Low cost competition heats up on Sydney-Melbourne

Even with the new services from Jetstar, Qantas will maintain its current 32 daily Cityflyer services on the route, which are aimed primarily at business travellers, while Jetstar will focus on the leisure end of the market.

“We believe using both brands effectively is critical to the future profitability of and market position of the Qantas Group,” said Joyce.

“That’s why we’ve decided that Jetstar will operate Melbourne Tullamarine to Sydney five times per day.”

Jetstar CEO Bruce Buchanan noted that despite the two airlines offering their services side-by-side, he doesn’t expect any cannibalisation of Qantas’ traffic, as some analysts have feared would happen. “The Qantas Group’s complementary two-brand offering through Qantas and Jetstar, already in place across many Australian domestic and international routes, can be successfully replicated on the important Sydney-Melbourne market,” he said.

As expected, the launch caused something of a fare war to erupt, with Jetstar promotional fares starting at $19 one way through the Twitter social networking site, forcing Tiger to respond a day later with $25 one way fares. Subsequently, Tiger issued another sale a few weeks later with fares again starting from $28.

With the addition of the new services to Tullamarine, Jetstar will reduce its services on the Sydney-Avalon route from seven to four per day. However, Joyce says that it is not planning to abandon its services from Avalon as it seeks to compete with Tiger’s Tullamarine base. “It’s still a very good destination for Jetstar, and having the combination of Tullamarine and Avalon is a unique combination for them. It allows Avalon to serve the Geelong market,” he said.

Joyce also noted that there were other strategic benefits to maintaining services to both Avalon and Tullamarine. “It allows price competition between Avalon and Tullamarine Airport, and we very much see a future for operations there.”

The reduction in Sydney-Avalon services follows Jetstar moving its flights to Perth and Adelaide across to Tullamarine to better compete with Tiger’s services from the main Melbourne airport. Jetstar now only operates flights to Sydney and Brisbane from Avalon.

Passenger traffic on the business-heavy route has fallen slightly due to the current economic downturn, with BITRE data showing passenger numbers declined by 2.5 per cent during the 2008/09 financial year, and traffic in June this year down by 6.2 per cent for the month. The route has also seen a small capacity reduction over the year as both Qantas and Virgin Blue removed capacity in order to boost their yields, although overall load factor remained steady over the year at 80.5 per cent.

With the new Jetstar services, it appears that the Qantas Group appears to have gained a new found boldness to push past its long held ‘line in the sand’ of a 65 per cent market share. “We’ve been saying that we think we can build on the 65 per cent, so we’re happy with 65 per cent market share overall. We think that’s the right position for the Group, the right balance between Jetstar and Qantas as it stands at the moment.”

However, any move to simply follow the competitor could be risky for Qantas, which recorded a nearly 90 per cent drop in full-year profit as it was hit by a drop in premium travel, as it would likely keep yields depressed for some time.

Nevertheless, Joyce appears to be focused on aggressively neutralising the threat Tiger poses to both Qantas and Jetstar, particularly if it is able to gain a foothold and establish a base in Sydney. In recent months, Jetstar has announced the launch of flights from Sydney to Perth – coincidentally starting on October 25 – possibly representing an attempt to pre-empt a launch of flights by Tiger on the same route. It also recently started a second daily service to Adelaide shortly after Tiger announced it would provide twice daily services on the route.

The battle between Tiger and Jetstar is also set to intensify in Asia, with Jetstar Asia announcing on August 19 that it will start its first flights to the Chinese city of Haikou from December 16. This will pit it directly against Tiger, with more competition on the way as Jetstar Asia plans to take delivery of three new A320s which will be based in Singapore.