Let the price wars begin!

Air fare price wars are breaking out in Australia, spurred by new airline entry and a build-up of fresh capacity.

An index of Best Discount fares in the domestic Australian market, produced by the Bureau of Transport and Regional Economics, dropped from 80.2 in January to 78.4 this month. The February 2008 level was some 8.5 percentage points below the same month last year.

The big reduction in discounted fares is possibly due to the effects of Tiger Airways' entry in Australia and a build-up of capacity by incumbent airlines.

Overnight, Tiger Airways released 100,000 fares from AUD9.95, inclusive of taxes, charges and baggage fees, across its network. It follows promotions by “New World Carrier” (NWC), Virgin Blue, and Jetstar, of 5,000 seats for AUD0.01, inclusive of charges and taxes. More competition could be on the way with the launch of Lion Air Australia later this year. The airline describes itself as a “Good Value Carrier” (GVC), offering both Business and Premium Economy seats, in addition to a standard Economy section. [more on Australian domestic fares]

Elsewhere in the region, incumbent full service airlines (FSAs) could come under increasing pressure from new entrants and a potential slackening in demand this year.

Malaysia Airlines (MAS) has unveiled a new five-year Business Turnaround Plan that will see it transform into a Five-Star Value Carrier (FSVC) by 2012. The airline is combining cost cuts (in the order of 20%) with a focus on continued yield and load factor growth to achieve some fairly ambitious profit targets. Behind the new plan are growing challenges in the industry, “such as overcapacity, air traffic liberalisation and rising fuel costs”. MAS will encounter extreme price competition against long-haul LCC, AirAsia X in coming years.

Meanwhile, another entrant, Bahrain Air, which described itself as a “Premium Low Priced Carrier” (PLPC) is vowing to shake-up the Middle East airline industry with its low price strategy initially covering 140 services per week to 13 destinations in the Middle East and Africa, including Dubai, Alexandria, Beirut and Doha. This could put chronic loss-maker, Gulf Air, under further pressure.

The next few years will be a challenging period for Asian aviation for the FSAs, LCCs, NWCs, GVCs, PLPCs and FSVCs alike. At times like these, cost discipline and adherence to a defined business model are crucial.

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