* China Eastern first top China carrier to enter low-cost
* Qantas, China Eastern see JV starting operations in
* JV to start with 3 planes, expand to fleet of 18
* Qantas shares up as much as 3.75 pct after announcement
(Adds China Eastern comments, updates shares)
By Narayanan Somasundaram and Alison Leung
SYDNEY/HONG KONG, March 26 China Eastern
Airlines Corp Ltd has joined with Australia's Qantas
to set up a regional low-cost carrier, marking the
first move by a big Chinese airline into the growing but
overcrowded no-frills sector.
China's third-largest airline by market value and
Australia's top carrier will invest up to $198 million over
three years in the equal joint venture, which will start in
mid-2013 with three Airbus A320 aircraft, Qantas said on Monday.
The fleet would expand to 18 aircraft by 2015, and China
Eastern said it expected the venture to be profitable in its
"I believe this low-cost model, whether in a high or low oil
price environment, will be competitive," China Eastern Chairman
Liu Shaoyong told reporters in Hong Kong.
The new Jetstar Hong Kong venture would look after China
Eastern's aspirations in the low-cost market while sharing the
risks and investment with Qantas. This would leave the Chinese
airline to focus on its big, growing domestic network.
For Qantas, it brings access to China, the fastest-growing
airline market, and enables it to take advantage of Asia's lower
operating costs, as it looks to turn around its international
business which lost A$200 million ($209 million) in 2011.
Earlier this month, Qantas abandoned talks with Malaysia
Airlines to set up an Asian premium airline.
"This is a good move for China Eastern. They can rationalise
their fleet and capacity allocation to this JV, meaning they
probably won't over-invest in regional (fleets)," said Patrick
Xu, analyst at Barclays Capital.
Shanghai-based China Eastern has a fleet of 377 aircraft and
is the country's second-largest carrier by passenger numbers.
The JV would look to tap rising demand not just from Hong
Kong, which caters to around 40 million passengers a year, but
also from greater China - a market that Qantas says is set to
see 450 million passengers by 2015.
The JV would tap into a market where only 5-10 percent of
capacity is by budget carriers, compared with half in Australia
and a third in Europe and the United States, said Nomura analyst
Qantas' Jetstar has JVs in Singapore, Japan and Vietnam as
well as its own operations in Australia and New Zealand. It
competes with Air Asia, Singapore Airlines'
low-cost carrier, Scoot, and Tiger Airways, which is
also affiliated with Singapore Airlines.
Asia is becoming the world's busiest hub for no-frills
airlines, which typically fly in a single-class configuration
and offer tickets estimated by analysts to be at least 30
percent cheaper than full-service carriers.
The low-cost carriers charge extra for in-flight services
from food to movies. In June last year, Asian budget airlines
from Malaysia to India placed a record $42 billion in plane
orders, signalling their high expectations for growth.
Under the tie-up, Qantas will lend its brand, commercial
management, maintenance and IT systems, while China Eastern will
give access to burgeoning Chinese demand.
"We believe there are huge opportunities for the Jetstar
low-fares model throughout Asia, including Greater China, and
are excited to be the first major Chinese carrier to bring this
travel option to the region," said China Eastern's Liu.
There would likely be more opportunities to co-operate in
the full-service aviation side with Qantas, he added.
Jetstar Hong Kong's fares will be half those of full-service
carriers, the two said in a joint statement.
By setting up airlines in Asia, Qantas can hire pilots, crew
and maintenance staff at much lower cost than in Australia and
can offer more connecting flights. Its staff costs equal 25
percent of revenue, compared with 15 percent for Asian rivals.
Australian trade unions, which recently fought a bitter
wages dispute with Qantas, have been critical of the airline's
move to base more of its international operations offshore.
"We would think Qantas should drop all these airline joint
ventures in Asia and concentrate on their premium product at
home," Stephen Purvinas, federal secretary of the Australian
Licensed Aircraft Engineers Association, told Reuters.
"Qantas have cut back on so many services, like their key
trunk routes into London and the U.S. that should be their
The Jetstar brand operates up to 3,000 flights a week in
Asia Pacific serving almost 60 destinations, including 30 in
Asia and eight in Greater China. It has said it is on track to
carry more than 20 million people in fiscal 2012.
Qantas shares closed up 2 percent, outperforming the wider
market. In Hong Kong, China Eastern shares last traded
down 1.5 percent at a 3-month low.
($1 = 0.9563 Australian dollars)
(Additional reporting by Maggie Lu YueYang in CANBERRA, Sonali
Paul in MELBOURNE and Twinnie Siu in HONG KONG; Editing by Anne
Marie Roantree and Mark Bendeich)