AFTER taking a hit to its core domestic earnings in the first half, Qantas has promised to step up its battle with Virgin Australia by upgrading its fleet of large A330s and ordering new planes.
Although the capacity glut in the domestic market has eased recently, the plans to upgrade Qantas' fleet of A330s used on Australia's key transcontinental route threatens to spark a strong response from Virgin.
While the battle has benefited flyers in the form of cheap fares, Qantas' premium domestic operations revealed the extent of the pain by posting a 34 per cent drop in first-half earnings to $218 million.
Jetstar's earnings fell 13 per cent because of the stiff competition from Tiger Airways in the domestic market and the cost of starting ventures in Japan and Hong Kong.
Investors took comfort from strong earnings in Qantas' frequent-flyer business and an improvement in its long-suffering international division, whose losses narrowed to $92 million, from $262 million, as it cut loss-making routes.
Qantas nearly trebled its bottom-line profit to $111 million in the first half, bolstered by compensation from Boeing for "opportunity delays" to the late delivery of 787 Dreamliners.
Qantas posted a 10 per cent rise in underlying profit before tax to $223 million, which was better than analysts had expected. Total revenue rose 2 per cent to $8.2 billion.
Shares in Qantas rose as much as 6 per cent on Thursday, before closing up 4.5¢ at $1.66 on a day when the broader market tumbled more than 2 per cent.
"There are issues . . . but investors have more faith in [Qantas] management and their strategy," Peter Borkovec, an analyst at White Funds Management, said. "It is the right step in the right direction."
Qantas has not given earnings guidance for the second half because of volatile conditions. But it has revealed that it will incur costs of as much as $50 million for shifting its main overseas hub from Singapore to Dubai as part of its alliance with Emirates.
In the domestic market, Qantas and Jetstar bore the brunt of substantial declines in yields - returns on fares - in the first half, a period in which airlines make most of their money. It indicated that it expected an easing in the high levels of capacity in the medium term. It plans to boost capacity in the domestic market by 5 to 7 per cent in the second half, a reduction from the growth levels in the first half.
Qantas chief executive Alan Joyce said the reconfiguration of the wide-body A330 planes on domestic routes would help the airline "leapfrog anything the competitors are doing".
"We have seen the competitor change the strategy multiple times. Virgin has given up the low-cost end of the market and gone to the premium end," he said. "The performance of Tiger clearly shows that Jetstar is significantly outperforming Tiger at the leisure end."
The upgrade to Qantas' 30-strong fleet of A330s - 20 of which fly on domestic routes - from late 2014 includes flat seats in business class, a refreshed economy cabin and a new in-flight entertainment system. The airlines will also buy five new Boeing 737-800 planes and extend the lease on two others.
Mr Joyce said it was difficult to gauge the extent to which competition in the domestic market would ease in the second half because Virgin had yet to deliver its earnings, and the competition regulator would not make a final ruling on its plans to take control of Tiger Airways until next month.
Virgin's intention to triple the size of Tiger's fleet to 35 planes in Australia if it does win approval for its bid looms as a danger to Jetstar's longer-term earnings here.