19 hours ago
Qantas gears up for a price war with rivals Virgin and Air New Zealand
The airline pendulum once again is about to swing.
After a golden run for Qantas investors in the past 18 months following the unceremonious exit of Alan Joyce, it appears the Flying Kangaroo is now gearing up for a major onslaught against its competitors.
That means, for a brief time at least, travellers are likely to reap the rewards of what is poised to be a three-way tussle to attract domestic and trans-Tasman travellers, and those looking towards Asian havens.
Qantas, Air New Zealand and a rejuvenated Virgin Australia have already begun putting the pieces into play, for what is shaping up to be a torrid summer of competition as each attempt to grab new, and defend, existing market share.
The aggressor is Qantas.
A fortnight ago, it announced a 20 per cent lift in trans-Tasman flights over summer — that equates to around 60,000 additional seats for December and January.
According to aviation expert Neil Hansford, it isn't just the Tasman where Qantas is expanding. Capacity is increasing in flights to Singapore, Bali and down Australia's east coast.
"They're now operating directly from Hobart and Newcastle to Perth, and they're operating from Newcastle now to Bali," he told ABC News.
"They're using their equipment very well to be able to provide services and it's getting more and more convenient for [consumers]."
Call it a coincidence, but in the next six weeks, Virgin Australia will relist on the Australian Securities Exchange. And suddenly, the pressure is on.
Last week Qantas pulled the pin on its Singapore-based Jetstar Asia offshoot, which will deliver an extra 13 aircraft into the domestic market.
Established almost 20 years ago, it was part of a move to push the Jetstar strategy through the region, with independent operations in Singapore, Vietnam and Japan.
In recent times, Jetstar Asia has become victim to intense competition from Air Asia and Singapore Airline's budget offshoot Scoot, racking up losses and soaking up resources.
Deploying those jets to the domestic, trans-Tasman and holiday markets like Bali will put a newly listed Virgin under pressure, forcing it to offer more seats at lower prices to retain market share. That's good for consumers but ultimately will restrict the airline's earnings growth.
According to Mr Hansford, the extra seats will tip the balance towards consumers as pricing becomes "more competitive".
"If you put on the capacity, you will fill it," he said, noting the flip side scenario would be restricting capacity to drive prices higher.
The rush to more seats ultimately could restrict earnings growth and profits for Qantas, Virgin and Air New Zealand shareholders.
The stars aligned for Virgin's owners in the past year.
The collapse of Rex and brief upstart Bonza reduced airline competition just as consumers began returning to the skies.
Virgin, which struggled for more than a decade to turn a profit before its collapse five years ago, has seen a huge financial turnaround.
It abandoned international routes, concentrating on major domestic and holiday destinations.
Finally, after missing a brief window of opportunity last year, American private equity group Bain Capital decided the time was ripe to offload a 35 per cent stake in the airline to the public.
It already had sold a 25 per cent stake to the well-heeled, state owned Middle Eastern carrier Qatar.
The Doha-based airline has struck fear into Qantas management.
Two years ago, Qantas successfully lobbied Canberra to restrict extra Qatar flights into Australia but is now watching with trepidation whether Qatar exerts pressure on the domestic market.
Qantas has been one of the biggest beneficiaries of the airline industry turnaround.
Its share price has doubled in the past 18 months, soaring to a record $10.87 close in early June on the back of lower fuel prices, reduced competition and healthy demand.
Airlines are among the most volatile stocks on global markets. Hugely capital intensive, subject to the whims of consumers, fuel price variations and health scares like SARS and COVID, they oscillate between huge profits and massive losses.
While Qantas appears to have hit a sweet spot in recent times, there are headwinds aplenty.
Funds manager Roger Montgomery told The Business that Qantas has one of the oldest fleets amongst its peers and is facing huge costs in replacing those aircraft, that won't make much profit.
"If you look at the business over the last 15 years, what you discover is that the company has lost about $110 million and that's despite the fact that debt increased substantially and that the government supported the company with about $2 billion worth of assistance," he said.
The purchase of further aircraft will see those losses mount, he argued.
The last time Qantas and Virgin went toe to toe in an all out war for market share, it nearly up-ended the Flying Kangaroo.
A decade ago, then-chief executive Alan Joyce drew a line in the sand, declaring Qantas's share of the domestic market would never drop below 65 per cent.
The two airlines sold tickets at below cost — with Virgin then backed by four major airlines, including Singapore and Etihad — and eventually Mr Joyce had to raise the white flag after Qantas plunged deeply in the red with losses approaching $3 billion.
Under new Qantas boss Vanessa Hudson, that is unlikely to be repeated.
Her capacity for a protracted war is constrained by the airline's desperate need to upgrade the ageing fleet left to her by her predecessor.
But she clearly is moving the pieces into position to put the squeeze on the competition.
That's been welcomed by the broader travel industry — cheaper flights are likely to boost tourism more generally.
Flight Centre Leisure chief executive James Kavanagh has forecast passenger numbers to increase by 4 per cent in December, and by 6 per cent in January.
He argued more people will travel because there's "more competition" which means "better pricing" and "more flexibility".
That has also been welcomed across the Tasman. While Air New Zealand is understandably wary about the potential impact of extra seats on the route, the Kiwi travel industry is ecstatic.
Daniel Painter, managing director of New Zealand travel agent Wild Kiwi, argued this kind of move could be just the tonic to restore travel to New Zealand back to pre-COVID levels.
A win for travellers that might just test the patience of investors.
