A Jetstar aircraft. [File photo]

China Eastern Airlines Co Ltd will establish a budget airline in Hong Kong with Qantas Airways Ltd, the flag carrier of Australia, the companies announced on Monday.

The joint venture, named Jetstar Hong Kong, is the first budget airline to register in Hong Kong.

The new carrier will have registered capital of $115 million, contributed equally by China Eastern and Jetstar Group, the budget airline subsidiary of Qantas.

Jetstar Hong Kong will start operations in mid-2013 with three Airbus A320 aircraft and expand to 18 aircraft by 2015, said Ma Xulun, vice-chairman of China Eastern, the nation's third-largest airline by market value.

A cooperation memorandum on the joint venture was signed on March 23, and it is awaiting approval by the Hong Kong Special Administrative Region's government, Ma said.

The airline will offer short-distance flights linking China, Japan, South Korea and countries in Southeast Asia. The first route hasn't been announced yet.

A budget carrier could be a good choice for China Eastern. The airline's profit dropped in 2011 because of fewer high-end customers.

On Sunday, China Eastern said annual net profit fell 9.2 percent to 4.89 billion yuan ($776 million) under China's accounting standards.

The number fell even though 68.73 million passengers were carried in 2011, 5.9 percent more than in 2010.

"A major reason for the reduction was the low load factor in the business and first class cabins," said Luo Zhuping, board secretary of China Eastern.

Luo said the problem reflected global economic uncertainty and affected the entire aviation industry, not just one carrier.

Chinese carriers' aggregate net profit last year fell to 26 billion yuan from 35.1 billion yuan in 2010, according to the magazine Air Transport World.

"The lower profit was an industry-wide trend, with aviation demand easing on the back of the global economic slowdown," said Li Lei, an aviation analyst with CITIC China Securities Co Ltd.

Higher fuel prices also pushed up carriers' costs, he added.

Both China Eastern and Jetstar are confident about the budget airline, even if the global aviation sector declines amid economic problems.

"I believe Jetstar Hong Kong will become profitable in three years," Liu Shaoyong, chairman of China Eastern, said on Monday. "The carrier will get a 6 to 7 percent market share in Hong Kong by then."

Bruce Buchanan, CEO of Jetstar Group, said Jetstar Hong Kong's fares will be 50 percent below the average of those on other flights in the region.

Jetstar Group comprises Jetstar Airways in Australia and New Zealand, Jetstar Asia in Singapore, Jetstar Pacific in Vietnam and Jetstar Japan.

Jetstar Airways launched a daily Beijing-Melbourne flight with a stopover in Singapore on Nov 24. The carrier has 12 destinations in China.

China is already a battlefield for international budget carriers fighting for a share of the huge potential market.

A report by research company CIConsulting said that about 70 percent of all domestic routes in China are suitable for budget airlines, and it predicted that 25 percent of domestic services will be provided by low-priced carriers in 2013.

Singapore Airlines is scheduled to announce on Tuesday its plans for its new budget subsidiary, Scoot, to enter China's market. The carrier won't begin services for three months.

Two main budget airlines in Asia - AirAsia Bhd and Tiger Airways Singapore Pte Ltd - are also attracted to the Chinese market. AirAsia has 10 destinations in China, while Tiger Airways has four.

However, China Eastern's participation would not have a huge effect on China's budget aviation industry, analysts said, although it will be the first of China's three largest airlines to enter the budget aviation section.

"The new budget carrier is just something that China Eastern is trying out, and it doesn't mean the company will fully turn to budget aviation, " said Li Lei.

Li said the markets in Hong Kong and the mainland are different and China's carriers cannot cut most costs to the level of true budget airlines.

Compared with international budget carriers, China's carriers lack enthusiasm for the sector.

Spring Airlines, currently China's only budget carrier, has about 3 percent of the domestic civil aviation market.

"China's airlines will encounter more challenges than foreign carriers, because of the strict industry regulations in China," said Li Xuerong, aviation researcher at CIConsulting.

She said China's budget aviation is just taking off and cannot develop on a large scale in a short time.