Qantas chief executive Alan Joyce says there has been a "tapering off" of capacity in the domestic market in the past few months, but he concedes there is still some way to go before it reaches more rational levels.
Speaking in Sydney on Thursday, Mr Joyce also said he was hopeful of a pick-up in demand after the election, which had dampened consumers' willingness to spend.
His comments come three days after Virgin Australia said it expected to lose up to $110 million this year. Mr Joyce said domestic market capacity had lessened after growth reached about 8 per cent over the past year.
But he said growth in flights remained too high in a market from which Qantas and Virgin derive the bulk of their earnings.
"Overall, there is still big growth coming into certain markets," he said, citing flights to regional centres and leisure destinations.
Mr Joyce pointed to Tigerair Australia's plans to expand on domestic routes, which would result in Jetstar "protecting its position" by increasing services. "[But] when capacity rationalises ... the position for everybody, I think, should improve," he said at CAPA's aviation conference in Sydney. "The capacity in the Australian domestic market has gone through these cycles before. It is a very competitive market."
Mr Joyce said Qantas would benefit from a fall in the value of the dollar, partly because it would reduce the incentive for foreign airlines to put on more flights to Australia.
But Cathay Pacific made it clear on Thursday it wants to expand services to Australia from 70 a week.