May 7, 2017

Jetstar scores high in managing assets, but product?

Jetstar shows it knows how to conjure up extra jets worth of capacity for nothing, but at very personal customer cost

Ben Sandilands — Editor of Plane Talking

Ben Sandilands

Editor of Plane Talking

Nice on the outside, less nice than ever on the inside?

Jetstar will gain capacity equal to one and half current A320s when it add six seats to the 180 seat inventory on 43 of its narrow body Airbus fleet according to this account in Australian Aviation of an investor day briefing.

The report is undoubtedly for investors a telling and persuasive endorsement of sound management of the Jetstar asset.

Jetstar group chief executive Jayne Hrdlicka made the point that this reconfiguration comes without the capital costs of acquiring new aircraft, which to make a stab in the dark when it comes to bulk discounts, could be worth anywhere between $30 million and $50 million before the costs of engines.

It is also very clearly true that this sort of asset management makes Jetstar a more formidable low fare competitor and one better able to contain the apparently limited ambition of Virgin Australia’s equivalent Tigerair Australia low cost subsidiary.

But what does it do for the product, or as the comments below the article discuss, the ability of cabin crew to do their job?

Jetstar makes the point that by making the seats wafer thin legroom isn’t compromised. Well, it’s pretty compromised with the current seats, so let’s say, it doesn’t make it worse.

If we turn the argument for more seats on its side, those extra six seats only add to the bottom line if they are sold. Otherwise they are an irritation. And talking of bottoms, jamming people into ever smaller toilets where they can’t perform the personal and hygienic functions they are intended to serve just adds to the misery of flying, especially if you are with small children or more elderly relatives.

There seems to be no mechanism in the market place that prevents airlines from diminishing the quality of the product in a physical way, including at times in the full fare or premium cabins to the point where the customer decides to fly less than before.

Will six extra seats really per flight really bring Jetstar better fortune? Will further hurting and humiliating customers make the brand stronger? When does this downward spiral in amenity stop?

These aren’t the most important questions facing society by any measure. But they sure make travellers as mad as hell.

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24 thoughts on “Jetstar scores high in managing assets, but product?

  1. chris turnbull

    Ben I recall how incredulous you were when these bathroom / galleys were mooted as a concept ! Now it’s reality . I once saw a while bunch of young people pile out of a Jetstar 320 at Nadi for ‘schoolies’ . Imagine that return flight with extra cramped loos.

  2. Craig Joseph

    read somewhere that Southwest, the worlds best airline ever, worked out their profit per flight once & it came down to something like 1 seat per flight.
    If Jetstar uses seats with thinner backs, then they can reduce seat pitch without reducing legroom. So if they reduce seat back thickness by 1-2 inches, that will work surely.

  3. Creeper

    There is one thing they didn’t mention.

    This extra row does not include a window. Talk about being boxed in.

  4. Deano DD

    So any idea if the cost of all the new seats, toilet/galley cubical fitting etc ?
    And to what end ?
    For those odd times when a flight is fully booked (perhaps 1 in 5 to 1 in 10 sectors) they gain an extra 6 seats at maybe $150 per seat or $900
    One would think that it would take quite some time to recoup the investment

    Why not convert some A320s that are due to A321s for an extra 40 seats (or perhaps 34 and give a tad more leg room) for $10-$15 mill extra cost
    These frames could then be shuffled to cover capacity spikes when needed
    Plus extra cargo capacity would be a good earner on top

    One thing I have never understood is why would you cram more and more seats into an aircraft
    I was flying regularly from Sydney to Maroochydore when Jetstar first started
    Qantas was flying 717s, then Jetstar took over the route using 717s and it was like WTF, my nose is now inches away from the seat in front
    This is when they had free seating and almost every flight had 2-3 rows strapped with an orange strap so no one could sit there, I asked the flight attendant what this was for and was told it was to keep the plane balanced
    My next question was “so why all the extra seats if you are just going to block 3 rows ?”
    I was told that sometimes the flight was fully booked
    I regularly flew up on the late Friday afternoon flight and returned on the late Sunday flight
    Over a 8 month period 4/5 flights had seats strapped and even when there was no strapping the flights were rarely if ever full and the 2 sectors that I regularly flew were supposed to be the busiest

    So again I ask
    On those odd occasions that flights are fully booked, I get the idea of seat cramming
    But with 9 out of 10 flights not fully booked, why put your customers through the torture of 30″ pitched seating when there are so many other options like
    1) Use A321s when needed
    2) When a flight is booked out some customers just book an earlier or later flight
    3) Where JQ and QF share routes, you could use extra QF capacity
    4) In peak times put on an extra flight, even if it was out sourced to Cobham or an Eastern Q400

    So why do they do it ?

  5. Travel Hound

    A search of the CASA web site reveals 32 of the 61 Jetstar A320 series aircraft are owned outright by QANTAS. As such there should be a fair amount of available CAPEX that can be spent on the new interiors / seats, especially when we consider TigerAir has to lease its aircraft. Jetstar has a real cost differential that it can use for its own (financial) advantage.

    With Jetstar delaying delivery of the A320NEO until the 2018/19 financial year, we could also see the airline further consolidate its advantage by using the CAPEX originally earmarked for the purchase of new NEO’s to buy-out leases on aircraft already in the fleet.

    If this situation does eventuate the airline could go to a full 100% aircraft owned model where all new aircraft coming into the fleet are purchased outright. This ultimately means the airline will become a real cash cow!

    For us as the consumer, it probably won’t make much difference. With limited competition in the LCC segment we will just pay higher prices and Qantas will just keep banking the money.

    I look forward to Jetstar further expanding its horizons. You would think QANTAS could leverage the Jetstar Australia business to further expand its pan Asian Jetstar franchises.

    1. Dan Dair

      “You would think QANTAS could leverage the Jetstar Australia business to further expand its pan Asian Jetstar franchises”

      I agree, you would think that,
      but past experience has shown how hopeless & cash-hungry JetStar-Overseas has been in the past.?

      1. Travel Hound

        Hi Dan Dair,

        The Jetstar Australia A320’s, A321’s and B787-8’s represent approximately 30% on a valuation basis of the QANTAS groups’ aircraft fleet. At a guess they have equity of approximately $1.35 billion, so from a projected profit forecast of $250-350, this financial year the return on capital will be somewhere in the region of 18-25% pa on asset valuations. The only other part of the group making this type of return is the rewards program.

        In contrast when the eight 787-9’s are delivered, the International business fleet (12-A380, 14-A330, 6-747, 8-737, and 8-787-9) will represent approximately 45% on a valuation basis of the QANTAS group’s aircraft fleet. I am not sure if this business has ever made a return on capital greater than 10%, so from this perspective there will always be questions when QANTAS invest in International.

        From a quantitative and market opportunity perspective there is merit in returning the Jetstar franchises back to growth mode. Even though the market is a little subdued at the moment an upturn in the growth cycle will represent an opportunity for these businesses (2 years). With many Jetstar franchise aircraft coming off lease, these businesses have crossed the line to a stage where they can invest in growth in a more sustainable manner (with less risk).

        A part of the growth strategy could revolve around the QANTAS group buying equity stakes in other existing LCC airlines and re-brand them with a hybrid Jetstar name. This could Jetstar instant critical mass, whilst at the same time start a consolidation process in the market.

        Out of all the LCC’s operating in Asia, Jetstar through its association with the QANTAS group would have to be one of the most financially secure. From this basis alone, there is probably more opportunity for Jetstar to sustainably grow than many of the other smaller LCC airlines.

        The next year or two will be interesting an interesting time for Jetstar.

        1. Mark Parker

          Travel Hound,
          I’m not a financial ninja, I’m mere SLF – the metrics you quote above…are they based on a traditional view of ROCE? for Qantas fleet? or is there some data that’s out there that accounts for the write down value of the 744 fleet and possibly some of the A330 fleet vs what is now coming onto the Qantas books.
          And FWIW – I’m just asking the question, not trying to attack or be a smart arse!

          1. Travel Hound

            Hello Mark,

            The valuation numbers are based upon the average age of the aircraft types and 18-year depreciation cycles (for the sake of achieving conservative valuations) referenced against aircraft valuation data. As there are many elements (interiors, engines, maintenance, overhauls) that make up an aircraft’s valuation, it is difficult to come to a true understanding unless you actually have the books. I use a “rule of thumb” process to come up with my numbers. This is sufficient for me.

            For the 747’s and A330’s I added an additional value to cover the investment in the new interiors. In reality the numbers for the 747 was based upon gut feel. With five of the aircraft leaving the fleet the valuations of these aircraft would be minimal ($5m each) whereas the six ER models were valued on age plus interiors ($50m).

            I shouldn’t have used the term Return on Capital, because my numbers were very basic and did not consider the Jetstar business, its costs and revenues as a whole. I only considered the aircraft. Still my numbers do give some strong indicators of how these businesses can be valued.

            …and finally comparing Jetstar with the International business the way I did was incorrect. I was simply trying to make a basic point based upon aircraft valuations that the Jetstar business should be well placed for more investment.

        2. Dan Dair

          Travel Hound,
          I suspect you are involved in JetStar, because you seem both enthusiastic & apparently well-informed.?
          I don’t make that statement in any negative context.

          Much of what you say, I can see the sense of, although equally, some of it seems to be predicated upon inside knowledge, though I accept that it could also be public-domain trading information which I wouldn’t have access to.?

          All that out of the way,
          I want to raise the ‘old chestnut’ of untwining JetStar finances from Qantas.
          QF owns half of JQ’s planes: Who’s bottom-line does that sit on.?
          Does QF pick-up the tab for any moments when JQ aren’t commercially flying the airframes.?
          Who picks-up the maintenance bills, the fuel bills, the staff-training costs, etc.?
          Who pays for all the back-room stuff, such as websites, booking agencies, flight-planning, staff-scheduling and so on.?
          Also, who pays for landing fees (bearing in mind slots are ‘owned’ by QF), gound handling fees & gate fees.?

          It’s easy to say that JetStar fully pay their way in this arrangement, but the annual reports talk only about Qantas group, they never talk about JetStar as an individual entity, except in the context of how profitable they are.!

          I am quite prepared to accept that JQ has become profitable, independent of Qantas.?
          My beef is that there isn’t anything in the reporting of Qantas that helps us to actually define how profitable JQ is as an independent entity & how much of it’s own way it is actually paying.?

          1. Cantbeeffed

            I know nothing about how it’s structured, but I’d hazard a guess that the arrangements between Qantas and Jetstar are at arms’ length for a number of reasons. Value transfer makes it very difficult to assess the performance of a business, and any value shifting would cause issues for those whom are judged on the performance. I can’t imagine a LCC subsidiary getting any free ride from its parent, it would defeat the purpose.

          2. Dan Dair

            Normally, I’d agree with you, but there’s reasonably good evidence from 4 or 5 years ago to show that JetStars offshore losses were being hidden within the overall group.

            That’s not to imply that Qantas group did anything illegal in its reporting.

            The inference is though, that the CEO was actively trying to ensure that his pet-project was supported through it’s bad times.

            It may well be that those bad times are now in the past,
            but because of the way Qantas group reports, it doesn’t make it clear whether JQ is genuinely profitable,
            or whether any or all of it’s profits are predicated upon the parent company covering various of JetStars fees and costs.?

          3. Travel Hound

            Hello Dan Dair,

            I think the information from 4-5 years ago was not based in fact.

            All we can do is use the information that is publically available to come to conclusions about the Jetstar business. It has reported profits for the majority, if not all of its operational life, which would have been done in accordance to accounting standards.

            You could argue there could have been some fudge, but not to level where strong profits could be reported for long periods of time.

          4. Dan Dair

            Travel Hound,
            Whilst making it clear that I am not suggesting Qantas did anything illegal,
            I disagree with you to the extent that it is possible (especially since QF haven’t disclosed any kind of detailed breakdown of JQ’s operating spreadsheet) that many (or potentially even all) of the cost-points I mentioned before, are or have in the past, appeared on Qantas bottom-line & not on JetStars.?

            I fully accept that JQ are a part of ‘Qantas group’ and it is Qantas groups prerogative to report its financials in any way it sees fit, so long as they meet the necessary standards.

            The fact that Qantas acted legally does not preclude any of the argument I made, about the actual current and previous profitability, or otherwise, of JetStar.?

          5. Goat Guy

            If Jetstar was as profitable as Qantas makes out they would publish the numbers, the fact they don’t is a pretty good indication that there is more to the story. You can move cost around within a group and not upset any auditors or accounting standards. You have to wonder why Jetstar get new more efficient, cheaper to maintain aircraft and Qantas get their hand me downs or are forced to run old 747’s. The only way you’ll ever know the true story is if they split it out to sell it but if they reversed their fleet priorities and Qantas got all the new cheaper to run planes and Jetstar got the hand me downs does anyone think that the numbers wouldn’t be substantially different?

          6. Travel Hound

            Hello Dan Dair,

            The QANTAS group own and manage the Jetstar A320’s, not Jetstar themselves. As such there is nothing out of the normal for QANTAS to pay for maintenance and repairs. QANTAS would simply on-charge Jetstar on a basis that is commercial in nature (a requirement of accounting standards).

            For the record the QANTAS group own A320’s (originally earmarked for the Jetstar franchises) and lease them to other airlines. One of those aeroplanes was recently returned and subsequently entered the Jetstar Japan fleet.

            The QANTAS group also own and manage all of the aircraft flown by QANTAS domestic and international. Some of the A330’s are flown both domestically and internationally, so from this perspective there would have to be some type of accounting arrangement to allow the costs of flying these aircraft to be assigned to an appropriate cost centre.

            The QANTAS group also own and manage the 717’s flown by Corban, an independent private company. In this instance they also have a contract to maintain the aircraft.

            Freighters Australia, a JV (I think) with Australia Post also flies aircraft owned and managed by the QANTAS group.

            If we dig a little deeper, there are still aircraft in the QANTAS fleet that are owned and financed through QANTAS arranged syndicates. In these instances profits from owning the aircraft are made by the syndicate, not QANTAS, even though QANTAS may have a shareholding (in the syndicate).

            There are strong arguments for QANTAS managing aircraft as a group, just as much as there are arguments for QANTAS to allocate aircraft to the individual airlines. From where I sit the QANTAS model for managing its aircraft is sound, so I am not too worried about the current arrangements.

            For instance there could be a strong argument for the QANTAS group to own the aircraft operated by the QANTAS airlines on the basis it would make financing and securing the assets easier as a group rather than as individual airlines.

            Recently, QANTAS delayed the deliveries of the A320NEO till the 2019/20 financial year and brought forward deliveries of the 787-9 for the 2018/19 year. These aircraft were for two different airlines within the group with two very distinct and different markets with deliveries based upon QANTAS group strategic goals for CAPEX spending.
            I am not too sure you would get the same amount of control if the airlines themselves were responsible for the aircraft.

          7. Dan Dair

            Travel Hound,
            You’ve provided a substantial amount of information, but I wasn’t actually suggesting that each aspect of Qantas group should physically be separated from the others. That would obviously negate all the synergy & duplication savings.

            What I was actually getting at was summed-up quite nicely in your opening paragraph;
            “QANTAS would simply on-charge Jetstar on a basis that is commercial in nature (a requirement of accounting standards)”

            Because of the way Qantas group reports its financials, we have no way of knowing how much Qantas group deems to be a satisfactory charge for the service it provides to JetStar.?

            For all I know, JetStar may pay through the nose for every single bean it utilises from Qantas group & despite this, it still makes a substantial profit……
            Or it may actually pay a nominal $1 to comply with accounting regulations and absolutely everything is charged back to Qantas group.

            Of course the truth is more likely to be somewhere between the two,?
            but since Qantas perfectly legal reporting methods are quite opaque, we really only have the word of the CEO that JQ is actually fully paying its way.?
            (I wouldn’t buy a used car from him but the business community still trust him, so what do I know.?)

          8. Travel Hound

            Hello Dan Dair,

            QANTAS would use the “arms length principle” when pricing services to the Jetstar group. Wiki defines the principle as being “the condition or the fact that the parties to a transaction are independent and on an equal footing”.

            I think we can move on from the rumours in years past. I think on the whole they have been debunked.

          9. Dan Dair

            Travel Hound,
            “I think we can move on from the rumours in years past. I think on the whole they have been debunked”

            Firstly, I would say;
            Well, you would say that, wouldn’t you.?

            Secondly, you may feel like they’ve been debunked or you may feel that sufficient time has passed, so that no-one really cares anymore what really happened a few years ago.
            However, since Qantas reporting continues to be so opaque,
            there aren’t any reliable public-domain figure which actually prove one-way or another, whether JetStar pays anything like its fare share of Qantas operating costs.?

            As always, I’m not saying that I know that JQ isn’t paying its way.?
            That’s the trouble, I don’t, because that information has never been made available.

  6. comet

    Squeezing the passengers in that way makes the passengers get angry.

    This might possibly be the reason why someone threw a cream pie in the face of Qantas group CEO Alan Joyce today.

    1. Ben Sandilands

      I can’t fathom anyone being that rude. How is doing a stupid thing like that going to promote a cause or an argument?

      1. comet

        The pie face incident made world news. The BBC has been running it. But nobody knows the reason or cause behind it. For his efforts, the offender will end up with an assault charge. It makes Joyce look good humoured, and Qantas/Jetstar will continue on as before. Strange.

        1. comet

          Now we find out the pie thrower belongs to a religious organisation, and he threw the pie because he didn’t like same-sex marriage.

    2. Flying High

      This is one reason why an extra 6 seats makes sense for Jetstar with more seats = higher revenue and/or lower fares:
      “We (Jetstar) are also committed to offering you competitive fares, which is why if you find a published internet airfare from another airline that is lower than the lowest available comparable Jetstar fare on Jetstar.com, on the same route for a comparable time, we will beat that fare by 10%.”

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