tsunami struck just a few days after Jetstar Asia began operations. The result was that tourism in the SEA region fell drastically and this affected Jetstar Asia along with all the other airlines. Consequently, it found it very difficult to get a foothold in the market....
The Merger with Valuair
In June 2005, there were reports that Jetstar Asia had entered into merger talks with another loss-making LCC in Singapore, Valuair. However, both the companies soon announced that the merger talks had ended over differences on the proposed shareholding pattern in the merged entity. Meanwhile, there were reports that AirAsia , a successful LCC from Malaysia, was also interested in acquiring Valuair and that it had offered SGD 20 million. However, in July 2005, Jetstar Asia and Valuair announced their decision to merge. This was the first merger in the low-cost airline industry in the SEA region. After the merger, a new holding company called Orangestar Investment Holdings (Orangestar) was created to operate both the airlines. Qantas infused SGD 50 million to obtain a 44.5 percent stake in Orangestar. The remaining stake was held by Temasek, Chew, Wong, Star Cruises, and Asiatravel.com (who were the major shareholders in Valuair)...
Jetstar Asia Vs. Competition
While Jetstar Asia was not very successful in the market, analysts noted that its rival Tiger Airways, with its strong business model, had managed to make an impact in the highly competitive low-cost market. Tiger Airways mostly served secondary cities. This helped it tap the markets ignored by the major carriers, which concentrated on big cities. Also, Tiger Airways followed a strict no-frills model to offer the lowest fares possible to its passengers. In contrast, Jetstar Asia catered to high traffic routes like Singapore to Hong Kong, Bangkok, and other cities where it competed against established airlines like SIA...
Outlook
In April 2006, Qantas applied to the Australian Competition & Consumer Commission (ACCC) to allow it to co-operate with Orangestar in fixing airfares. The application was accepted by the ACCC in May 2006. However, it was only an 'interim authorization' and the ACCC could withdraw it at any stage in future. The approval by the ACCC meant that there would be collaboration between Qantas, Jetstar Airways, and Jetstar Asia with respect to air fares, network routing, and scheduling. Once again, Tiger Airways officials criticized this deal, saying that it might prove anti-competitive to LCCs in Singapore...
Exhibits
Exhibit I - Logos of Jetstar Airways and Jetstar Asia
Exhibit II - Destinations Served by Jetstar Asia and Tiger Airways as in June 2006
Exhibit III - Air Travel Market in the Southeast Asian Region in 2005-2006
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