ACCC concerned by Qantas comments over price war

Competition tsar Rod Sims is "concerned" by comments made by Qantas that could be interpreted as a signal to end a fierce price war with its competitor, Virgin Australia, that has been a boon for travellers.

Sims said it was "fair to say" the Australian Competition and Consumer Commission is "concerned at the comments and we are assessing them".

On Thursday Qantas boss Alan Joyce told shareholders he was moderating capacity growth this year to between 1.5 per cent and 2.5 per cent in the domestic market, from 8 per cent growth in the past year. He then said at a media conference if Virgin reduced its capacity to zero: "I'd be quite happy to make sure that Qantas adds zero per cent levels into the market because we are focused on maximising our 65 per cent capacity position."

Joyce has previously said: "We will match capacity in the marketplace to determine that optimising profit position. Quite happy if capacity is zero, quite happy to - less happy - to add 10 per cent to maintain the position that we have. But we maintain complete flexibility in what we can do in capacity."

But the comments have come on the ACCC's radar, so too comments made in March by the boss of Qantas' domestic business, Lyell Strambi, says Sims.

Strambi warned he would add two planes for each one added by Virgin. "We've made it very clear we'll be sensible in terms of capacity. But if a competitor puts one [plane] in, we'll put two in as a group. We're very clear, we're not making any apologies for it. That's the game and people need to understand the game."

The banks are subject to price-signalling legislation, but the aviation industry is not. This makes it difficult for the ACCC to make much progress in some of its investigations. For this reason it would not be a surprise if the ACCC had a quiet word in the ear of a new government to consider the merits of widening the legislation to include other industries when it conducts its root-and-branch inquiry into competition in Australia.

But, for now, the ACCC will no doubt look at Qantas' 65 per cent line-in-the-sand comments in relation to market share to ensure there is no funny business going on when it comes to competition. It won't be the first time. It is understood the ACCC looked at the 65 per cent market share about 12 months ago and found no issue.

Qantas says it takes its obligations under the Competition and Consumer Act very seriously. "We've been very clear about our intent to maintain our profit-maximising 65 per cent share of the domestic market, which puts us in the position to offer the best service to customers. Our recent financial results confirm the merits of that strategy," a spokesman said.

He said Qantas would add as much or as little capacity as it needed to maintain that share. "How the rest of the market reacts to that is up to them," he said.

Airlines have a history of price wars. The fiercest was in 2004 when extra capacity poured into the market when Qantas launched low-cost carrier Jetstar.

The latest price war has been particularly vicious, culminating in Virgin posting a loss of $98 million in the year to June 30, partly due to the savage price competition in the domestic market. Its domestic operations lost $44 million, compared with a profit of $93 million previously.

Qantas managed to report an overall underlying profit before tax for the year of $192 million but its domestic earnings before interest and tax fell 21 per cent to $365 million, down $100 million from last year, while Jetstar's profit fell 32 per cent to $138 million.

Virgin boss John Borghetti said he found the comments by Joyce "a little curious". He said his decision to increase capacity was based on the group's overall strategy to reposition the airline and move into different markets rather than chase market share.

Qantas is hell-bent on keeping its 65 per cent market share. It is based on a belief that the airline industry works on the "S-Curve" phenomenon, which measures capacity share against revenue share. The theory is there is a certain profit optimisation point where if you add more capacity you get little in the way of increased revenue, but if you lose capacity, revenue falls off a cliff.

Virgin isn't perturbed or listening to Qantas. After hearing the comments, Borghetti told his investors to expect a capacity rise of 3 to 4 per cent this year, preferring to continue with the group's strategy.