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Australia’s Skies May Prove Too Small in Price War

Richard Branson, chairman and founder of Virgin Group Ltd.
Richard Branson, chairman and founder of Virgin Group Ltd., listens during a summit in Washington. Photographer: Jay Mallin/Bloomberg

July 22 (Bloomberg) -- Kerry Dillow, a Perth advertising executive, made the 3 1/2 hour flight to Melbourne last week to visit friends after paying A$366 ($321) for a round-trip ticket, about a quarter of her fare in 2005.

“We are definitely taking advantage of the cheap prices as soon as they are available,” said Dillow, 31, who flew with Richard Branson-backed Virgin Blue Holdings Ltd. “It’s completely about the price.”

Australian fares have tumbled as Tiger Airways Holdings Ltd. challenges Virgin Blue and Qantas Airways Ltd. in a market that has never previously supported more than two national carriers for longer than two years. Capacity may also grow 4.2 percent a year until 2014, as domestic airlines begin to receive the 184 narrowbody planes they have on order, according to Royal Bank of Scotland Group Plc.

“The mother of all domestic battles is brewing,” said Peter Harbison, managing director at the Sydney-based Centre for Asia Pacific Aviation. “There are going to be some very bruised bodies as this intensifies.”

Qantas and its budget unit Jetstar, which together carry about two-thirds of domestic passengers, have already reported lower passenger load factors on internal routes as capacity growth outpaces traffic. In May, the Qantas brand carrier filled 75.4 percent of domestic seats with paying passengers compared with 77.9 percent a year earlier, according to a company filing. Jetstar’s domestic flights were 74.4 percent full, a decline of 7.2 percentage points.

Shares Tumble

Virgin Blue, the nation’s No. 2 carrier, in May cut its profit forecast as much as 75 percent citing falling demand for leisure travel and rising capacity. The carrier was unchanged at 31 Australian cents at the 4:10 p.m. market close and has lost 47 percent of its value this year.

Sydney-based Qantas fell 1.7 percent to A$2.36 after earlier dropping as much as 2.1 percent. The carrier has tumbled 21 percent this year, the second-worst performance among the 30 stocks in the Bloomberg World Airlines Index.

“It’s a very competitive market, which is never great for airline profitability,” said Sean Fenton, who helps manage $740 million at Tribeca Investment Partners in Sydney. “It won’t change until the new planes are reined in.”

Orders Backlog

Qantas and Jetstar have at least 150 new planes on order, some of which will be used on international routes and to replace existing aircraft. The carrier yesterday announced an order for seven Bombardier Inc. propeller planes.

Virgin Blue, with a fleet of 53 aircraft, has ordered as many as 105 Boeing Co. 737s including options. Singapore Airlines Ltd.-backed Tiger has nine planes based in Australia. It plans to eventually boost its fleet in the country to 30.

Qantas will add 340,000 seats on domestic routes this year, including at Jetstar, said spokesman David Epstein, affirming the company’s February forecast. He declined to comment further. Melissa Thomson, a spokeswoman for Brisbane-based Virgin Blue, declined to comment.

Australia’s small population and geographical spread are the main challenges faced by carriers on domestic routes. The country is home to 22 million people, less than the state of Texas, and few overseas markets can be reached with single-aisle planes. About two-thirds of Australia’s inhabitants are also concentrated in eight cities, which further limits the number of routes available.

Tiger Charges

Tiger began domestic Australia flights in November 2007 and has now set up hubs in Melbourne and Adelaide. The Singapore-based airline has kept costs and fares down since entering the market through steps including charging extra for food, airport check-in and reserved seating.

That has helped give Tiger the lowest costs in the market, according to Citigroup Inc. Excluding fuel, it costs Tiger 2.75 Australian cents to fly each seat a kilometer, analysts at the bank, including Shavarsh Bedrossian said in a July 16 note. Jetstar’s cost is 5 cents a kilometer, compared with 5.75 cents at the Qantas-brand carrier and 6.25 cents at Virgin Blue, they said.

The cost-savings have allowed Tiger to offer lower ticket prices, which other carriers have followed. A government-run index tracking discounted fares on the nation’s 70 busiest routes has plunged more than 42 points since Tiger began flying in November 2007 to a reading of 55.2 this month.

“It’s no coincidence that competition in the domestic air-travel sector has never been greater since Tiger Airways arrived,” Tiger’s Australian commercial director Steve Burns said in an e-mailed statement yesterday.

Falling Unemployment

Economic growth may help fares rebound even without any reduction in a capacity, according to Citigroup. Australia’s economy may expand 3 percent in 2010-11, with unemployment falling to 4.75 percent the following year, the government said earlier this week.

“Rationalization of domestic low-cost carrier capacity is not the necessary precursor to yield recovery -- economic recovery is,” Citi’s Bedrossian said in the report. “Downward pricing pressure resulting from Tiger entering the market is no different to that of Virgin Blue and Jetstar when they entered the market.”

Leisure Challenge

Jetstar, which first flew in May 2004, and Tiger are competing for leisure traffic that has been Virgin Blue’s focus since Branson founded the carrier in 2000 with two planes and A$10 million. Virgin Blue’s new Chief Executive Officer John Borghetti, an ex-Qantas executive, is now challenging his former employer in the corporate market and is looking to cooperate with Air New Zealand Ltd. to help fill planes.

The start of Virgin Blue a decade ago contributed to the 2001 collapse of Ansett Holdings Ltd., which was then the nation’s second-largest carrier with a 41 percent share of the domestic market. Owner Air New Zealand placed Ansett in administration the day after the Sept. 11 terrorist attacks. The same year, Qantas bought Impulse Airlines, a regional carrier that had added Sydney-Melbourne flights in 2000 in an attempt to become a national airline.

In the 1990s, Ansett and state-owned Australian Airlines, which merged with then-internationally focused Qantas in 1992, saw off a challenge from Compass Airlines. The newcomer began flying in 1990 as the government liberalized the air-travel market. It collapsed a year later. A revived company lasted about as long after taking off in 1992.

“Australia’s aviation history suggests price wars will keep going until the new entrant goes broke or one of the incumbents goes broke,” said Tribeca’s Fenton.

For now, Dillow, the advertising executive from Perth, is enjoying the bargains and planning more trips following her visit to Melbourne. She has already booked A$180 one-way tickets for a trip across the country to the beach resort of Cairns next month.

To contact the reporter on this story: Robert Fenner in Melbourne

To contact the editor responsible for this story: Neil Denslow at

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