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Qantas v Virgin: the kick-and-gouge, cut-throat brawl

Qantas isn’t the only airline in financial strife, as Virgin Australia releases its latest financial results.

The second act in financial reporting terms of a brutal year for airline employees and investors was completed this morning with record losses by the Virgin Australia group.

Its statutory loss after tax of $355.6 million and underlying loss before tax of $211.7 million (not including its part of the sorry Tigerair saga) was as uninspiring a performance as the similar basis underlying the loss of $646 million for the Qantas group (including its Jetstar misadventures) announced yesterday.

Take away scale differences and ignore the very substantial international network differences, and Qantas and Virgin had a no-holds-barred kick-and-gouge playground brawl that left each sore and probably sorrier than the brave faces each tried to show.

But there are other similarities and differences that affect everyone, including customers in a market where brand loyalty has been eroded by pursuit of the lowest price of the day.

  • Investors: Qantas is much more relevant again. It’s going to have more shares to sell as it divides and restructures its domestic and international entities, whereas Virgin — with little in the way of free stock given that three foreign airlines have almost 70% of the action already — just doesn’t cut it.
  • Employees: Virgin is the place to work. It’s growing and has put on over 4000 staff  under CEO John Borghetti (Virgin now has over 10,000 employees all up), many of them taken with him from Qantas after he missed out on the top job taken by its group CEO Alan Joyce, who is busy sacking them twice as fast as Virgin can recruit.
  • Customers: Virgin lost people chasing bargains to Jetstar (which was the original plot), but under Borghetti it has won far more business accounts and upmarket discretionary spenders from Qantas than anyone imagined possible, profoundly changing its market profile in the process.

While Virgin is smaller overall than the Qantas group it is sufficiently frequent to be a practicable alternative carrier in all of the major and second ranking domestic city pairs, especially where  Qantas retreated in favour of Jetstar, seriously annoying many of its better paying customers who went over to Virgin and show little signs of ever coming back.

As the market stats keep showing, Qantas is a mature, established brand. Virgin is the immature imitator and is winning customers over, even in times when demand is weakening, which both airlines admit is the case in their guidances yesterday and today.

On international routes, Virgin is a “virtual carrier” by and large, relying on code shares with equity holders Singapore Airlines and Etihad in particular, while Qantas is a wounded and shrinking former giant, down to less than half the market share it had early this century.

Both airlines struggle with their low-cost brands of Jetstar (Qantas) and Tigerair (Virgin). Qantas says Jetstar domestic is still making money without breaking out the figure, but Virgin says its 60% share in the Singapore-controlled Tiger brand cost it $46 million in the year.

Neither has worked out how to stop their customers defecting to their cheaper subsidiaries.

Each carrier is “bomb-proof” (to use a term forbidden in their terminals) when it comes to their economic future. Qantas remains cashed up, and Virgin, thanks to a deal to sell part of its loyalty program, will be seriously rolling in it again by the end of October, when 35% of the Velocity program is flogged to Affinity Equity Partners.

The next year shows every sign of being as cut-throat as the last, despite a capacity truce. Each carrier nurtures a low-fare and rapidly growing infant that could ultimately kill their full service products. Australia has two strong airline groups. The challenge that continues will be to stop them behaving like a duopoly, and drag consumers back to the bad old days of the Two Airline Policy when few people flew, and we all died in the thousands driving along crap roads to holidays in Surfers!

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