AUSTRALIA and Canada are very similar countries in many ways – and unfortunately, one of those is in the air.
Both commonwealth nations feature relatively small and dispersed populations, which makes aviation an incredibly important public service.
Unfortunately, this also makes these countries’ air sectors very easy for just one or two to control.
Australia and Canada both play home to established duopolies in the air, as well as a lack of secondary airports in their major cities, which results in a focus on price, and little more, by the country’s carriers.
“In both markets, regulators have not necessarily recognised the fact the current systems has an inbuilt favouring of stability without asking whether more competition could be achieved without undermining stability too much,” aviation expert Carolyn Childs remarked.
The two countries also share one unfortunate similarity – they have both lost two low-cost and/or start-up carriers in the last 12 months.
Australia has this year seen the demise of Bonza, while intercapital services by Rex Airlines have also been rolled back.
Meanwhile, Canada has lost Lynx Air and Canada Jetlines, while Flair Airlines – which is funded by 777 Partners, like Bonza – has had a number of its aircraft repossessed.
However, Childs believes there is a wider issue at play in both markets, which is beginning to rise in prevalence around the airline industry in general.
In fact, she suggests in both Australia and Canada, and indeed throughout the world, full service airlines (FSA) are getting better at responding to low cost carriers (LCCs).
“The way full-service airlines are bundling and unbundling their fares has put significant pressure on the LCCs,” explained Childs, who was marketing lead at the International Air Transport Association, and a tourism researcher for MyTravelResearch.com.
“Maintaining lots of product assets and disaggregating them into different bundles gives you potentially dozens of different products or value propositions.”
“Their vast troves of data in the age of AI means they can do really effective dynamic pricing, which scoops up budget demand whilst reducing the risk of leakage from higher fare levels – especially when you look at tools such as [frequent flyer programs].”
These offerings are becoming more well-presented in booking systems, with a clearer idea of what the trade-off is for the customer.
Childs points to another similar air market where this is particularly present, with one airline controlling the majority of the market share.
“How [Air New Zealand] presents this is the best….you are in effect offered the option of an LCC product nested within a full service airline.
“More experienced travellers are getting better at looking at these options and making the trade-offs.”
Not even the world’s largest air market, the United States, is free from this sort of behaviour; LCC Southwest Airlines has had its operating margins squeezed by similar conduct from FSAs.
However, the ability for FSAs to infinitely squeeze LCCs is not inexhaustible, as Airline Intelligence & Research Chief Executive Officer Tony Webber unpacks.
“Their cost base is materially higher (30% to 40%) than LCCs,” Webber explained.
“This means that FSAs have to close off their cheap seats much earlier than LCCs, which limits their ability to compete with LCCs for these lower yielding customers.”
FSAs with established networks are now also getting far better at leveraging their assets to defend their market share and manage their yield.
“Obviously, Rex had anticipated some competitive response on pricing, but I don’t think they gamed the scenarios where Qantas [allegedly] priced against them on their regional routes, which were a big part of operating cashflow for Rex whilst they established the routes,” Childs explained.
The power of habit plays a large role in a traveller’s behaviour too, particularly with a stressful experience such as flying.
Childs thinks Bonza made a mistake in limiting flyers to booking through an app, particularly when rural customers were a large part of its target market.
“This combination required people not just to know about Bonza, but also to change their thinking about the ability to go point-to-point, but also how they booked their travel,” she said.
“That much change creates a lot of friction for consumers to overcome in a category with an extremely perishable product.”
There is also the intangible value of the history and prestige of flying a premium airline comes in; after all, they’re not called “legacy carriers” for no reason.
“I think finding offers and deals by flying a FSA at an LCC price has an emotional benefit to the consumer as well,” Childs said.
As Australia awaits a potential genuine challenger to Qantas Airways and Virgin Australia, Childs likens success in the airline industry to an “Anna Karenina situation”.
“All successful airline launches are happy in the same way, and all unsuccessful ones are unhappy in their own way.”
