AIRLINES and their shareholders may be facing renewed uncertainty but travellers are set to reap even lower fares as Qantas and Virgin Australia slug it out in the domestic market.
The chief executive of Qantas, Alan Joyce, upped the ante - and the stakes - this week when he announced that the Flying Kangaroo and its budget offshoot, Jetstar, will boost capacity on domestic routes by as much as 11 per cent within the next four months.
Qantas and Jetstar have decided to take what they hope will be short-term pain to fend off Virgin's advances and, to a lesser extent, a revived Tiger Airways.
Apart from travellers, the indirect beneficiaries of cheaper fares are the country's airports, which stand to gain from more passengers passing through their terminals.
But pity the holders of airline stocks. The deluge of extra seats on routes across the country will force down fares, crimping earnings for Qantas and Virgin in a market from which they make the bulk of their money. The increases will be most pronounced on the main routes on which Qantas and Virgin compete.
Even before Qantas revealed its hand this week, travellers had been the winners from a tussle that has been under way since the beginning of the year.
The latest government figures show business-class fares this month are almost one-fifth cheaper in real terms than in 2003 - the baseline for the statistics.
The big drop in business-class fares first occurred in December and January, when Qantas and Virgin began competing vigorously for well-heeled passengers.
So-called "restricted economy fares" are more than 30 per cent less - when adjusted for inflation - than in 2003, while "best discount" tickets are almost 40 per cent cheaper.
In contrast, "full economy" fares are 22 per cent more expensive than in 2003. The latter have been skewed by Virgin removing its "premium economy" fares in January.
The big question now is whether Virgin will pull back on its capacity increases in the face of a more aggressive Qantas, or become more defiant. That question will be answered on Tuesday when Australia's second-largest airline releases its annual results.
Virgin has already been doing its best to snare lucrative business travellers from Qantas by flying twin-aisle A330s on transcontinental routes and other business routes such as Sydney-Melbourne.
Tiger will also beef up flights over the coming months as it boosts flight frequencies to the number it was operating before it was grounded for six weeks by the air safety regulator last year.
Where they can, airlines are doing their best to recoup higher operating costs. Qantas pushed through fare rises for domestic flights in April to counter higher fuel prices, while it and Virgin have had fees in place since July to offset the carbon tax.
Even budget airlines have increased fares on certain routes, despite their reluctance to do so, because their passengers tend to be more sensitive to price rises.
Tiger announced this week it will raise domestic fares by an average of $5 from October 1 to "take into account rising fuel prices". But airlines' ability to hold fares at present levels will be undermined by the latest boost to capacity via increased flight frequencies or the use of larger planes.
The chief financial officer of Qantas, Gareth Evans, said on Thursday that there was "no doubt we are seeing the effect" of increased capacity in the domestic market on his airline's yields.
"[But] we believe that absolutely taking this action is the right thing to do from a medium to long-term profitability perspective," he said.
It will certainly be a gamble travellers have no qualms with.
Frequently Asked Questions about this Article…
What capacity changes did Qantas and Jetstar announce for Australia’s domestic market?
Qantas and its budget offshoot Jetstar said they will boost capacity on domestic routes by as much as 11% within the next four months to counter competition from Virgin Australia and a revived Tiger Airways.
How will Qantas and Jetstar increasing capacity affect domestic airfares?
The added seats are expected to push fares down, especially on main routes where Qantas and Virgin compete. The article notes travellers are already seeing cheaper tickets, and a fresh capacity boost will likely keep downward pressure on prices.
What does the article say about recent trends in business and economy fares?
Government figures cited in the article show business-class fares are almost one-fifth (about 19%) cheaper in real terms than in 2003. Restricted economy fares are more than 30% lower and 'best discount' tickets almost 40% cheaper vs 2003, while 'full economy' fares are 22% more expensive—affected in part by Virgin removing its premium economy fares.
How might the capacity battle affect Qantas and Virgin shareholders and airline profits?
The article warns that the deluge of extra seats will crimp earnings for Qantas and Virgin and create renewed uncertainty for airline shareholders. Qantas’s CFO acknowledged falls in yields but argued the move is aimed at medium- to long-term profitability.
What could Virgin Australia do in response to Qantas’s capacity increase?
The article says the big question is whether Virgin will pull back on its own capacity increases or stand firm. That decision was expected to be clearer when Virgin released its annual results (mentioned as happening on the following Tuesday). Virgin has already targeted business travellers by flying twin-aisle A330s on transcontinental and key business routes like Sydney–Melbourne.
Will Australia’s airports benefit from lower fares and higher capacity?
Yes. The article notes airports are indirect beneficiaries of cheaper fares because higher passenger numbers through terminals should boost airport activity and revenue.
What are Tiger Airways and budget carriers doing in response to rising costs and competition?
Tiger plans to beef up flights to the frequencies it operated before it was grounded and has announced it will raise domestic fares by an average of $5 from October 1 to account for rising fuel prices. The article also notes budget airlines have increased fares on certain routes despite passenger price sensitivity.
How are airlines trying to recoup higher operating costs such as fuel and the carbon tax?
According to the article, Qantas pushed through domestic fare rises in April to offset higher fuel prices, and both Qantas and Virgin have had fees in place since July to offset the carbon tax. Airlines are using fare rises, route changes and fees to try to recover higher costs while still competing on capacity.
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