Ultra-cheap seats to flood the market

Mark down the weeks leading into the September school holidays as the beginning of a rare full-on fares war in Australia that is part of the fallout from the attempt by Virgin Australia to steal Qantas’s business customers.

Although not widely reported elsewhere, the business press is abuzz with news of a capacity war between Australia’s two biggest domestic airlines in the second half of this year.

The Centre for Asia Pacific Aviation in Sydney is reporting that the number of airline seats flying around Australia will increase by a whopping 21 per cent from September in the biggest single capacity ramp-up of recent times.

If that doesn’t sound much, airline traffic in Australia normally increases by 5-7 per cent a year. That’s business as usual, in which you get the occasional snap sales of cheap seats complemented by larger cheap seats throw-outs in the traditional low-season periods of February-March and October-November.

What is about to happen, on the face of it, is bordering on irrational, but the major airlines can well afford it as both are abundantly profitable on the domestic front. Joining the capacity war, Tiger Airways, still recovering from last year’s grounding, will finally have its full Australian fleet back in the air by July.

Meanwhile, Virgin Australia, having abandoned its former role as a backpackers' low-cost airline, has invested tens of millions of dollars reinventing itself as a business airline with a cost-base low enough to appeal to holiday-makers and bargain hunters as well.

Virgin’s new chief executive John Borghetti is betting the company on an ambition to double the number of business travellers using the airline from 10 to 20 per cent of the total.

But Qantas is drawing “a line in the sand”: it says it will fight to retain its 65 per cent overall market share. Chief executive Alan Joyce told the Australian Financial Review he was willing to add as many additional flights as necessary. “There is a lot of capacity being added to the market by Virgin and by Tiger,” he said “We are entitled to defend our position.”

The AFR says it understands Qantas is planning to add a significant amount of ­capacity from July. This could mean increases of up to 13 per cent in capacity, depending on how many additional flights Virgin puts on.


Industry sources say Virgin is planning capacity increases of 17 to 18 per cent, although this figure has been disputed by another airline source.

“Our capacity plan is driven through a continued focus on yield and margin improvement opportunities on individual sectors, as opposed to an overall group market share goal,” a Virgin spokeswoman told the AFR.

That’s code for concentrating the ramp-up on key interstate business routes, like Sydney and Melbourne to Perth, as well as the Melbourne-Sydney-Brisbane corridor.

Analysts said yields, or average ticket prices, would fall as increased competition meant there were more seats in the market to sell.

By July, Tiger will have established an aircraft and crew base in Sydney, which will lead to the reopening of routes from Sydney to Brisbane and the Gold Coast, as well as increases in Melbourne-Sydney flights to as many as 11 return services a day. It also leaves open the possibility of introducing services from Sydney to Cairns and Perth for the first time.

Tiger, meanwhile, announced last week that it would begin double-daily flights from Melbourne to Hobart in November, rising to three a day over the summer peak. Flights to Cairns will be cut back or even stopped during that wet-season period.

While many travellers continue to shop for overseas specials, the airlines will be attempting to impress upon them the availability of cheapies at home. If the domestic capacity war plays out as expected, interstate fares will be ultra-cheap for most of the rest of this year. But they’ll need to be to move the number of empty seats that are being contemplated.

Could you be tempted by cheap domestic fares to travel within Australia – for a holiday or to visit friends or relatives – or is your focus on international destinations? What will the airlines have to do better to tempt you?