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28 days to Melbourne / Sydney airfare wars

28 days to Melbourne / Sydney airfare wars

That’s how long it is to March 1st when REX airlines starts their domestic operations between Sydney and Melbourne. All borders being open, I will be flying with them on that first day.

The advent of a new domestic airline is something to celebrate for passengers, as it will mean the slashing of airfares. For Airlines, not so much, as it will threaten their profit margins.

With REX announcing its pricing structure – placing it firmly in a competitive position, especially in Business Class, Virgin, Jetstar and Qantas are going to have to pub their pricing algorithms to the test.

We can already see the dramatic impact REX’s entry will have on the pricing of the Melbourne / Sydney route. It’s about to experience the mother of all slashings.

Lets take a look at the market* for Economy on the two dates of 1 February (today) and 1 February, when REXs first domestic route starts operating between Sydney and Melbourne:

Economy (return)

Monday 1 February

Monday 1 March

  • Qantas – AU$221 – $311
  • Virgin – AU$156
  • Jetstar – AU$96 to $196
  • REX – AU$198

Qantas is holding the fort on price mostly. Virgin has reduced by ~30-60% and REX is placing itself firmly between Qantas and Virgin. It looks like Jetstar, and maybe Qantas as well are redistributing their fare price categories, with their cheapest lower, but their highest, well higher. This is no surprise given that we know they have a very sophisticated algorithm running in their pricing department.

Now it should be noted that REX has sold a bunch of AU$90 fares straight after their announcement of ticket sales for the route.

Business (return)

This is where you can really see the difference take effect. All the airlines are slashing their business tickets when REX enters the fray with its AU$601 fares.

Monday 1 February

Monday 1 March

  • Qantas – AU$1,437 – $1,645
  • Virgin – AU$596
  • REX – AU$601

Qantas has had to reign in its prices by AU$400 to AU$800. Virgin pricing has dropped by AU$300 and REX has placed itself just above Virgin, which is appropriate since their B737-800s a year ago were flying for Virgin.

*These figures are based on a google flights search conducted on Friday 29 January 2021 of direct flights out of Sydney to Melbourne return for the dates of 1 February and 1 March.

Observations

Besides the huge, I say HUGE difference in prices once REX hits the market, here are my observations summarised:

  • REX is firmly placing itself mid-market for both Economy and Business class seats between Qantas and Virgin, with Jetstar trailing behind
  • The biggest change in price is the cost of Business Class: Qantas reduces its minimum fare by AU$400 and its maximum nearly AU$800 once REX enters the market
  • You can now get a return ticket to Melbourne in Business Class with Virgin or REX for around AU$600
  • Qantas is still charging more than twice what the other two airlines are charging for Business

2PAXfly Takeout

At some point, Qantas loyalists will start asking why they are paying more than double the other airlines price for Business Class between Melbourne and Sydney. Do they actually get more than double the value? Are Qantas lounges double as good as Virgin or Rex? Is the snack in Economy worth the extra 50 bucks? Maybe the booze is twice as good?

Prepare for a price war. Qantas prices are likely to be the most affected, but then, even during a pandemic, its pockets are deep. On the other hand, Virgin has been reborn with a stripped to the bone cost base, and an owner with deep pockets. REX is the new kid on the block with planes it has presumably leased for a comparative song, given that no one is investing in aircraft at the moment, while no one is flying. They also have a quite nice wad of funding, that has just been approved by shareholders, and a partially subsidised regional network, that has possibly been least affected by border shutdowns.

Arguably, Qantas has the most to lose. Once it starts compromising those prices because it is losing business at the pointy end, then the price and capacity war is on!

We will have to see who blinks first.

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