Air Australia–Where does a new Carrier fit?

Posted on: January 6th, 2012 by: Martin J Cowling


Since the start of aviation , Australia’s domestic airline market has been largely composed of two major national airlines. From time to time the cozy duopoloy is challenged by a new entrant with a blaze of low fares.The latest such carrier is Air Australia.

2011 Background

Twelve months is a long time in aviation. Qantas the dominant domestic carrier suffered a series of rolling disputes in 2011 culminating in the dramatic three day grounding of the carrier’s services. Tiger Airlines Australia was also grounded be the safety authorities in mid 2011 for safety breaches. Virgin Blue the nation’s largest discount carrier has made a move to full service airline.

Brisbane-based Strategic Airlines

Operating as a full service charter airline since 1991, its biggest  client has been the Australian Defence Force  until last year . Strategic purchased Ozjet in 2009 along with its staff , Air Operator Certificate and the Perth-Derby  route.

On 15th November, 2011, Strategic retired its name, red white and blue brand and full service model. It became Air Australia, a new international and domestic low-cost carrier. Its route network expanded on December 15, 2011. The carrier has a mixture of A320s and A330s.   Why the shift? Simple. Air Australia, needs to make money. It lost that major contract with the Australian Defence Force last year amidst a police investigation. The airline is cash flow positive because of its charter business but made a significant loss last year. 

Services now include:

  • One domestic flight:  Melbourne to Brisbane
  • Melbourne and Brisbane to Phuket
  • Brisbane to Bali,
  • Melbourne and Brisbane to Honolulu
  • Brisbane-Port Hedland
  • Perth to Derby
  • The airline also plans to fly between Brisbane and Darwin. It has permission to fly to China and has applied to fly to Vietnam.
There is no competition on the Hawaiian routes.   This seems to be the strategy- to build an international network that is not Sydney focused and not in direct competition with the “big boys”. Jetstar/Qantas and Hawaiian all operate only from Sydney to Honolulu. I am interested to see if there is enough traffic on those sectors for Air Australia. Honolulu used to be a very popular destination for Australians but they have seem to moved onto other destinations no. Air Australia is a brand new carrier and have no US partnerships to feed traffic to or from.  From Brisbane to Bali via Darwin, Air Australia competes with both Jetstar and Virgin.

Unique Selling Points

CEO Michael James (who has been with the airline since 2002) said in contrast to Qantas and Virgin, the airline would offer: “Simplicity, value, operational integrity, genuine fares and service are our promise and all that we believe many Australian travellers want in order to get safely and enjoyably from A to B,” Air Australia are emphasising the following:

  • their 100 per cent Australian ownership
  • planes that are serviced in Australia (a dig at Qantas)
  • first bag free (a dig at Virgin, Tiger and Jetstar)
  • the option to buy a meal when booking and/or snacks on board (I am not convinced many people will take the meal option)
  • an eight-seat fully serviced business class (with no lounge,  no frequent flyer points and fares that are not much less than competitors)
  • an economy class with just 152 total seats on its A320s, compared with 180 seats on the same planes flown by Jetstar
They are believed to be considering introducing a frequent flyer program similar to the one Southwest Airlines had in the USA where a free trip is awarded after every ten flights.

Operational Integrity

This is a major issue.  Reading through the Trip Adviser’s discussion page on Strategic, there is complaint after complaint about the airline’s reliability. For example, Never again!!! 2 hour delay there, 9 hour delay on the way home!!!  In June, 2011, a “minor fault” on an A330 stranded several hundred people in Kuala Lumpur for four days.  The episode cost the airline more than $1 million in expenses to look after the people stranded. It has said that internal procedures have been overhauled and aircraft schedules changed to ensure there are always backup planes available.

The Big Question

Who will fly an airline that has no other significant domestic network, only flies twice a day on one domestic route and a couple of times a week on their international routes,  and offers fares that are not much different to the others?? If Air Australia tries to expand and directly compete on other domestic routes then it will be in a risky space. The CEO reassuringly has said: “Many of our staff and advisers have extensive airline backgrounds and we have seen it all before, we understand the challenges of the industry and we understand the market”  I don’t see enough differentiation to grab passengers, however and an emphasis solely on discounted fares will ultimately fail. Without a significant differentiation, I can’t see Air Australia filling their planes and therefore survival is at risk. There are a few directions, Air Australia could go with their model.

 The Allegiant Airlines model

At the moment, they seem to be following the Allegiant Airlines model. Allegiant is a US Carrier that is similar to Air Australia in that they operate charter and regular services. They have been doing so since 1997 and had their current business model since 2001. Some of the features ofAllegian’s model include:

  • Generating high ancillary incomes in addition to ticket revenue- they currently average  $33 per passenger in ancillary revenues
  • Selling 400 000 hotel rooms to their passengers (and receiving commissions)
  • Flying from from smaller airports which have limited regular carrier services
  • Flying only to to leisure destinations
  • Marketing to leisure passengers traveling to warm-weather destinations
  • A significant focus on  low operational costs
  • A “RyanAir” feel
  • profitability every year since 2003, unusual for an airline

 

An extended Jet Blue Model

I would like to see Air Australia go after the JetBlue model. JetBlue also a US airline aims to be low cost but in terms of passenger amenities and services, they outshine the big carriers. I think there is room for JetBlue to go really radical to attract passengers:

  • Market the legroom advantage heavily (modelled after JetBlue in USA)
  • Ditch Business Class and fill the space with one class seats (again JetBlue in USA) simplifying operations
  • Reduce their fare types from five to two
  • keep the one bag free (Southwest in USA markets this heavily)
  • Offer wifi on all planes at a fee (AirTran in USA)
  • Install seat back entertainment (to compete against other carriers) -possibly a couple of free options and the rest pay per view
  • Offer free Tea and Coffee in departure lounges (AirTran)
  • Offer free drinks on board (Southwest in USA)
  • Emphasise Australian snacks and drinks on board
  • Market the snacks heavily- offerring deals and options
  • Paint each tail as a different Australian animal (like Frontier in the USA)
  • Push the sale of duty free on board ensuring duty free is a significant part of revenue (following Korean Air)
  • Provide an Australian candy/sweet like a Minty upon landing and approach (Air New Zealand still provides candy in this situation)
All of this will require capital. Capital, I am not sure Air Australia has. Personally, I would be fairly pessimistic about their future but am ready to be surprised.

I will report on my first Air Australia flight next Tuesday.

Their website: http://www.airaustralia.com/

 

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