While China hypnotises Australian airlines, and others that are on the outside looking in, with its huge potential, its airlines this year are playing out the painful consequences of lifting capacity beyond demand, and then trying to fill their flights by resorting to fare cuts that make a bad outcome even worse.

This report on CNBC Asia makes some of those points with a clarity that is supported by many other more detailed reports from Asia publications for those with the relevant subscriptions.

What is happening in China is, on a grander scale, almost exactly what is happening in Australia.

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But how will it end here? Is what is happening in China really an accurate indication of what may happen in this country?

Neither the Qantas group nor the Virgin Australia group are on death’s door, or anywhere near it, although neither would want to see certain problems unique to each other persist for say another three years, when disaster might become a manifestly imminent outcome.

What will happen instead will be the breaking of certain parts of their business models, forcing very disruptive changes on them, or bringing in radically richer or smarter funding, and that doesn’t mean opportunistic leveraged equity raiding,  which has so far as major carriers are concerned world wide, has a 100% rolled gold record of total failure in terms of travellers, competition, quality of product and airline careers.

Leverage equity buyouts may bring rewards to privateers, although at the very real risk of destroying them, or their financiers, as would have occurred had the Airline Partners Australia bid for Qantas not failed to attract enough investor commitments at the final hurdle in 2007.

The metaphor that seems most appropriate to such bids is that the perpetrators or instigators need to get through the emergency exits with as much gold as they can carry before the aircraft and enterprise concerned burst into flames.

In China, such catastrophic outcomes seem likely to be overcome by state intervention, which is likely to suppress the growth of air travel, but at least provide domestic travellers with recourse to an expanding high speed rail network relevant to a compact and high density population distribution.

In Australia, if past history is a guide, both established and new carriers would be allowed to collapse.  But Virgin Australia is ‘established’, and Qantas is an assemblage of units, with deeply different characteristics, that always has the potential to be torn apart with the components sent on their separate ways, or quite possibly, set loose to attack each other under new owners, the way the British Airways’ Go LCC went for its parent’s throat until it was sold off by former Ansett CEO Rod Eddington,  but then onsold to easyJet, which has been a potent and successful competitor to BA within Europe ever since.

The history of capacity and fare wars on a large scale is acutely well known to the managements of Qantas and Virgin Australia.  This is why they will be trying to either cut and run, or perform radical surgery or augmentation, in the near future, to avoid history repeating itself.

Just keep in mind that what looks like a good strategy for managers and major stakeholders is never automatically going to be the best thing for ordinary shareholders, employees or travellers.

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Peter Fray
Peter Fray
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