Australia headed for domestic fare war

(Sydney: 20 February 2007) The Centre for

Asia Pacific Aviation (CAPA) today noted the excellent first half results by

Virgin Blue, and predicted a capacity-led escalation in price competition in

the Australian domestic market later this year.

Executive Chairman, Peter Harbison, stated, “Virgin Blue is to be congratulated on an excellent set of numbers, achieved in a fairly benign operating environment. While the carrier forecasts net profit for the current full year will be more than 60% higher than in 2005/06, earnings will be more tested in 2007/08 and launch costs associated with long-haul operations in 2H08 will ensure profits stay under pressure in 2008/09”.

According to the CAPA report, published in its weekly Peanuts LCC report, the main test over the next year will be how Virgin Blue responds to:

  1. a lower cost Tiger Airways; and,
  2. the competitive response from Qantas and Jetstar.

“A positive for Virgin Blue is that is has been able to restrict its cost increase (in the latest half, excluding fuel), to 1.5%. But, from mid-07, a capacity battle is looming – with inevitable pricing competition. Just as Virgin Blue increases its capacity by 10% and Tiger adds a further 3% to the total (with a disproportionate impact if focused on a handful of routes), Qantas and Jetstar will be obliged to add seats to retain market share – either by delaying retirements, bringing international capacity onshore or leasing in new equipment”, said Mr Harbison.

Mr Harbison also described Virgin Blue’s new profit share arrangement for its staff, as a a “sensible move” ahead of the entry of a new competitor, when staff productivity and retention will be crucial.

CAPA will shortly release its highly-anticipated Aviation Outlook report for 2007. For further information, please visit centreforaviation.com