Qantas now has a real threat to deal with — Virgin Australia.

The union threats are gone, quashed by the aftermath of Qantas locking out 100,000-plus customers over the weekend.

But as the bills mount up, more urgently than it ever expected because the ACCC says Qantas has to do more, do it quicker, and do it in writing at regular intervals so that it can be sure the airline fully compensates those it stranded for the true costs of their dislocation, the flying kangaroo faces something it seems to have been hell bent on avoiding.

And that is real competition. It isn’t that Qantas hasn’t been innovating of late, but it has to contend with a fresh new competitor in Virgin Australia, with bigger, cheaper business-class seats, real meals in economy class, lounges with food and seats for everyone, and lower fares.

Sign up for a FREE 21-day trial and get Crikey straight to your inbox

By submitting this form you are agreeing to Crikey's Terms and Conditions.

It could be a re-run of what has driven the now 82% of overseas travellers away from Qantas on international flights, which is largely a consequence of expecting people flying to most of Europe to pay more to take an extra half day to do so through the welcome-to-hell London Heathrow experience and being shunted onto time-consuming British Airways connections.

That international failure of the Qantas brand now comes with frequent flyer risk too, because Virgin Australia is setting up points and lounge reciprocity with Etihad, Singapore Airlines and Air New Zealand, three carriers who have been carving up the Qantas long-haul market share, thus putting competitive stress on the loyalty link that Qantas offered across its domestic and international and code shared services.

It’s hard, but without unions to blame, Qantas has to actually start being competitive, and reconsider trying to cram its customers into Jetstar flights that, infuriatingly, can often cost more than a Qantas seat at short notice.

Last night Alan Joyce sent a rather late apology email to all Qantas Club members. But where were the double points that were being promised by Qantas sources? Where are the price cuts to match the discounts of up to 30% off business-class fares that Virgin Blue will apply to its new and much larger business-class seats on the Melbourne-Sydney-Brisbane golden triangle from January 18? (I’ve already seen these seats — from afar in from my discount economy seat, naturally — flying on Virgin Australia jets for soon-to-be abolished premium economy fares.)  Joyce’s email was empty handed, but expect more soon.

The messaging from Qantas on the Virgin Australia challenge has so far come with a curious reliance on incumbency. Qantas is known to prepare PR script lines for its apologists just as Virgin Australia has what could be termed talking points.  If you listen to its major retailers or apologists, the reliance they place on Qantas keeping rusted-on frequently flying business travel supporters on the premise that they suffer from  amnesia or a have a generous capacity to forgive the inconvenience of sleeping in airports or missing entire conferences seems to be a “coincidental” common theme.

But those assertions focus on managed corporate travel accounts used by the big end of town and the more widely travelled levels of public services.  To a degree, those travellers fly with the airline that has the account.  When John Borghetti at Virgin Australia talks about lifting his share of corporate accounts from less than 10% to 20%, he means those that come with a preferred carrier contract.  And he isn’t going to stop at 20% either.

However, there is a whole new category of business traveller that was enabled by lower domestic fares since Virgin Blue arrived and stayed (against the odds) in 2000. These are the small business travellers, sole traders, academics, and others who could suddenly travel far more than before, can exercise choice, have their own budgets and value trade-offs to consider, and will happily mix ‘n’ match one way on Qantas and another way on Virgin Australia according to price, convenience and the avoidance if humanly possible of Jetstar or Tiger.

This is the middle market, it pays about $100-$200 for a typical one-way fare, it generates most of the profits for domestic operations,  and it is what Qantas and Virgin Australia are fighting over more than managed accounts that may not come up for renewal for three or more years.

This is where Qantas and Virgin Blue are doing battle, for the equivalent of the swinging voters in politics.  They sit in preferred economy seats closer to the front doors and over-wing exits. They disappear into loyalty lounges at the airports, and they are about to be showered with offers of “bonus” frequent flyer points, upgrades,  free or reduced valet parking, and even, according to some rumors, airline subsidised credit card bonus points where the linked cards are used for non-airline purchases.

Prepare to be “bribed” if you are a middle-market prospect. And because of its size, and its predicament, this is going to cost Qantas a lot more than Virgin Australia.