Airline overcapacity is concentrated in Western Australia. Can Qantas and Virgin recalibrate?

Australia is the world's seventh-largest domestic market and arguably has been one of the plushest with the most handsome yields. Recently large additions of capacity from Qantas and Virgin Australia have shredded profitability by hundreds of millions of dollars. There is much debate about the Qantas Group's 65% market share "line in the sand" that sees them add capacity to match Virgin. Overlooked in this debate is where the capacity is being added and why it is so difficult to absorb it.

This report looks at the growth in the domestic market over the past two years, when this battle has been at its most intense. The fastest growing market has been the segment within Western Australia, with nearly 40% growth. This capacity is tied to mining work, which has recently softened. This market typically has very limited (if any) leisure focus, so it is difficult to stimulate demand with reduced fares and profits. There has also been rapid capacity expansion on east-west coast routes, markets which are also challenging to stimulate.

The issue for Qantas and Virgin now is not only to address the capacity situation at large, but also their strategy for Western Australia, where one-third of all Australian airline capacity goes to or from.