Qantas has spent the past 12 months pondering the budget airline after Richard Branson's Virgin Blue managed to snare 28% of the domestic market since its launch three years ago.
Jetstar will also be a direct competitor to Qantas' full-service operations, but the budget airline expects to carry mostly leisure travellers.
Qantas has invested A$100 million (US$72 mllion) in start-up capital and will spend about US$1.15 billion on 23 Airbus A320s.
Qantas Chief Executive Geoff Dixon said the no-frills carrier had been launched to "fill a void in the market".
"We are very confident this airline will be the lowest cost airline in Australia by a long shot. We believe it can be profitable in its own right as they (similar low-cost airlines) have been overseas," Dixon said.
He said though Jetstar would operate on some Qantas routes, "we are very confident that it won't cannibalise our business in any meaningful way".
Flights in May
Virgin's focus on service and its cut-price fares have proved popular with Australian travellers.
The airline, co-owned by Branson's Virgin Group and Australian transport concern Patrick Corp, is capitalising on its success by making its stock market debut on 8 December while forecasting continued growth in market share.
It has previously said it would welcome competition from a Qantas budget airline.
Jetstar Chief Executive Alan Joyce said fares and routes would be announced in January. Fights would begin in May and nearly 2000 jobs would be created.
Joyce said Jetstar would achieve efficiencies through a higher
"Though Jetstar will operate on some Qantas routes, we are very confident that it won't cannibalise our business in any meaningful way"
Qantas chief executive
use of aircraft and a fast check-in process. Passengers would select their own seats and pay for food and beverages.
Qantas dropped its 'Flying Kangaroo' logo in favour of a simple star for the new airline after research showed the public was not in favour of more "Australiana".
Dixon has said the purchase of new aircraft will not stretch the airline's books and forecast record domestic earnings this financial year.
Qantas is quickly recovering from what the chief executive described as the worst operating conditions in aviation history
early this year.
In August, the airline recorded its first loss since becoming a private company in 1995. It lost nine million dollars in the second half to June, taking full year net profit to 343.5 million dollars - down 19.7% on the year.
Dixon said Qantas recently became the world's 10th biggest airline in terms of passenger numbers.