While this morning’s reported net loss after tax of $67.8 million by Virgin Australia in the year to June 30 was within its guidance after the Queensland floods and cyclone, it comes a day after Qantas reported a doubling of group profits driven by domestic, frequent flyer, freight and Jetstar franchise earnings on scales way above anything it seems likely to replicate in the medium term.

There were two significant positives for Virgin Australia.

It reported pulling dozens of managed travel accounts off Qantas with a 29% growth in corporate and government account sales, something the group’s CEO John Borghetti has often described as critical to its future.

And it also scored a maiden profit from its international services flown by V Australia and Pacific Blue of $22.4 million before interest and tax, after paying for the cost of route restructuring that saw it drop South Africa in favor of flying to Etihad’s Abu Dhabi hub for European connections.

For those who like to play around with numbers, this means that Virgin Australia’s international operations are $238.4 million more profitable than those of the Qantas international division, which was reported yesterday to have lost $216 million in the same period.

The contrasts between the Qantas Group and Virgin Australia results are about more than size. Virgin Australia’s policy is to maximise Australian jobs, while Qantas has put the heavy emphasis on offshoring fleet and jobs to reduce its labor costs and access new intra-Asia business. Virgin Australia CEO John Borghetti said the airline had added 300 maintenance positions and 100 call centre jobs, many replacing overseas positions, in the same interval that Qantas was cutting up to 1000 positions.

Until now, the Qantas offshoring strategy has been carried by the Jetstar franchise in Asia, and the basing of three Australian Jetstar A330 wide-body jets at Changi Airport to exploit lower terms and conditions for its staff. That strategy is to be augmented by a Jetstar Japan franchise, and a new narrow-body yet premium quality carrier to be based in Asia, which Qantas CEO Alan Joyce yesterday disclosed is running into delays in the negotiating phase.

For investors and analysts this puts Qantas in the Asia game in a direct, potentially lucrative but risky way, while it downsizes its Qantas international operations, while Virgin Australia has formed a potent alliance with Singapore Airlines but without diversifying like Qantas into owning a part of the Asia-Pacific action.

At least not yet.

Virgin Australia CEO John Borghetti understands the Qantas strategy through his long career at Qantas, but says remaking Virgin Australia domestic to offer a quality alternative to the frustrations travellers experience with interstate Qantas and Jetstar services had to be the first priority.

He told this morning’s results briefing that while managed corporate and government travel had grown from 10% to 13% of Virgin’s business mostly since the new brand, and its lounges and products were rolled out in May, when Virgin Blue turned into Virgin Australia, the revenue it was earning from business clients had risen more steeply, and continued to do so in July, after the books closed on the last financial year.

With Tiger back in the hunt, and Qantas confusing consumers by undercutting Jetstar on routes where the two were never supposed to compete with each other, it sounds like Qantas risks being trapped in the middle in an increasingly chaotic fare war with Tiger and Jetstar at the low end, and Virgin Australia at the quality end.

Peter Fray

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