Turbulent Times: Bonza's Flight to Administration Marks Another Low-Cost Setback

On Tuesday, budget airline Bonza entered into voluntary administration. With speculators calling for the Virgin Australia’s IPO in 2024, this may push the date back while the waters settle.

Bonza was founded in October 2021 by former Virgin Australia executive Tim Jordan, with U.S. investment firm 777 Partners as the backer. However, operations didn’t begin until January 2023. It was started as a low cost airline to rival the only other domestic low cost airline, Jetstar. Just 15 months later, the planes are grounded and administration has been announced.

How did this happen?

Here’s the story:

The Introduction Of Low Cost Carriers

Bonza joins several failed low-cost airlines in Australia since the Low Cost Carrier (LCC) market began to take shape in the early 1990’s. The LCC market popped up following the government’s decision to terminate the Two Airlines Agreement, a policy that only allowed the government-owned Trans Australia Airlines and the privately-owned Ansett Airlines to operate.

The Two Airlines Agreement was set up to:

• Ensure stability in the airline industry following World War II, which was considered vital for the nation's economic and regional development,

• Manage infrastructure investments and development, ensuring that resources were not spread too thin,

• Allow for better regulation of safety and service standards, as the government could focus on overseeing a smaller number of operators

It was later terminated as economic analyses suggested that increased competition would lead to more efficient service, lower prices, and better coverage of both major and regional routes.

Since then, several new companies, such as Compass Airlines, Impulse Airlines, Rex Airlines, Jetstar, Tiger Airways Australia, and Virgin Australia, gradually entered Australia’s domestic market. Only Rex Airlines, Jetstar and Virgin Australia remain after Covid-19 saw the closure of Tiger, with Virgin narrowly escaping closure in 2020.

Bonza Takes Off & Lands Abruptly

Bonza launched in January 2023 and their game plan was simple:

• Offer the bare basics to keep prices low, no lounge service or free onboard meals

• Utilise wet leases to keep startup costs low, wet leases provides an aircraft, complete crew, maintenance, and insurance. Bonza was only responsible for fuel, airport fees and taxes

• Operate in regional areas, 85% of their routes were unserved by current airlines

And to begin with it worked, with fares between $59 to $79 each, it attracted a lot of attention from regional customers.

However it didn’t take long until the company ran into trouble. First there was significant public backlash following widespread cancellations due to issues sourcing a pair of 737s to launch new operations at the Gold Coast. More recently the parent company 777 Partners was being pursued for $46 million in unpaid aircraft leasing fees and damages in the UK.

It’s believed that the uncertainty of 777 Partners financial condition, which has not provided audited financial statements for the past two years, has caused a domino effect to the repossession of the Bonza planes.

Impact on Virgin Australia’s IPO hopes

As Bonza operated largely on it’s own flight paths it is unlikely that Virgin will pick a significant increase in customer bookings, however this shake up may bring back investor’s doubt in the viability of Virgin. Given Virgin was only rescued from voluntary administration back in 2020, there would need to be a drastic turnaround to provide the sound financials needed to overcome this doubt.