Jetstar regional flights face headwinds - analyst

Jetstar will use a fleet of five 50-seat Bombardier Q300 turbo-prop aircraft to fly to at least four regional centres initially.

Macquarie says Jetstar regional operations here will have a big fight on its hands to make money in new analysis which dissects notoriously high fares to provincial cities.

Analysts estimate Air New Zealand's average regional fare is around $123 per ticket (excluding GST) and hence Jetstar would be looking at around $80 a ticket at the discount of around 40 per cent the low cost carrier has indicated it could bring to the regional market.

"However, with generally less business travel on the regional routes, we think the differential between Air New Zealand and Jetstar could be slightly lower, but that said, Jetstar will be pricing a new service which will require additional discounting," Macquarie said.

At around $80 a ticket this would would represent a loss of $1 million of earnings before interest, tax, depreciation and amortisation or $1.6m at the net profit level per aircraft for Jetstar.

The breakeven ticket price would be $90-$103 based on operating and capital costs estimated, Macquarie said.

"We note that Jetstar have signalled they intend to operate with rational intent, hence will have to close the ticket price gap, or have clear flow on benefit to their network."

Jetstar is narrowing down options for flying to four regional destinations in what will be serious competition to Air New Zealand.

A Jetstar spokesman said the airline was not expecting its regional operation "to be profitable overnight" but was taking a long term view on its regional investment in New Zealand.

"Our new regional services will be one part of the dual Qantas-Jetstar brand here, which includes profitable main trunk domestic flying and Jetstar and Qantas services transtasman."

He said the airline had received very encouraging support from the regions it had visited.
"We're looking forward to working with regional partners to make our new services a success."

In an estimate of the cost per seat for regional aircraft for both airlines, Macquarie estimates Air New Zealand is likely to have lower operating costs due to scale and larger planes, but Jetstar's lower capital cost may be an advantage.

On an operating cost basis, the analysts said the New Zealand airline would have around a 5 per cent advantage for its Q300 aircraft due to its scale allowing for better efficiency of labour (crew rotations, ground staff), maintenance, marketing and administration costs.

Jetstar was unlikely to be able to remove much cost as expenses such as fuel, labour and maintenance were generally set at market rates. Jetstar may look to discounts for landing/terminal charges at regional airports as an incentive to begin service.

"Further to Air NZ's scale, it will also benefit from flying its larger ATR72 aircraft on a number of the regional routes that Jetstar are looking at servicing. This aircraft offers better fuel efficiency and scale, and we estimate could have operating costs 15 per cent below the Q300 per seat. The capital costs are likely higher with it being a more expensive aircraft."

The new Jestar services will be operated by a fleet of five 50-seat Bombardier Q300 turbo-prop aircraft and are expected to create at least 100 new jobs for pilots, cabin crew, and ground crew.

Centres under consideration are Hamilton, Rotorua, New Plymouth, Napier, Palmerston North, Nelson and Invercargill. Regional fares will go on sale in September with first flights taking off in early December.

Jetstar is fully owned by Qantas and launched transtasman flights in 2005 and established main trunk domestic operations in New Zealand in June 2009. The New Zealand economy has soured since Qantas chief executive Alan Joyce made the regional expansion announcement in June but he said then the plans had been costed on a number of economic scenarios.