Fierce competition between Australia’s domestic airlines and a desire to lure back travel-shy customers is forcing down airfares in the lead up to Christmas.

Airlines are slashing ticket fares to win back customers frightened away by the dangers and uncertainties of the pandemic.

But analysts say the massive discounts will be short lived, as airlines need to claw back billions of dollars lost at the hands of travel bans and border closures.

The extra competition comes after Rex Airlines expanded into capital cities earlier this year and new outfit Bonza promised to launch in the first quarter of 2022.

Yet despite all the changes, Australia still lives in a two-airline world to a large extent, much as it did back in the days of Ansett and TAA (Trans Australia Airlines).

“If you look at the market, you’ve got Qantas group (which includes Jetstar) at 67 per cent, and Virgin on 33 per cent,” said Mark Chaskiel, CEO of FBI Travel.

“You’d think [Qantas chief] Alan Joyce would be happy with that, but Virgin wants to gain market share and carve out a niche.”

Driving down prices

That competition is making itself felt in prices, where “Virgin is offering fares probably 20 to 30 per cent below Qantas in economy,” Mr Chaskiel said.

And the same is true of business class.

A Qantas business-class ticket between Melbourne and Sydney might be $455, while a Virgin ticket might be $299, he said.

In a report published on Tuesday, the ACCC said Australians were more optimistic that state borders would stay open and “a choice of four airlines on the country’s busiest routes appears to be putting downward pressure on airfares”.

The ACCC said Rex’s expansion was forcing down airfares and Bonza’s entry would likely do the same, particularly in the regional areas where it has pledged to focus its efforts.

Mr Chaskiel said Rex is a limited competitor with “about two or three flights a week on some trunk routes”.

But the ACCC demonstrated Rex’s presence on these routes likely forced down prices.

Rex’s expansion likely drove down airfares. Source: ACCC

On the Melbourne-Brisbane route, for example, the threat of Rex’s entry forced existing players to drop prices by as much as a third, as the chart above shows.

Rex also forced its rivals to lower fares on the Brisbane-Sydney route, albeit to a lesser degree.

But analysts believe the big discounts are unlikely to last long – especially in business class – as the major airlines need to recover from their pandemic losses to remain viable over the long term.

Clawing back losses

“While they need to provide some price incentives to the market to break down the reticence to travel that many people feel, they also want to return some of the earnings they have lost in the last two years,” said Ian Thomas, an airlines analyst with research group CAPA.

And those losses have been significant.

The numbers in brackets indicate a loss.

Discounts over the next few months “are likely to be a transitional phase – not a sign of how things are going to be in the future,” Mr Thomas said.

“What you are seeing now is more a promotional thing trying to build into Christmas.”

Virgin to focus on economy

Although Rex is having an influence at the margins in discount pricing – and the ACCC sees that as likely to continue – Virgin is probably going to be a bigger influence in the economy space.

Until now it has been playing a double game, trying to win in business as well as economy.

“It will continue in the premium traffic market, but with less emphasis there,” Mr Thomas said.

“It has made some inroads [in business class], but it will be increasingly focused on the middle to lower ends of the market.

“That’s where Jetstar operates, but [Virgin’s] view is that is something they can attack more aggressively.”

That means consumers can expect some good deals at the cheap end of the market – and there are already signs that budget costs are falling.

Holidaymakers warned

Mr Chaskiel warned anyone considering buying cheap flights for a holiday to make sure they lined up accommodation first, though.

“Getting to a place is not a problem,” he said.

“Finding a place to stay is a problem.”

This is particularly the case in holiday destinations like the Gold Coast.

That’s because the opening of state borders and ongoing difficulties with international travel mean motoring holidays are putting pressure on accommodation in popular locations.