License article

Costly battle for corporate flyers

A BATTLE over who offers the best champagne and the most leg room in their business-class cabins threatens to crimp the earnings of Qantas and Virgin Australia.

In a retaliatory move, Qantas will increase capacity significantly on domestic routes in the coming months as it seeks to repel Virgin's assault on its lucrative corporate travellers.

The airline will boost services during peak hours on key business routes between Sydney, Melbourne and Brisbane, while reintroducing Boeing 747-400 jumbos to the Sydney-Perth route and putting more wide-body Airbus A330 aircraft on the Melbourne-to-Perth run.

But Qantas' insistence that it will aggressively defend its 65 per cent share of the domestic market raises the prospect of heavy discounting of fares in the coming months.

Although a boon for travellers, the defensive move threatens to dent the earnings of Qantas and Virgin, which are both labouring under high jet-fuel prices and soft economic conditions.

Qantas has also attempted to outflank Virgin in the leisure market by using Jetstar to increase capacity on key routes, while QantasLink ramps up services in Queensland.


Matt Crowe, an equities analyst at Commonwealth Bank, said Qantas had embarked on a ''fairly predictable defence'' that promised to bring cheaper fares for passengers but would threaten earnings.

''It is game-on in the domestic market. They are about to get into a price war with Virgin and this is clearly pretty tough for earnings,'' he said.

As part of an attempt to slash a further $400 million in spending next financial year, Qantas has delayed the delivery of two new A380 superjumbos by almost four years.

Investors expressed reservations about Qantas delaying the delivery of the A380s, saying it was pursuing short-term gains at the expense of business growth over the longer term.

Will Seddon, a portfolio manager at White Funds Management, said Qantas was delaying efficiencies brought by new A380s, which would be key to turning around its loss-making international business, in order to defend itself in the domestic market from Virgin's advances.

''It seems to be illogical and not great for investors. They shouldn't be taking the bait this easily. The key metric is not market share, the key metric is profitability,'' he said.