Dogfight gets dirty

Virgin boss John Borghetti has sent a clear message to counterpart Alan Joyce - Qantas doesn't have a monopoly on grenades.

Borghetti hurled one directly into the Qantas camp - a warning that unfettered bad-mouthing can have legal consequences.

Leon Zwier, the legendary tough man of commercial law, has been briefed by Virgin - although at this stage it is not clear whether Borghetti will even fire off a legal letter.

Joyce has been telling anyone who will listen that Virgin has been acting uncommercially through funding excessive amounts of airline seat capacity - an exercise he says is designed to harm Qantas.

It is possible the accusation defames the credibility of the Virgin board and management, who have a duty to look after the interests of shareholders and uphold competition law and not to engage in predatory pricing behaviour. Virgin is also mulling over the legal potential to hit Joyce for his aspersions about Virgin's historic and prospective profits (or lack thereof). The theory goes that speaking publicly about Virgin's financial position could have an effect on the pricing of its current equity issue.

Given the three major shareholders are taking up their entitlements and underwriting the shortfall, Joyce's ability to affect the pricing is probably nonexistent.

Virgin's performance over the past five years is a matter of public record. While profits have been disappointing, Borghetti's transformation strategy has been impressive. Borghetti's real agenda is he wants to shut Joyce down because maybe someone is listening - other than the media.

It looks like Canberra is running a mile from Joyce's attempts to have the government injunct the Virgin rights issue. In 2011 the government approved creation of Virgin's current structure, which allows its listed head stock to have no foreign ownership limits. There are no limits on Virgin having an equity issue and no prohibitions on its foreign (airline) shareholders taking up their entitlements.

But it makes a big difference to Joyce because Virgin has large shareholders with deep pockets that are prepared to offer funding - this time around it is $350 million.

From Qantas' perspective, it's about Virgin having access to funds to mount a competitive campaign.

Some think it is personal between Joyce and Borghetti, who missed out on the top job at Qantas.But the war smacks of concern (or even fear) from the Qantas camp - tinged with desperation.

Up to 49 per cent of Qantas shares can be owned by foreigners and up to 25 per cent by one foreign airline, so there is some scope for the national airline to find a sugar daddy - alliance partner Emirates is the obvious contender. But Emirates showed no interest in taking an equity position in Qantas when their operating partnership was executed. Joyce is probably staring down the barrel of at least one year of losses and potentially more.

The capacity war has placed a financial toll on both airlines. Virgin told shareholders it would add 3 to 4 per cent capacity in the current half but wouldn't comment beyond that. To retain its 65 per cent market share Qantas will need to match it - at a time when demand is sluggish and requires fare discounting. This has crushed Qantas' yield. But Virgin's yield has improved because it has improved its share of the business market.

Borghetti says he is outraged at suggestions he is happy to wear a loss to crush Qantas. He would rather take a bigger slice of the business market without getting Virgin's nose bloodied, but Qantas is not going down without a fight.

Meanwhile, it is unlikely Nationals leader Warren Truss is going to help Qantas. There is little appetite in Canberra to repeal the Qantas Sale Act and even if that part of the structural playing field was levelled there is no guarantee Qantas would be inundated with partner/shareholders looking to fund it.

This is why Joyce has no choice but to attempt to torpedo Virgin's $350 million equity injection.