Australian Airlines, the low-cost international arm of Qantas, is looking to extend its reach beyond Asia when it starts replacing its Boeing 767 fleet.

Australian operates five all-economy 767-300s on Asian leisure routes where yields are too low for Qantas to make money. At the end of January Australian will replace Qantas on the Perth-Denpasar (Bali) route, adding yet another Asian destination to its network.

Australian's 767s are on lease to Qantas from British Airways and Qantas has subleased them on to Australian. Peter Gregg, Qantas chief financial officer, says the BA leases are nearing maturity. When they do, Gregg predicts that Australian will look for a longer-range replacement aircraft. "The 767s limit Australian's ability to fly to certain markets," he says. "An aircraft with longer legs might open up new routes, such as Lebanon and Greece, which have traditionally been strong markets for Australians," Gregg predicts.

Australian could add destinations in that region in the same way it has in Asia, by taking over routes where Qantas has withdrawn or plans to withdraw due to low yields. Gregg views these as more likely candidates for Australian's expansion than transpacific routes to North America, where Qantas operates profitably. Qantas has carefully avoided competition between the parent airline and Australian in any markets.

Mediterranean destinations would bring a shift in Australian's marketing strategy. So far it has focused on inbound leisure traffic, but routes to that region would appeal more to independent and group travel out of Australia.

Any expansion towards Europe opens up other route options. The most likely ones would be those European cities where Qantas has reduced or dropped service due to low yields. Australian might also operate fifth freedom flights to Europe via Asia. Now that Qantas has re-entered China, where it holds fifth freedom rights to much of Europe, the Qantas group is actively analysing whether some Australia-China-Europe routes might suit Australian Airlines better than Qantas.

The two-year-old low-cost airline's initial success points to a likelihood of it entering new markets in the near future. According to Gregg: "Australian bears close watching."

Source: Airline Business