Running head: LOW-COST CARRIERS IN AUSTRALIA

Low-Cost Carriers in Australia:
A Major Power in the Future?

Sakurai Takayuki

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LOW-COST CARRIERS IN AUSTRALIA

2Abstract
This essay assesses the potential ability of low-cost carriers (LCCs) to influence the aviationindustry in Australia. It focuses specifically on Australian domestic aviation, and how LCCs
have affected it, together with the possible effects in the future. First of all, it examines thehistory of how low-cost airlines have developed, as well as the current situation of theAustralian industry. Secondly, the paper focuses on the strengths versus the weaknesses ofLCCs, assessing whether or not they are suitable for the market. Lastly, it compares thesuccessful airlines to the unsuccessful companies to figure out what is necessary for LCCs tooperate profitably in Australia. This essay concludes that LCCs have had numerous
influences on Australian aviation, significantly changing the power balance in the last fifteen
to twenty-five years. In addition, there should still be room for low-cost carriers to enter into
the Australian market. However, as the market becomes even more difficult to enter, factors
such as financial backing and diverse fare structures should allow easier entry for those who
attempt to move in.

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Low-Cost Carriers in Australia:
A Major Power in the Future?
Low-cost carriers (LCCs) have been a major threat to the airline industry in recentyears, and their popularity has grown throughout the world. Their presence has been arevolution in the industry. LCCs are said to have started in the United States in 1978, andsince then, the low-cost marketing method has proved to be a force all around the world(Francis, Humphreys, Ison, & Aicken, 2009). In some regions, they have become a major
threat to the incumbent airlines. The Australian airline industry is no exception. LCCs such as
Virgin Blue (currently Virgin Australia) and Jetstar have managed to become dominant
powers in the country. Virgin Blue even expanded their company in 2011, combining Virgin
Blue, V Australia, and Pacific Blue under the new name Virgin Australia (Taylor, 2011). In
addition, fourth party LCCs, including Tiger Airways, a subsidiary of Singapore Airlines that
“entered Australia in November 2007” (Creedy, 2011), have attempted to enter. Anassessment of history and the current situation, an examination of the strengths andweaknesses of LCCs, and a comparison of successful and unsuccessful airlines shows thatLCCs have made a big impact on the Australian airline market. Moreover, there is still spacefor newcomers, but certain requirements are necessary for them to survive.

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History of Australian Aviation
First of all, an examination of the history and the current situation of Australianaviation shows LCCs’ impacts on it. In the initial stage of the industry after 1945, “theAustralian government had a ‘two-airline’ policy, which was, in effect, a cozy duopoly
whereby the domestic market was shared between Qantas and Ansett” (Bamber, Lansbury,Rainthorpe, & Yazbeck, n.d.). Qantas started operations in 1920, and Ansett started in 1936.
In Australia, the trigger of the low-cost competition was the deregulation of domestic flights,
which took place in 1990. The Australian government deregulated domestic flights, allowing
newcomers into the market. Forsyth (2003) says that “deregulation opened up the market, andnew airlines were permitted to enter all domestic routes…Very soon after deregulation
occurred, the first low cost carrier, Compass, entered.” Compass only lasted for a year, as itran out of funds. Soon after in 1992, Compass Mark II, the second LCC, entered the industry,again failing in just six months.
After this, there was a period where Qantas and Ansett, the two incumbent airlines,
maintained their strength, unaffected by newcomers (Forsyth, 2003). As this period faded, thesecond entry phase started in 2000. Impulse was the first to enter, soon followed by Virgin
Blue, a subsidiary of the Virgin Group. Virgin Blue started operations in August, 2000, with aLOW-COST CARRIERS IN AUSTRALIA

5target to put a threat to key domestic routes against Qantas and Ansett: “The results were avicious fare war that cost the industry A$500m…Most of the loss fell on Ansett, forcing it
into administration in September 2001 before finally collapsing in March 2002 (Virgin Blue,2002).
One of the biggest events in Australian aviation history was the collapse of Ansett, asit forced the second strongest airline in the industry to exit. This had a huge effect for thepower balance, creating a huge gap for LCCs to gain strength. According to Bamber,Lansbury, Rainthorpe, & Yazbeck (n.d.), Qantas and Virgin Blue tried to acquire this gap,
resulting in an 80% share by Qantas. However, Virgin Blue had prices that were 30-40%
lower than Qantas. Together with the large gap left by Ansett, this “helped Virgin Blue to win
about one third of the domestic market within three years” (Creedy, 2009). Furthermore, inNovember 2001, Qantas “struck a deal to take over the struggling Impulse and used it as thebasis for the most important strategic move…the launch of Jetstar,” and had almost 18%
share of the domestic market (Creedy, 2009). Thus, LCCs have had a major influence on
domestic aviation, causing Ansett’s bankruptcy, and setting extremely low fares within themarket.

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6Strengths and Weaknesses of LCCs
Secondly, an examination of the strengths versus the weaknesses of LCCs clarifies
whether or not Australia is a suitable market for them to enter. One of the clear strengths forLCCs in Australia is the chance on dense routes. Bamber, Lansbury, Rainthorpe, & Yazbeck(n.d.) says “from an airline industry perspective, Australia comprises about dozen key cities,
most of which are separated by long distances and near the coast of a large island continent,”
inevitably creating dense routes such as Sydney-Melbourne. Dense routes are an advantage
for low-cost carriers, as there is room for them to compete against the incumbent airlines(Francis, Humphreys, Ison, & Aicken, 2006). On the other hand, LCCs are vulnerable to theavailability of secondary airports and their facilities. However, as stated above, Australia’s
main cities are concentrated in one region, unlike countries in Europe, where there arenumerous cities scattered around. One of the methods for LCCs is to use secondary airports
to keep their expenses low. Thus, it may seem hard for them to use the same method within
Australia. However, as Ansett collapsed, it left airport facilities available for the newcomers.
Virgin Blue has proved this as “Virgin Blue has been moved into a number of airport terminalpreviously used by Ansett” (Virgin Blue, 2002). Consequently, this weakness for LCCs is
unlikely to be a problem in Australia. Therefore, it is possible to say that Australia is a market

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7and a country that is suitable for LCCs, with the opportunity to use their strengths.
Successful and Unsuccessful Airlines
Lastly, a comparison between successful and unsuccessful airlines indicates thequalities that are required for newcomers in Australian aviation. As mentioned before, thederegulation in 1990 opened up the opportunities for LCCs to enter the domestic industry.
However, as Francis, Humphreys, Ison, & Aicken (2006) says, “the uneven spread and speedof the low cost model around the world…cannot be attributed to deregulation alone,”deregulation is not the only key for LCCs to gain opportunities and capitalize upon them.
Therefore, comparing the successful and unsuccessful airlines will clarify what is needed for
low-cost carriers.
One of the things that is necessary is a steady financial structure. According toForsyth (2003), LCCs that were not a subsidiary of a major airline collapsed within two years.
This includes Compass and Compass Mark II, which both failed due to limited funds. On thecontrary, Virgin Blue and Jetstar were the exceptions. Both airlines were a subsidiary of abigger airline group, meaning they had significant financial backing. As a result, they wereable to maintain their position in the market, and became the two airlines after the dominant
Qantas, whereas the airlines that were not subsidiaries of major airlines found it difficult toLOW-COST CARRIERS IN AUSTRALIA

8continue operating. Another element for success is the fare structures. Many LCCs tend tohave simple fare structures, such as single class seating, no codeshare flights, or frequent
flyer programs, whereas Virgin Blue was different. According to Creedy (2009), “while stilloffering lower fares, it began adding extras such as frequent flyer scheme, lounges, in-flightentertainment and premium seating in a bid to attract higher-end customers.” After becoming
Virgin Australia, they now have a “strong partnership between Delta, Singapore Airlines,
Etihad, and Air New Zealand. Using codeshares and frequent flyer service, joining StarAlliance” (Qantas and Virgin Australia, 2014). So, by using complex and numerous fareswith frequent flyer programs, Virgin Blue was able to gain higher-end customers and not justthe ones looking for low prices. Thus, the comparison indicates that financial backing from aparent company and flexible structures are required for LCCs to be able to continue as aviable operation, just like Virgin Blue or Jetstar did.
Conclusion
In conclusion, LCCs have had a big influence on the Australian airline industry sincedomestic deregulation in 1990, which importantly forced Ansett to collapse, and introducedlow prices to the market. In addition, it can be said that Australia’s domestic market can still
handle newcomers. However, there are certain requirements in order for them to survive asLOW-COST CARRIERS IN AUSTRALIA

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the industry is becoming highly competitive, with new airlines entering. The factors required
are stable financial backing and diverse fare structures. By adapting to this, LCCs could havethe chance to become the fourth or fifth airline in Australia, threatening Qantas, the mostdominant carrier in the country.

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10References
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