Qantas to close Jetstar Asia as financial challenges and regional competition intensifies

Qantas Airways (ASX: QAN) has confirmed it will close its Singapore-based low-cost subsidiary Jetstar Asia in a bid to free up millions in capital to support an ambitious fleet renewal program.

Jetstar Asia has faced growing challenges in recent years from rising supplier costs, high airport fees and intensified regional competition.

The company expects to unlock as much as $500 million in fleet capital that it will recycle into its core businesses to improve long-term returns.

Route closures

The closure will impact sixteen intra-Asia routes, with no change to both Jetstar Airways and Jetstar Japan services into the region and domestic and international operations in and out of Australia and New Zealand.

Qantas said it will progressively redeploye 13 Airbus A320 aircraft from the intra-Asia route to core markets in Australia and New Zealand.

The airline plans to use some of these to accelerate fleet renewal in its regional operations servicing Western Australia’s resources sector.

Operational challenges

Prior to the decision, Qantas announced that the airline’s performance was deteriorating and it expected to post a $35m underlying EBIT loss this financial year.

The company has made the decision to close the airline with the backing of majority shareholder Westbrook Investments.

Jetstar Asia will continue to operate for the next seven weeks on a progressively reduced schedule, before its final flights on 31 July.

Difficult decision

Qantas Group chief executive officer Vanessa Hudson said closing the airline had not been an easy decision.

“Jetstar Asia has been a pioneering force in the Asian aviation market for more than 20 years and has made air travel accessible to millions of customers across the region,” she said.

Ms Hudson said the company would provide redundancy benefits and employment support services to Jetstar Asia employees and offer full refunds to customers with existing bookings on cancelled flights.

Fleet renewal program

Qantas plans to redirect funds freed up by the closure of Jetstar Asia into its scheduled fleet renewal program, which commences this month with the arrival of the first Airbus A321XLR.

The company will also receive delivery of the first A350-1000ULR (ultra long range) aircraft next year for the start of its Project Sunrise ultra-long-haul routes.

“We are currently undertaking the most ambitious fleet renewal program in our history, with almost 200 firm aircraft orders and hundreds of millions of dollars being invested into our existing fleet,” Ms Hudson said.

“We are making disciplined decisions to recycle capital across our business and prioritise it towards stronger-performing segments as well as strategic growth initiatives like Project Sunrise.”

Virgin Australia IPO

Australia’s second-largest airline group Virgin Australia has launched a $685m initial public offering (IPO) to list on the Australian Securities Exchange.

The value carrier and direct Qantas competitor operates a fleet of more than 100 aircraft on 76 routes to 38 destinations across its domestic and short-haul international business.

The IPO will comprise 236.2 million fully paid ordinary shares priced at $2.90 each and will allow certain existing investors the opportunity to realise part of their investment in the company.

On completion, these investors are expected to hold 30.2% equity in Virgin, with the remainder being held by existing shareholders Qatar Airways Group, Virgin Group, Queensland Investment Corporation and current owner Bain Capital.

Revitalised group

Virgin chair Peter Warne said the group had been revitalised under Bain’s ownership.

“After making significant progress with Virgin Australia’s transformation and with the backing of Qatar as a strategic investor, we believe it is now appropriate for the business to transition to a publicly listed company,” he said.

“This will provide new investors an opportunity to share in the success of Virgin Australia as the airline enters its next phase.”

Virgin Australia shares will commence trading on the ASX this month under the ticker code VGN, initially on a conditional and deferred settlement basis.