Low cost, high competition
by Eric Ellis, FORTUNE Magazine

(FORTUNE Magazine) - Chong Phit Lian, the new CEO of Jetstar Asia, a Singapore budget airline, used to run Singapore's mint. That's the last time she was awash in cash.

The two-year-old carrier, whose principal owners are Australia's Qantas (Research) and the Singapore government's investment agency, Temasek Holdings, has run through $36 million of startup capital and is desperately trying to raise $20 million more to keep itself airborne.

Jetstar Asia is facing just about every problem that could bedevil a fledgling airline--low loads, dejected staff, regulatory nightmares, soaring fuel costs, and low brand recognition. Despite the merger last summer with rival Valuair (also part-owned by Temasek) and the acquisition of coveted landing rights in Jakarta and Bangkok, things haven't improved much.

Chong, 54, who became Jetstar Asia's CEO in March, has no airline experience. She declined to be interviewed, saying through a spokesman that she is "busy raising money." But Peter Gregg, Qantas's chief financial officer and its point man for Jetstar Asia, says the Australian carrier is "committed to this airline."

Jetstar Asia's apparent difficulties (it does not report results) stand in sharp contrast to the success of Tiger Air, another Singapore budget airline in which Temasek has a stake, and low-cost airline Air Asia in Malaysia. Tiger CEO Tony Davis, at 36 a budget-industry veteran who previously ran Britain's bmibaby.com, says his carrier is profitable. Tiger, which started flying in 2004, is adding routes, including three to China. Jetstar Asia, by contrast, recently dropped two routes from its schedule, including one to India. Tiger is buying its own planes from Airbus; Jetstar Asia leases a handful of Boeing 737s. "We are well ahead of our expectations at this point," Davis says.

On a recent Jetstar Asia flight from Singapore to Jakarta (roundtrip: $150), the plane was about 90% empty. The return flight was about a third full. Jetstar Asia's revenue on the outbound flight could not have been much more than $1,500, barely enough to cover airport parking fees. "How do they survive?" one passenger asked as she surveyed the rows of empty seats.

That's a question that dogs Qantas and Temasek, both of which have a jumble of sometimes competing interests. Qantas's strategy seems clear, if troublesome in its execution. It is the dominant carrier in Australia and wants to expand in Asia.

"Qantas has to be in the Asia space," says Peter Harbison, an analyst at the Centre for Asia Pacific Aviation in Sydney. The airline's goal is to keep passengers captive on its network in and out of Australia and to fly them around Southeast Asia on Jetstar Asia. (Qantas also owns a budget carrier called Jetstar that operates only in Australia.)

But that makes its choice of partner odd, as Temasek also owns Singapore Airlines, which in turn owns both low-cost regional feeder airline Silk Air and Tiger. Further complicating the Qantas-Temasek relationship is the long-running feud between Singapore Airlines and the Australian government, which recently, after lobbying by Qantas, denied Singapore Airlines (Research) the right to fly the lucrative transpacific route between Sydney and Los Angeles.

Industry insiders say relations between Qantas and Temasek are strained. Temasek recently sold its 5% stake in Qantas, which is often mentioned as a takeover target for Temasek or Singapore Airlines. Although it owns just 25% of Jetstar Asia, Temasek exercised its considerable clout by getting Chong, who has worked under Temasek's executive director, Ho Ching, appointed as CEO.

Qantas, Jetstar Asia's biggest shareholder at 45%, put a brave face on the move. "It's appropriate at this time for an Asian airline to be run by Asian managers," says Qantas's Gregg. Temasek's scattershot investment approach--it took stakes in all three 2004 budget-airline startups--seems to favor Tiger, particularly if Davis achieves his plan to spawn similar airlines in China and India. A Temasek exit from Jetstar Asia would leave Qantas flying solo--and doing it from not-so-friendly ground, in the heart of Singapore Inc. Top of page

YOUR E-MAIL ALERTS
Follow the news that matters to you. Create your own alert to be notified on topics you're interested in.

Or, visit Popular Alerts for suggestions.
Manage alerts | What is this?