Will they get bums on seats?

With Rex now operating jet services on the "golden triangle" and Bonza entering the market later in 2022, the Australian aviation sector will have more major players than ever before. But can the Aussie market sustain four carriers, and when push comes to shove, who will succeed in filling seats? ADAM BISHOP investigates.

Australia’s cut-throat aviation sector is preparing to welcome a new player later in the year, pending final regulatory approvals of course, and it’s probably fair to say that most aviation pundits have expressed strong doubts about the viability of four airlines competing for the Aussie travel dollar in a market that has already seen its fair share of bloodshed. Carriers like Tiger, Ansett and Compass have all fallen over in the last 30 years, but despite this, the soon-to-launch US-backed, low-cost carrier Bonza is extremely confident it can buck history and operate a viable business model Down Under.

Speaking with travelBulletin about the airline’s launch strategy, the globetrotting CEO of Bonza, Tim Jordan, paints a rosy picture of how the business plans to achieve commercial success, and he is very keen to make clear that its entry need not be at the expense of existing carriers in the market.
“We are not a ‘me too airline’,” Jordan explains.

“We are about creating new demand on unserved and under-served markets, the vast majority of our routes are not served by other airlines and in cases where they are, we are simply offering a lower-cost alternative.

“What’s missing in the Australian market is a low-cost product and we are wholly focussed on the leisure market, and while there are great carriers already in Australia who focus heavily on the big percentage of the market — that is not us,” Jordan insists.

Bonza CEO, Tim Jordan is confident the airline will not step on the toes of existing carriers, but will fill a hole in the Australian aviation sector.

Bonza’s big pitch to the industry is that it is not here to compete for any other airlines’ lunch, and if its Aussie-centric marketing efforts are any guide, the airline appears very much prepared to march to the beat of its own drum. Whether it’s the plan to sell Bonza-branded budgie smugglers on board its flights or line dancing through the kiosks of Sunshine Coast Airport to mark its latest Tamworth route, clearly Bonza intends to stand out from the crowd one way or another.

However not everyone is entirely convinced of the carrier’s business logic, and one of those people raising questions is the Deputy Chairman of Bonza’s impending competitor Rex Airlines, John Sharp, who concedes “maybe [Bonza] will be proven right” in time, but for now he certainly has doubts about the viability of charging an average ticket price of $50 in the face of a fee-happy sector, still recovering from COVID.

“Don’t forget that 10% of that ticket goes to GST, and most airports, once you get past the honeymoon period, will be charging between $10 to $20 per passenger movement,” Sharp argues.

“Then you have to pay the on-route charge, so it really doesn’t leave you with a lot of money to pay for the fuel, the leasing of the aircraft, the crew, and all of the marketing and overheads, but I’ll be fascinated to see how it works, I wish [Bonza] good luck and I hope they succeed but it’s hard to see how it will work at that price.

“It could work at a much higher price, but I think at that average ticket price of $50 they are going to find it hard to make the sums work.”

But despite doubts expressed by observers and competitors, Bonza is adamant that raising ticket prices will not be one of the ways it shores up its margins after it launches later in the year.

“You can’t just say you’re a low-cost carrier, you have to deliver on that promise too,” Jordan says.
“So yes, we do firmly believe that if a passenger flies for an hour, it shouldn’t cost them much more than 50 bucks – which is game-changing for the industry.”

Another factor providing Jordan with cause for optimism is the profile of the Australian market itself. He believes that while Australia’s population has continued to grow, including in major regional catchment areas, the number of low-cost routes has remained stagnant.

“There’s probably a degree of hesitancy amongst certain carriers and we know we’re not going to get everything right, but we also believe there are many, many route opportunities in Australia,” Jordan enthuses.

VA appears to have left the door open for a low cost carrier, retaining the Air Operator Certificate for Tiger after its closure in August 2020.

“The reason I’ve got so much confidence in that is because back in 2010, there were 58 low-cost routes operated in Australia by Tiger and Jetstar collectively, and by 2019, there were 58 routes operated by low-cost carriers in Australia, in other words there has been no change in all that time.

“Whilst the population of Australia continues to grow, the GDP of Australia continues to grow, whilst there is growth in regional Australia, nothing has changed from a low-cost perspective.

“When looking at the largest 15 domestic aviation markets in the world, of which Australia is the eighth largest, up until our announcement Australia was the only one which had no independent low-cost operator, Australia was the only one with just one low-cost carrier, every one of the other top 15 markets had at least two or more low-cost operators. So, Australia has this perception of being highly competitive and very much full, but the reality is it’s not when compared to its peers of market sizes around the world,” Jordan argues.

The notion of the Australian domestic market being underserviced by low-cost carriers is an interesting one when viewed from the vantage point of Virgin Australia, who abandoned the space when Bain Capital acquired the business, swiftly axing the Tiger brand from its stable in August 2020 at the expense of around 3,000 jobs. Many observers at the time viewed the move as a pretext for VA to reposition itself as a low-cost carrier with a focus on the local market, despite repeated denials by the airline’s new owners that this was ever going to be its intention. Instead, VA continues to insist that it is working towards operating a successful hybrid model straddling the space between budget and mid-market services.

Virgin Australia CEO Jayne Hrdlicka reports that while there is a gap in the market left by Tiger, VA does not plan to reclaim the entirety of that market.

Speaking at the CAPA Australia Pacific Aviation Summit late last year, VA’s CEO Jayne Hrdlicka repeated the airline’s pragmatic position regarding low-cost operations, restating that the flagship brand had no intentions to move downmarket and gobble up all of Tiger’s previous slice of the market.

“There’s a gap left by Tiger pulling out of the marketplace and we’re taking only part of that gap and leaving the rest of it because we think it’s more appropriate for others,” Hrdlicka said.

“We’ll take about a third of Tiger’s marketshare, which were guests who are more appropriate for us than for Tiger and that balances everything all out.

“We’re very clear about who we appeal to and we’re very confident about where we can succeed so we’re not looking to clip anyone’s lunch, about 33% of the market seems about right to us,” she added.

Part of this hybrid approach also saw Virgin Australia overhaul its Economy fare structure in August last year, unveiling a new Economy Lite fare type which raised many eyebrows at the time considering the airline’s pledge to stay away from the budget carrier space. The new category doesn’t offer customers checked baggage or seat selection (unless purchased at an extra cost), a move VA said was merely driven by an internal review which found around a third of its customers don’t bring a checked bag with them when they travel.

It’s important to note that Virgin Australia also left the door open when it cut the Tiger brand in 2020 to relaunch a budget replacement at some stage, stating in a business update at the time it would retain the defunct carrier’s Air Operator Certificate to provide an option to launch a low-cost carrier when the “market recovers” to sustain one.

Hon John Sharp AM, Deputy Chairman of Rex Airlines

Rex Airlines Deputy Chairman John Sharp believes “it’s possible” VA could change its mind down the track and relaunch a new low-cost carrier of their own but cautioned they would want to make sure they know why Tiger failed in the past and why a new brand would not follow the same fate.

“I’d want to be convinced that having failed to make Tiger work over 10 or so years, what’s changed? What would make the current Virgin capable of running a new Tiger when the old Virgin couldn’t make work? What’s the difference? We all know that VA was very badly burned by Tiger, it never performed and it always lost money and it cost Virgin a lot, so I think that memory is still very much etched into the minds of people at Virgin that would make them very careful about talk of creating another low-cost carrier,” Sharp believes.

“You also have to remember that Virgin has changed its strategy since Tiger was closed down and the strategy is to be more mid-market or hybrid, whatever term you want to use as they keep using different terms to describe their market position, but it’s certainly not full service.

“My guess is that what they are trying to do is sit halfway between where they were as a full-service airline under John Borghetti’s administration and Tiger,” Sharp rationalises.

While most airlines have been somewhat conciliatory and watchful in their approach to the prospect of Bonza entering the fray, the same can’t necessarily be said for Qantas boss Alan Joyce, whose more pugilistic approach to competition has been noticeable through various public comments about his carrier’s plan to rigorously “defend its turf” in a marketplace he describes as “the most competitive in the world”.

Qantas CEO Alan Joyce has been vocal in his scepticism that Bonza will succeed.

Speaking at last year’s CAPA conference in Sydney, Joyce said he was sceptical of Bonza’s claim of uncovering many underserved regional routes in Australia, especially in light of Qantas significantly expanding its domestic network over the last couple of years.

“We’ve started nearly 50 new domestic routes so I would have thought we have most of them covered, but maybe we don’t, so if [Bonza] can find a unique value proposition that they can make money on, fantastic, fill your boots up on it,” Joyce observed.

The Flying Kangaroo’s chief has also hinted the carrier was prepared to do everything it can within the rules to maintain its edge against any new player, which some have taken to mean competing on any new route with Bonza directly, a tactic that has previously ruffled the feathers of Rex Airlines. So outraged by Qantas encroaching on its exclusive route territory, Rex even enlisted the services of law firm Clayton Utz earlier this year to “explore all legal avenues” to stop Qantas from what it alleged was “abusing its market position in order to hurt its competitors through anti-competitive behaviour in the form of capacity dumping and predatory practices”.

“Since Rex’s announcement in June 2020 to launch domestic routes, Qantas has tried to intimidate Rex by commencing services on nine regional routes in competition against Rex. The routes are marginal for one carrier and certainly too small for two airline operators,” Rex argued back in February.

While competing on routes is above board, the rub occurs when an airline does so at below cost for the express purpose of running a competitor out of the route, a tactic Joyce emphatically denies Qantas has ever deployed.

Nonetheless, the ACCC pre-emptively stated in March this year that it would be looking at the Australian domestic market “very carefully” to ensure new players are not denied the chance of competing with the more established brands.

“Obviously, aviation has had a shocking time and Australia desperately needs a competitive aviation sector, given our landmass and the fact that we’re basically a whole lot of city states,” ACCC Chair Rod Sims said.

Of particular concern to the consumer watchdog has been access to Sydney Airport, from which Bonza will notably not be initially flying from when it launches, given the steep costs involved and a scarcity of landing slots.

“We’ve got the prospect of more competition from Rex on city routes and Bonza who will target unserved routes, whatever the chances those companies have at success, they must not fail simply because they can’t get slots at our airports,” the ACCC’s Rod Sims argued.

Rex is confident they will continue to grow in the post-Covid era.

While Sydney is not on Bonza’s map just yet, Jordan has stated that the NSW capital is very much part of its longer-term strategy.

“We believe there are opportunities in Sydney to do something different,” Jordan said. “We want the 20% of the population who call Sydney home to benefit from Bonza fares in the future.”

Rex Airlines’ John Sharp has also been a very vocal critic of how airlines like Virgin Australia and Qantas have effectively been “squatting” on slot capacity at Sydney Airport, taking advantage of the Federal Government’s decision to waive the “use it or lose it” rule during the lean period of the travel shutdown.
Sharp argues that Virgin and Qantas have been gaming the system to keep challenger brands from competing and allowing higher fare prices to be maintained.

“Virgin has more slots at Sydney Airport today than it had pre-COVID and it has got exactly half the fleet, you do the maths on that,” Sharp says.

“If you’ve got half the fleet, theoretically, you should have half the slots, and they’ve got more slots than they had before COVID so it’s kind of a weird aberration.”

“Virgin has been able to play the game and they’ve been able to take slots, the purpose of which is to stop anyone else from having a slot so there’s less competition for Virgin and there’s less competition for Qantas, which is a deliberate move by both of them to try and reduce competitive pressure so they can put all their prices up,” Sharp concludes.

Despite his qualms though, Sharp is very confident that Rex will be able to continue its growth trajectory during the post-COVID era, built on a foundation of quality and affordability.

“We are a genuinely full-service airline that operates at really affordable low prices, we have the best on-time performance numbers of any airline…we offer the same cabin experience as Qantas does, and we offer prices that are in some cases lower than Virgin’s fares,” Sharp enthuses.

And while Rex’s Deputy Chair believes his airline’s travel experience is at the very least comparable to the Qantas experience for example, he admits that the perception of the carrier in the minds of Aussies does not yet match that reality, flagging more work to be done to improve that misconception.

“I think we’ve still got a long way to go before people have had the opportunity to experience our product and weigh up the experience on our flights, so we’ve got more to do there,” Sharp admits. “Habit is also another big factor, for a lot of Australians travelling with a particular airline is a habit and they just like Qantas, despite the fact that Qantas may be three times the price of Rex and going to exactly the same place.”

“Price obviously is another big factor, but it’s not the most important one because if it was there’d be a hell of a lot of people getting off Qantas and jumping on a Rex flight because the price differential is enormous.”

While there has been a lot of commentary around the viability of four carriers operating in a recovering and supposedly cluttered market, Bonza’s chief is quick to point out that airlines have not been the exclusive victim of the travel shutdown, with all quarters of the travel sector hurting as a result of the pandemic.

“The last two years have been torrid for all of us, and when I say the industry I mean tour operators, travel agents, airports, everybody, and we all need to work together to recover as quickly as possible,” Jordan believes.

“We will absolutely be putting our arms around travel agents and welcoming them to work with us because the most important thing to us is that someone is sitting on a seat on our aircraft and they have hopefully paid us a little bit of money for it. The worst thing in the world for the industry is an empty airline seat,” Jordan says.

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