Virgin Australia’s Return to Profitability Signals Fare War with Qantas

Financially challenged flag carrier Qantas is facing more turbulent days ahead as Virgin Australia indicated a looming price war following its return to profitability.

However, the price war is not only a result of Virgin's pre-tax profit of $82.5 million which signals its return to profitability, but also a consequence of Qantas's announcement last week that it would hike domestic flights by up to 11 per cent in the next four years.

Virgin Chief Executive John Borghetti said the extra seats to be offered by Qantas would result in plane fares in Australia going down. He said the air carrier would concentrate on business class clients who helped improve Virgin's bottomline.

With the price war, Virgin offered $88 for the Sydney-Melbourne route, $21 dollars cheaper than Qantas's $109 fare. Passengers are left to decide if the $21 difference is worth exchanging Qantas's offer of refreshments and complimentary checked baggage versus Virgin's no meal and extra baggage charge.

"I have been around a long time - 40 years - and I haven't seen discounting to this level since way before Ansett stopped flying. There is a lot of aggressive competition but frankly we were expecting it and we will be as competitive as we can be to ensure we hold our position. We do have a cost advantage on our side," Newscom.au quote Mr Borghetti.

Income from business class passengers accounts for 20 per cent of Virgin's domestic revenue. Reaching that 20 per cent target was the tipping point that creates a new competitive norm, the airline executive said.

Mr Borghetti was once Qantas Chief Executive Alan Joyce's competitor for the CEO post in the flag carrier as replacement for Geoff Dixon in 2008. His loss to Mr Joyce led Mr Borghetti to quit his lifetime employment with Qantas and join Virgin as CEO in 2009. Mr Joyce joined Qantas in 2000 through Aer Lingus and Ansett.

It would be a second round of price war between the two Australian airlines which led to heavy losses for Virgin before. To prevent a repeat of loss, Mr Borghetti followed Qantas' model of focusing on business class and members of frequent flyers clubs who are good sources of profits for the air carrier.

With a different financial environment, aviation industry observers believe that Virgin would win the price war this time not only because Qantas is hampered by a strong labour union but also has a net debt of $7.5 billion compared to Virgin's net debt of $1.7 billion.

However, the real victory would come more from the fact that Mr Borghetti worked for so long for Qantas that he knows the best ways how to clip the airline's wings.