Airline Competition Heats Up As Qantas Poses New Challenge

Competition betweein Qantas and Virgin Australia may continue to escalate this year, as Alan Joyce, the head of Qantas, annouced that it will still push for 10% excess capacity in order to protect the airline’s market share.

The move is actually hurting profits, as Qantas has lost over $100 million from its domestic operations in the last siz months. But Qantas currently holds 65% of that market, and it’s a very important market at that. Domestic business apparently rakes in $137 million in profits, with over nine million customers availing of Qantas’ loyalty programs yearly.

On Friday, Mr. Joyce explained his decision to investors. This policy is supposedly based on the “S-curve” theory, which states that profit can be optimized by adding capacity and offering more flight frequencies, thereby gaining a higher share of the market.

The published paper by McKinsey & Company describes S-Curve as this: ”With the S-Curve in mind, network managers around the world have been building dominant positions at airports and on routes, to capture the revenue premium that goes with such dominance. Additionally, managers have tried to limit the damage in those markets in which they are disadvantaged. They do this either by matching competitors’ frequencies (often triggering unnecessary overcapacity), and/or by focusing on connecting traffic or by withdrawing altogether,”

However, according to experts the S-Curve theory, may fail when there are low cost carriers to compete with. Virgin, Tiger Australia and Jetstar are just some of these competitions, not including other international carriers.

Analyst say Virgin has a slight upper hand because it has lower cost over Qantas, and it also has stakes over Skywest, which will compete with QantasLink, the regional airline.