Indonesia AirAsia X has been granted an operating licence in a move that sets the stage for an even bigger battle among airlines on flights between the east coast of Australia and Bali.
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Jetstar, Virgin Australia and Garuda Indonesia all offer flights between Australia and Denpasar.
The routes are highly competitive and are popular with the lower-yielding leisure market rather than the more lucrative corporate market and have been weak performers for airlines over the last year.
Indonesia AirAsia X, which last week received its air operator's certificate from the Indonesian government, plans to fly A330-300 aircraft.
The partner airline to Kuala Lumpur-based long-haul low-cost carrier AirAsia X could launch flights between the east coast and Bali by early next year, with Melbourne-Denpasar tipped as the likely first route.
Indonesia AirAsia X will also offer onward connections from its Bali hub to other destinations such as Jakarta, Kuala Lumpur and Singapore. It already offers flights from Perth and Darwin to Denpasar.
Virgin last month took a $51 million impairment on its international business, which chief financial officer Sankar Narayan attributed particularly to weakness on its Bali routes due to increased capacity and competition.
Virgin flies 737s from the east coast to Denpasar, versus the larger Boeing 787 Dreamliners flown by Jetstar and the A330s used by Garuda.
Qantas Airways' low-cost arm Jetstar has also been struggling on its south-east Asian routes. Jetstar Group chief executive Jayne Hrdlicka last month told analysts there was an "unprecedented" level of capacity within south-east Asia and between Australia and south-east Asia.
"Our result in our Jetstar International flying also reflects some of that," she said.
Ms Hrdlicka said she expected the bottom of the cycle had been reached in the region but yields, or returns on fares, were not expected to increase quickly.
CAPA Centre for Aviation said it was difficult to see Virgin sustaining its south-east Asian network, which consists of flights to Bali and Phuket, due to the increasing amount of competition.
"Bali and Phuket have been impacted by an increase in capacity from Asian carriers, notably low-cost carriers that have a lower cost base through their Asian geography but also (in the case of AirAsia X and Scoot) through widebody usage, lowering unit costs," itsaid.
"At the same time, Virgin's cost base has increased. AirAsia X and Scoot operate widebodies near their certified maximum while Virgin has a medium density on its narrowbodies, which can be further hampered by having to block seats in order to fly non-stop."
Virgin also uses its fleet of 737s on domestic, trans-Tasman and Pacific routes, meaning there could be flexibility for the airline to redeploy aircraft elsewhere.
