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Qantas eyes Virgin and keeps big retaliatory hit in wings

May 26, 2014 Aviation, Headline News No Comments Email Email

egtmedia59The momentous decision by Qantas to suspend adding new capacity to its domestic operation in the next quarter does not necessarily mark the end of the ferocious capacity war between Australia’s two big domestic carriers.

Senior sources at Qantas confirmed at the weekend that Qantas is waiting with interest to see how competitor Virgin Australia responds. Qantas has a contingency plan to renew the capacity war, with a vengeance, if it sees fit, in the following quarter.

The Qantas domestic operation (comprising Qantas Domestic, QantasLink and Jetstar Domestic) will add zero capacity from July to September this year – a period which makes up the first quarter of financial year 2015.

The move was interpreted as an olive branch or truce. Qantas appeared to be retreating from its dogged defence of 65% domestic market share, the “line in the sand” which has dominated discussion of the topic for years.

Speaking to eGlobal Travel News at the weekend, however, a very senior Qantas source made it clear that the Qantas decision on capacity marks a pause in the capacity war, rather than any surrender. Qantas is testing the market. Contingency plans are in train for a robust response in the following quarter, should market demands require it.

The Qantas decision to call a halt to capacity injection triggered a jubilant reaction  from the stock market last week, as shares in Qantas shot to their highest point in 2014.

Some analysts had difficulty interpreting the share movement, with a few suggesting that it might reflect news that the New South Wales government was looking at lifting the curfew and flight caps at Sydney Airport.

The key, however, is airline capacity.

“With the new Virgin Australia directors from partners Air New Zealand, Singapore Airways and Etihad due onto the Virgin Australia board next month, we doubt whether Virgin Australia will respond aggressively to Qantas’ olive branch,” Macquarie analyst Sam Dobson said in a note to clients, reported at the weekend by the Australian newspaper.

That’s the major issue.

In latest Qantas monthly traffic and capacity figures, for April 2014, Qantas Group passenger numbers fell by 1.5% from the previous year. Group capacity (available seat kilometres) increased by 2% and demand (revenue passenger kilometres) increased by 0.4%, resulting in a revenue seat factor of 76.4% which was 1.2% lower than the previous year.

In response to changing conditions in the domestic market, the Qantas Group says it has revised planned capacity additions in the first three months of financial year 2015.

Total Qantas domestic capacity growth will “be zero” in each of the first three months of financial year 2015, compared to the prior corresponding period, the airline has confirmed. Qantas will continue to monitor and adjust capacity according to changes in market conditions (including demand, supply and customer requirements) during the period.

Virgin Australia has been steadily pressuring Qantas in a continuing price war for domestic low-cost customers, while also seeking to boost its share of the high-yield corporate and government market, dominated for years by Qantas.

Earlier this year, Qantas reported a AUD 252 million loss. It is shedding 5000 jobs in a bid to turn itself around.

Written by Peter Needham

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