Australia’s aviation sector is undergoing one of its periodic shakeouts following the collapse of Virgin Australia. While present indications are reasonable that Virgin Australia will be rebirthed, the collapse has led to both established and would-be operators in Australia’s lucrative domestic aviation sector mulling the possibilities of future operations.
Many parties keen for a slice of the pie
The collapse of Virgin Australia has caused established local players like Regional Express (REX) and Alliance Airlines to consider ramping up their operations. It has also seen established foreign companies like Indigo and IndiGo thinking about dipping their toe in the local pool. Then there are the companies and individuals with minimal aviation experience but deep pockets and big dreams. After all, who wouldn’t want their own airline?
The domestic aviation sector in Australia is one of the world’s most profitable. Plenty of competitors look enviously at the fat fares picked up by both Qantas and Virgin Australia on the lucrative transcontinental and golden triangle routes.
But getting a slice of that pie is easier said than done. Lots of players have had a crack at it but fallen by the wayside. In the last few decades, we’ve seen both iterations of Compass, OzJet, Air Australia, and Impulse all unsuccessfully attempt to break into mainline domestic operations.
Maintaining the status quo
The general view is that there’s enough demand to support two full-service domestic airlines and one or two low-cost airlines. That’s pretty much how things have run in recent times. This presumes that those airlines are well run and efficient. That’s something neither Virgin Australia or its low-cost offshoot, Tiger Airways, could claim to be in recent years.
The restructuring and sale of Virgin Australia is an attempt to reboot this status quo. It’s also an attempt to transform Virgin Australia into a lean, well run, and superbly managed airline – kind of bringing it up to par with Qantas.
But some companies are circling the Virgin Australia collapse and have developed plans to go it alone, to introduce another player into the sector and shakeout the status quo.
Indigo Partners, who are on the bidding shortlist for Virgin Australia, have looked at getting their own local air operator’s certificate and kicking off their own (presumably low-cost) airline. Local regional airline, REX, has also floated the idea of expanding into mainline jet operations next year.
Rusted on passengers a barrier to new entrants
Most would argue that more competition is a good thing. But here’s the thing, the majority of revenue across Australia’s domestic airline industry is generated by a minority of flyers – the high fare-paying frequent flyers. In a previous life, I was a fairly hardcore frequent flyer. This kind of passenger wants frequency, reliability, flexibility, and good service.
Operating three flights a day to Melbourne isn’t going to snag you a share of this market when Qantas is operating 33 flights a day.
No new airline can introduce the kind of frequencies, service, and facilities that this type of passenger wants. Sure, the new airline can ramp it up, but in the meantime, your prospective cash-cow passenger is parking his backside in the lounge in the other terminal drinking another airline’s pinot.
It took Virgin Australia 20 years to garner a 30% share of the corporate market. Its share of the government market is even less.
Why expanding the competitive landscape is unlikely to happen
This suggests that any potential start-up airline is going to be a minor player for a long time. It will fly leisure travelers and bargain hunting small business owners who can’t get into the Qantas Lounge. That means unless the new start-up is prepared to play a very long game, the financial pickings from Australia’s domestic market are going to be slim.
It would take a brave prospective operator to step outside of the existing two full-service and one or two low-cost operators model. The Virgin Australia collapse does give rise to an opportunity, the full-service model, and/or a low-cost replacement for Tiger Airways. Taking up the space vacated by Tiger may be a good fit for Indigo Partners, leaving someone else to run the full-service rebooted Virgin Australia.
What is less likely to happen is to see a new player come into the market in addition to the current competitive model.