Qantas invests $60 million in Asian expansion

The Jetstar Japan joint venture expected to break even after year three.

Andrew Mudie

Andrew joined the growing team of Motley Fool freelance writers in mid-2013 following years of personal development as a passionate self-taught sharemarket investor. At the time, Andrew was an engineer by trade, writer by hobby, and an investing nerd by passion who spent far too many breaks reading, writing and learning. Andrew’s first investing lesson came with his first stock selection in 2011 when takeover rumours caused a spike and subsequent plunge in the share price of Woodside and then the 21% fall in the market through mid-2011. The next four years of investing saw Andrew dabble in a vast array of strategies until settling on his favourite investment methodology, which is closely aligned with that of the Motley Fool: Fundamentals-based long-term buy-and-hold of great companies at great prices.

Published November 4, 2013 7:24 am AEDT

Qantas (ASX: QAN) will pour an extra $60 million into its Japanese joint venture Jetstar Japan.

The capital, which is being matched by joint venture partner Japan Airlines, will be used to support future fleet and infrastructure needs in order to capitalize on the huge potential of the Japanese low-cost airline market. It will take the shares controlled by Qantas and Japan Airlines to 45.7% each, while fellow joint venture partners Mitsubishi and Century Tokyo Leasing will have their stakes reduced from 8.3% to 4.3% as they have not participated in the equity injection.

Jetstar Japan currently operates 18 aircraft across nine Japanese destinations, with the plan to have 24 aircraft operational by mid-2014. Since it started operating in July 2012, the airline has made over 3 million flights and is now the largest budget airline in Japan. Analysts have indicated that the capital raising was required due to either larger losses than expected or accelerated plans to expand market share. Jetstar Japan has the aim of breaking even within three years of launching and reported a loss of $50 the first 12 months of operation to June 2012.

Low-cost airlines are a new phenomenon in the world's third largest economy, with a potentially huge market domestically, and even larger once short-haul international routes to China, Korea and Taiwan commence within the next two years. This was evidenced by three budget airlines, Jetstar Japan, Peach and AirAsia Japan, all starting to fly domestic Japanese routes in the second half of 2012. Since then, AirAsia has decided to pull out of its joint venture, with the airline to be re-branded as Vanilla Air. There does not appear to be any indication that the exit of AirAsia is a cause for concern.

Foolish takeaway

Jetstar Japan is just one way in which Qantas CEO Alan Joyce is attempting to turn around the company. After years of poor returns on invested capital and a sagging share price, Mr Joyce is retiring old aircraft, cutting costs, signing codeshare deals, and expanding into new territories such as Japan in order to turn around earnings and profits.

A number of analysts have predicted the company's earnings per share will triple in the next 12 to 18 months, with profit to follow soon after. If all goes well, there could be significant share price upside for investors willing to accept a little more risk.

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