Qantas Group CEO Alan Joyce, disappointed but not yet defeated over HK rejection.

After years of sometimes bombastic rhetoric about how Qantas would control its Jetstar franchises in Asia through what would have been puppet managements the prolonged efforts to set up a Jetstar Hong Kong operation have been rejected by its authorities.

The saga underlines a fundamental difficulty for Qantas in its various ambitions at different times in Malaysia, Singapore, Vietnam, Hong Kong and Japan.

The message in Australia was that Qantas would always exercise control,  while the requirement in Hong Kong and Japan was that it not have such control, even though Singapore, the home of Jetstar Asia, proved a push over when it was set up almost ten years ago.

Where it could be said to have survived but not prospered.

The messaging on Asian investments from Qantas CEO Alan Joyce was at times, aggressive, triumphal, and insensitive and premature and by the standards of commercial negotiations or proposals in that hemisphere.

In due course the Qantas rhetoric about Asia was toned down, and the structure of the loss making but expanding Jetstar Japan operation was significantly modified to the satisfaction of Japan’s regulations.

However Jetstar Hong Kong’s ownership and management structure changes failed to win over what was always a strongly hostile business, political and administrative environment.

Jetstar Hong Kong was formally announced on 26 March 2012, and was intended to start services with three A320s by the end of that year, growing its fleet to 18 of the 180 passenger single aisle Airbuses by 2015.

Everything went wrong  from that moment on, as noted in this report last August.

The media has been through six years of bombast as to how Qantas was going to control its Jetstar franchises in Asia, something specifically prohibited in Hong Kong,  and verboten in practice elsewhere, including puppet shareholdings in which a putative majority national stakeholder was financed by the on paper minority Australian owner.

When Mr Joyce was quoted in the Australian media, and Asia media, and seen delivering presentations, as to his promise to go into Asia and take business from its established carriers, it was probably all over from that moment onwards.

One of the fundamental rules of trade relations in Asia is that if you are going to do anything in another state, you tell those associated parties about it first, and in their own language, and in a courteous manner, rather than inform them in English through the Australian media.

Jetstar Hong Kong has been a painful screw up from the moment the airline starting taking delivery of A320s for an operation that Qantas management kept insisting was on track for approval, which was contrary to all the official and unofficial signals in Hong Kong.

Each of those jets for various and often quite long periods of time attracted monthly finance, airport parking and other charges. Let’s call them curatorial charges, since they may as well have been in a museum of flight collection. Per jet those charges would have been at least $400,000 a month US, and for the embryonic JQ HK enterprise to even get considered for an operating certificate, it also had to have a local management structure, flight manuals, training, checking and other flight standards and safety procedures in place for scrutiny, plus the pilots and cabin crew and support staff available, and trained, so that they could be assessed as part of the licensing arrangements.

Starting an airline is more than making loud and to some ears, uncouth claims about what it is going to do to the market in the state from which the regulatory approvals are being sought.  Qantas does indeed have the resources to meet all of those needs, but they don’t come cheaply, not even if your cost base is in Kuala Lumpur, Jakarta or Ho Chi Minh City, rather than in the very costly working environments of Japan or Hong Kong.

Last July Shanghai China Eastern Airlines, which was a foundation partner with Qantas in Jetstar Hong Kong, announced it would set up its own low cost unit.

In January of 2014 Hong Kong Express rebranded itself as a low cost carrier, with  notable similarities to the Jetstar model.

Jetstar was being flattered by imitation, but Qantas in Hong Kong, and China, was not benefiting from its visions or investments.

The Jetstar Hong Kong debacle may not be totally complete. It could be that Qantas and its partners will persevere and overcome,  but that will mean certain continued spending on an uncertain objective .

It was preceded by the inglorious failure of  the 2011 plan by Qantas to set up a minority owned but controlled low cost but premium quality single aisle carrier somewhere in Asia, with Kuala Lumpur and Singapore most frequently identified as the target bases.

That plan, variously dubbed Red Q  or Asia One  was to have used A320s with premium seats larger than those in the Qantas A380s,  a proposal that caused incredulity throughout the airline industry at the time.

The goal of having a trans border low cost airline franchise was also pursued by Singapore Airlines through its variable investments in Tiger Airways Holdings, and Malaysia’s Air Asia (single aisle) and Air Asia X (longer haul wide body) operations.

Tiger Airways’ ambitions came unstuck, and saw it driven bleeding money out of the Philippines and Indonesia, while it eventually sold all of its Australian franchise rebranded Tigerair to Virgin Australia Holdings.

AirAsia and its X brand are similarly experiencing very unfavourable trading conditions in Australia and throughout Asia.

Seen from 2015 the low cost model doesn’t translate profitably into a hemisphere wide franchising proposition.  The three major players, Qantas, Air Asia and Singapore Airlines (which also owns Scoot, a wide body low cost carrier) have some very difficult issues to deal with in rationalizing the appeal of their original game plans, and the so far dismal outcomes.

Updated Qantas response from CEO Alan Joyce this morning

The Qantas Group will work with its fellow shareholders in Jetstar Hong Kong to review the enterprise, following the Air Transport Licensing Authority’s decision to reject the local carrier’s application to establish an operation in Hong Kong.

Jetstar Hong Kong – a joint venture between Shun Tak Holdings Limited, China Eastern Airlines and the Qantas Group – was announced in March 2012.  Each partner holds a one-third economic share while the Hong Kong based Shun Tak Holdings has 51 per cent of the voting rights and ultimate control. Seventy per cent of the board is from Hong Kong.

At 31 December 2014, the Qantas Group investment in Jetstar Hong Kong was carried at $10 million.

The low cost carrier’s application for a licence to operate scheduled air services has been under consideration by the local licensing authority for over two years.

Expressing disappointment at the decision, CEO of the Qantas Group Alan Joyce said: “This is as disappointing for the shareholders as it is for the travellers that Jetstar Hong Kong planned to serve.

“It’s the travelling public who have lost out, because the message from this decision is that Hong Kong appears closed to fresh aviation investment even when it is majority locally owned and controlled.

“At a time when aviation markets across Asia are opening up, Hong Kong is going in the opposite direction. Given the importance of aviation to global commerce, shutting the door to new competition can only serve the vested interests already installed in that market.”

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