Fares to nosedive as Qantas gambles on higher capacity

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.

By · 25 Aug 2012
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By ·
25 Aug 2012
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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.

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