Australian Domestic Aviation Market
Qantas, Virgin battle for Australian skies
The battle for the Australian skies between Virgin and Qantas is shaping as one that demonstrates how the youth and flexibility of the small upstart, Virgin, are worthy adversaries to the flatfootedness of the market giant, Qantas.
Size and legacy have not worked so well for Qantas against the nimble Virgin Australia, which 18 months ago launched a strategy to tackle the Flying Kangaroo head-on in the lucrative premium market.
The Virgin target was to achieve a 20 per cent market share. With more than a year left to get there, the airline has reached the 17 per cent level (it was 13 per cent a year ago.) Virgin's half-year result demonstrated all too clearly that its strategy is gaining traction.
Advertisement: Story continues below Its passenger yields grew more than 13 per cent - well ahead of the growth experienced by Qantas - accomplished for the most part by growth in the business market.
Virgin's net profit for the half actually exceeded that of Qantas, although the comparison is not quite fair given Qantas took large one-off hits associated with industrial action and the grounding of its fleet. Virgin has clearly articulated its strategy and, with the benefit of a few positive breaks, has shown mastery in its execution.
Without the luxury of deep pockets, Virgin has needed to work harder to outfox Qantas. Its chief executive, John Borghetti, has been the master of making what capital he has work harder. The revamp of the lounges was done on the smell of an oily rag and his international strategy has redefined the notion of capital lite.
He has found ways for the international business to cover all major global routes by entering into joint ventures with offshore airlines, looking for a cheaper way into the local market through partnerships.
In contrast, Qantas is pursuing airline start-ups in Asia through its Jetstar brand and is still grappling with the notion of a new premium intra-Asian airline out of either Singapore or Malaysia.
Only this week, the Qantas boss, Alan Joyce, calmed investors by insisting he would not be spending much capital on these new ventures.
Being the former government-owned legacy operator has brought with it a series of issues for Qantas.
The most heralded of these are industrial relations agreements and the other is that increased competition from offshore carriers has eaten away at Qantas international's business market share, which has been bleeding red ink for years.
As its trump card, Virgin took the lead on Qantas yesterday with the announcement of a corporate restructure that will house its international operations in a separate company and free the listed head company from its 49 per cent foreign ownership limit, thereby allowing offshore funds to buy into the stock.
For years, Qantas has been lobbying Australian governments to amend the Qantas Sale Act to achieve this outcome. Armed with this new competitive disadvantage, it might be able to head back to Canberra and restate its case.