Indonesia AirAsia Extra on Monday announced it would launch five weekly return A330-300 flights between Melbourne and Bali from December 26, with introductory economy fares as low as $99 each way.
The route is highly competitive. Virgin Australia Holdings offers 10 weekly return flights, Jetstar offers nine and Garuda Indonesia has daily services.
Indonesia AirAsia Extra's Bali flights will offer 377 seats, including 12 semi-flat business class bed seats which will be on sale for $499 one-way.
The fares will go on sale from tomorrow until November 2 unless sold out earlier, the airline said.
AirAsia X chief executive Azran Osman-Rani said he believed the airline could compete effectively on the route, even though low-cost rival Jetstar operates a more fuel-efficient Boeing 787-8 Dreamliner, because his plane offered more seats and labour costs were lower.
He said Indonesia AirAsia Extra's entry was likely to lead to lower fares on the route and compressed margins, but he said the low-cost carrier model was about volume and scale.
Jetstar responded to the launch by offering a special of its own, with $88 one-way fares to Bali from Melbourne, Sydney, Brisbane, Adelaide, Perth and Darwin.
Melbourne-Bali is the first route being launched by Indonesia AirAsia Extra. The airline also plans to add connecting flights to north Asian destinations like Japan, Korea, China and Taiwan so that the traffic on the route is not all one-way.
"Melbourne has been one of our most successful markets with our current service to Kuala Lumpur and this is an important advancement in our multi-hub strategy. We have a great partnership with Melbourne Airport and have much confidence in the opportunities here," Mr Osman-Rani said.
Indonesia AirAsia Extra is in talks with other Australian airports about flights to Bali, although it will only have two aircraft this year.
Mr Osman-Rani did not rule out the prospect of Sydney-Bali flights being announced soon, and he said other east coast destinations served by AirAsia X, which include Adelaide and the Gold Coast, would be targeted in the future.
Short-haul arm AirAsia Indonesia already flies between Perth and Bali and Darwin and Bali.