Is the entry of Bonza going to hurt Australian airline stocks?

Nick Sundich Nick Sundich, February 3, 2023

For the first time since 2007, Australia has a new airline. Sunshine Coast-based Bonza finally took its first flight on January 31, less than a month after getting its Air Operator Certificate.

Is Bonza a threat to airlines, particularly listed airlines Qantas (ASX:QAN), Regional Express (ASX:REX), Alliance Aviation (ASX:AQZ)? Investors in those companies don’t seem to think so and we would agree with them.

Nevertheless, we think investors should be aware of the company and the fact that it may either present an opportunity or a threat to the incumbents at some point.

 

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Bonza is not an immediate threat to airline stocks

Bonza’s business model is totally different to Australia’s other airlines that operate with the hub and spoke model, with a few bases in capital cities and a model of transporting passengers to, from, and between these hubs.

This model means that passengers living outside these hubs would have to connect in a capital city. Bonza’s business model is to service airports that lie outside these hubs, such as the Sunshine Coast (its main hub), and transport passengers between these cities without having to connect in major airline hubs, such as Sydney.

Consequently, Bonza serves a completely different market to Australia’s other airlines. Indeed over 93% of its routes are not currently served by any other airline. So it is not a threat to the incumbents for now.

 

Here’s where Bonza could become a threat

We think Bonza is most likely to pose any kind of threat when it opens its base in Melbourne. Then it will be serving a handful of routes that are served by other carriers – in particular flights from Melbourne to Mildura, Newcastle and the Sunshine Coast.

But even then, it will not pose a significant threat because it will only be serving limited routes served by other carriers and it will lack the scale that competitors do.

We think if Bonza pivots its model to serve capital cities, while importantly keeping its low-cost structure, then it could pose a threat to airline stocks.

 

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Sydney in the mix

In this scenario, however, it will be critical for Bonza to serve Sydney. The airline has refused to fly to Sydney’s main airport given high landing and parking costs. But in a few years time, when Sydney’s second airport opens, we could well see Australia’s newest airline serve the nation’s largest city.

Whether the airline pivots will depend on the success of its initial business model. If it can carve out a profitable niche, there may be no need to pivot.

 

Where Bonza could be an opportunity?

We think if Bonza is successful, it could trigger other airlines to start serving some of Bonza’s routes. This will be a far more difficult scenario for the airline compared to the present one where it has these routes all to itself.

If Bonza is not successful, however, it may specifically pose an opportunity for Virgin Australia, which is looking to list later this year.

Virgin could potentially acquire Bonza’s 737 MAXs, on the cheap. Virgin will be introducing the MAXs in April this year and deliveries will occur over the next few years after that. But it may be able to accelerate the timeline if it can negotiate a new leasing deal with the aircraft’s lessors.

 

Virgin is always looking for a good deal

Although this is hypothetical matter, we observe that Virgin Australia has taken aircraft from other airlines in the past. In 2021, it acquired seven 737-800NGs directly from SilkAir, which no longer needed the aircraft.

Therefore, it is not unrealistic to assume that if Bonza does not work out, Virgin Australia could potentially pick up Bonza’s aircraft. Even with refurbishment costs, it would be cheaper and quicker than acquiring factory fresh aircraft.

 

Airline investors still should watch Bonza

Although Bonza could be a threat or an opportunity, depnding on how you look at it, most of them are some time away from potentially being a reality. So for now, investors in airline stocks should not fret about their companies conceding market share to Bonza.

Nonetheless, investors should still watch Bonza closely, because other airlines may need to react dependant on what the airline does in the next few years and how it performs.

 

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