Australia's two aviation heavyweights, Qantas Airways Ltd (ASX: QAN) and Virgin Australia Holding Ltd (ASX: VGN), could face stiff competition from a new budget airline, Koala Airlines.

What is Koala Airlines, and where did it come from?

The new budget airline carrier plans to launch and begin operations in Australia in late 2026. 

Koala Airlines acquired Desert Air Safaris Pty Ltd, an Australian air tours and charter flights operator for Australia, PNG, and the Pacific Islands, in 2019. Koala Airlines inherited a valid Air Operator Certificate (AOC) via its acquisition which is currently valid through May 2027.

The airline says it plans to do things differently to other budget airlines that have previously tried, and failed, to break into Australia's aviation market.

Rather than competing on ultra-low fares (a tactic which failed for Bonza and Rex Airlines, which went into liquidation and voluntary administration in 2024), Koala plans to focus on niche markets and customer trust.

"While many new low-cost carriers have entered the market since 1990 and focused solely on offering cheaper fares, almost entirely leading to unsustainable competition, Koala is taking a more innovative route," it said on its website.

"Our goal is to carve out a unique niche that enhances the industry landscape without disrupting existing standards by creating a lasting impact on the industry", Koala says.

"At the forefront of our strategy is Koala Tech, a groundbreaking technology platform designed to revolutionise the aviation industry. This innovative platform seamlessly integrates a range of aviation business applications, enabling comprehensive automation and harnessing the full power of artificial intelligence."

Up, up, and away

Koala Airlines said it is finalising negotiations to acquire a fleet that will enable its AOC to be upgraded with the new aircraft type. 

"This step is crucial in solidifying our operational capabilities and readiness to serve our customers with the highest standards," it says on its website.

Koala Airlines chief executive Bill Astling has responded to critics who dismissed the airline as an unrealistic venture that wouldn't get off the ground. 

"What we don't have on the AOC is the aircraft type, because Desert Air operated a lot of smaller aircraft," he told The Australian.

"But we do have one, despite what people might think."

He said Koala Airlines had also "secured aircraft", but he would not say what type or where the planes would come from.

There was a need for confidentiality to "look after certain shareholders who don't want this thing broadcast all over the place," he added.

"If I'm opening a store I'm not going to tell you what I'm going to sell 18 months before I start, or even what's in the store," he said.

Qantas, Virgin holding ground

Qantas and Virgin remain dominant in Australia's aviation market, backed by strong fleets, travel networks, loyalty programs, financial scale, and minimal domestic competition.

The Qantas Group, which also includes Jetstar, currently accounts for around 60% of domestic passengers while Virgin accounts for around 35%.

Flight Centre Travel Group Ltd (ASX: FLT) chief executive Graham Turner told Sunrise on Tuesday that while the Australian market is ready for a third airline, any competition would need serious financial backing. 

"They will need some investors with very deep pockets, I don't think there's any doubt about that," he said.

"We've had basically two airlines for as long as I can remember. The Australian domestic market is quite a prolific one. It's a big market, even by world standards. I think Melbourne to Sydney is the fifth busiest route in the world.

"I think they can (succeed) but the financial aspects of the player will need to be very, very strong."

The Qantas share price is in the green today, up 0.37% and changing hands at $10.93 a piece at the time of writing. The share price is 89.1% higher for the year.

Virgin Australia's share price is also higher this afternoon. At the time of writing, the airline's shares are trading for $3.22, up 0.94% for the day and up 11% over the year.