Airlines

OPINION: Bonza was doomed to fail from the start

OPINION: Bonza was doomed to fail from the start
Ivan Stevenson explores where the Australian low-cost carrier went wrong (Image credit: Mitchul Hope/Flickr)

The UK has witnessed numerous airline failures and startups in recent years. Notable examples include well-known and long-established brands such as Monarch and Flybe, as well as tour operator Thomas Cook, which had its own in-house airline.

Additionally, market consolidation through takeovers has been a common theme. Liberalisation of air transportation has enabled greater competition across Europe, benefitting the UK with leisure-focused Jet2, low-cost carrier easyJet, and the Irish-born Ryanair becoming household names across the UK and beyond.

The US has seen similar phenomena in its domestic market, while further afield in India and the Asia-Pacific region, low-cost carriers such as IndiGo, AirAsia, and Singapore Airlines’ low-cost offshoot, Scoot, have grown in response to the rapid increase in middle incomes and the resultant demand for leisure services. Most recently, Australia witnessed the rapid rise and fall of another low-cost startup, Bonza, in a market dominated by Qantas and its low-cost subsidiary Jetstar.

This first of two articles examining airline strategy will look at the case of Bonza to glean insights before considering recent and emerging developments in the UK airline sector.

Liberalisation and the establishment of low-cost airline operations, along with a focus on ancillary revenue, have driven airline profitability across many markets and customer segments over the past two decades. The principles underpinning a low-cost strategy are generally well-documented and understood, yet significant market failures abound. Bonza is a prime example of this. But what does a successful strategy look like?

Ryanair is perhaps one of the best examples of a low-cost airline that has remained true to its founding principles while evolving to meet shifting market demands. Specifically, Ryanair offers only what customers really want and need at a price they are willing to pay, and at the absolute lowest possible cost to the business.

It also identifies opportunities for revenue generation through the creation of additional value propositions, mostly baggage, seat assignment and onboard sales. Also, despite having the largest fleet of newly acquired Boeing 737 series aircraft, modern Ryanair started with a fleet of used airframes and gradually consolidated around a common fleet type.

Most recently the airline evolved into a group structure and established separately branded subsidiaries to help mitigate potential diseconomies of scale and keep costs low in various key markets. Like other successful low-cost carriers, they began small and focused on deploying technology to support market growth, solve problems and ensure consistency in product and service quality.

Similarly, Jet2 and more recently easyJet have diversified by establishing their own tour operations, and easyJet has European and Swiss subsidiaries to facilitate access to these respective markets. All these companies have a clear understanding of who their customers are and what their needs entail. They innovate to meet evolving customer demands and utilise technology to keep costs low.

Where did Bonza go wrong, then? Many airline startups recognise they are entering a challenging market, however the airline industry is often considered glamorous due to its high-value assets and its role in facilitating global connectivity and trade.

Michael Porter, professor of strategy at Harvard Business School, famously said in relation to the airline industry that “sexiness does not equal profitability”. But many airline leaders appear guilty of believing otherwise.

Even with a well-understood strategy, it is easy to fail. The complexities of the global environment mean that even the best-laid plans can be upended overnight – a fact that should compel aspiring airlines to be even more meticulous in their planning. The well-known investor Warren Buffett raised eyebrows when he purchased significant shares in various US carriers in 2016, only to dump the stock in the wake of the Covid-19 pandemic.

Buffett has stated that the worst kinds of business are those requiring significant capital for rapid growth but then fail to deliver earnings – such as airlines. He also points out that if it is not the airline itself that is subject to global turbulence, it’s the oligopolistic equipment manufacturers, exemplified by ongoing issues at Boeing.

Backed by a large US-based investment company whose core business is football teams, Bonza launched operations in January 2023. Despite having had some success establishing Flair Airlines in Canada, several classic mistakes appear to have been made by the backers.

Bonza sought to acquire new aircraft and expanded quickly to cover a large network of unserved secondary destinations, branding itself as a “bogan” airline – a controversial and usually pejorative Australian slang term akin to “chav” in the UK. Imagine a UK airline focusing its brand on that concept.

The airline struggled to service its expanding operation organically, resorting to wet leasing aircraft from its sister Canadian company and subsequently running into regulatory difficulties with the Australian Civil Aviation Authority. They also quickly diversified into holiday operations but gained a reputation for unreliability due to frequent schedule cancellations caused by unavailable aircraft, crew shortages and non-profitability. Financial difficulties at the sister Canadian operation have also emerged.

Australia, like every market, has its nuances and particular characteristics, making airline startups particularly challenging. It seems Bonza was doomed to fail from the start due to high capital investment and the expectation of fast growth in a narrow market segment that is highly price-sensitive, presenting few opportunities for appropriate levels of ancillary revenue generation – one of the principles on which modern low-cost airline profitability is built.

With the UK and Ireland currently seeing a flurry of new airline startups targeting various segments and business models, the next article will review some of these and evaluate their place and potential in their respective markets.

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