How Qantas and Virgin are running each other into the ground

It seems intense competition isn't always healthy for business. But it's great for consumers.

(Source: Virgin Australia)

Virgin Australia published the above graph as part of its latest half-year result presentation to argue profits in the airline business are at their worst in 20 years.

It’s fair to say that over the past two decades the sector has seen its fair share of turbulence. But In the past five, it’s gone from booming profits to loss. So what happened?

Many blame the ‘capacity war’ which has seen the number of services being run by both Virgin and Qantas is outstripping passenger demand.

The argumentis that Virgin’s aggressive play to add more and more flights is forcing Qantas to do the same to maintain its dominance and market share in the domestic market.  

As the graph below shows, that’s exactly what Virgin is doing. In the past couple of years the growth in the airline’s total capacity has begun to outpace its passenger growth.

But has this really forced Qantas into adding more and more flights to its domestic services? Yes and no.

Qantas wants to retain its 65 per cent market share, so it’s increasing the number of services it offers. But its own data shows it is  doing this by continuing (rather than slowing) its current trend in growth of services.

Qantas increased the capacity it offers well above passenger numbers in the past and still delivered strong profits. So what has changed?

It seems that increased competition from Virgin is having another effect; it’s lowering the price of the average airfare.

Both carriers have lowered prices to keep filling more and more planes they are launching into the sky. This is because in the airline business, there is nothing worse than than flying a plane with empty seats.

Meanwhile, fuel and staff costs are continuing to rise for both companies.

So both airlines are increasing costs to maintain or gain market share and at the same time are being forced by competition to not increase their primary form of revenue, passenger airfares.

It’s anyone’s guess as to how long this can go on for, but at this rate it seems the intense competition between Qantas and Virgin is running both airlines into the ground.

Got a question? Ask the reporter @HarrisonPolites on Twitter.

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