Cheaper airfares on domestic flights? Don’t hold your breath

What really haunts the Australian aviation industry aren’t those Qantas ghost flights that got the competition regulator fired up; and nor is it the COVID catastrophe.

The real culprit is the price war between Qantas and Virgin Australia, which lit up the skies little more than a decade ago. It torched more than $3 billion in earnings from Qantas and Virgin’s books and left scars that even the current chief executives of the two airlines can’t forget.

So while the tie-up between Qatar Airways and Virgin has got everyone from Treasurer Jim Chalmers to tourism authorities popping champagne corks, hopes of the deal ushering in a new era of cheaper airfares may be a tad optimistic.

Qantas and Virgin Australia are unlikely to engage in a price war.Credit: Bloomberg

With Qatar taking a 25 per cent stake in Virgin, new international flights on the cards will undoubtedly help boost competition in the Middle Eastern and European corridors. And yes, these additional flights should translate into better fares for travellers, which are sorely needed given the routes have been dominated by the Qantas/Emirates alliance.

If this results in meaningfully cheaper fares, this should increase inbound and outbound tourism between Europe and Australia.

But don’t expect a return to those heady days of domestic price wars that allowed us to enjoy cheap flights on the Sydney-Melbourne-Brisbane golden triangle.

Qantas and Virgin are no longer run by chief executives (Alan Joyce and John Borghetti respectively) locked in a struggle for market share. Instead, the carriers are for the moment governed by a pair of pragmatic women who understand that protecting profit is the bigger game.

Just because Virgin can reduce fares doesn’t mean it will.

More importantly, private equity firm Bain, which bought Virgin out of bankruptcy, wants to maximise the return it gets on its investment. If the speculation is correct, Bain just pocketed about $1 billion from selling 25 per cent of Virgin to Qatar. (Bain has not contested this speculated figure.)

And with a public offering and a stock market listing still in sight for Virgin, Bain is in line to take even more money off the table. It won’t be in a mood to jeopardise its return.

But Virgin isn’t about to spoil the party by saying domestic airfares won’t come down. In fact, the narrative from Virgin is that the addition of Qatar as a major shareholder could enhance its operations and reduce costs by, for example, providing it with more bargaining power to negotiate with aircraft manufacturers.

So in theory, it could pass some of this improvement to lowering domestic fares. But just because Virgin can reduce fares doesn’t mean it will.

The history of big movements in airfares our (essentially) duopoly market reflects capacity. In 2014, we saw big cuts to domestic airfares on the back of the brutal capacity war between the airlines.

Under the leadership of Borghetti, Virgin sought to pilfer market share from Qantas, forcing Joyce to publicly draw a line in the sand on market share.

More recently, the post-COVID environment resulted in major capacity constraints, so airfares skyrocketed and along with that, both the airlines’ profits.

It is also worth noting that in recent months, Virgin has overtaken Qantas domestic in market share. There isn’t much in it, and it hasn’t elicited a chest-beating response from Qantas boss Vanessa Hudson.

The Qantas group, which includes Jetstar, still dwarfs Virgin in domestic market share. This reflects Australian travellers trading down to cheaper flights at a time when their spending is constrained and a bit of softness in the business market that Qantas mainline dominates.

Hudson, however, isn’t drawing lines in the sand. Instead, she has been revelling in Qantas’ most recent and stronger profit performance, which was posted as capacity has again been relatively constrained, and load factors are historically high.

Virgin should report its half-year profit in the coming month and, given the prevailing business conditions, it should also be a positive result.

So it might be better for the travelling public to put any thoughts of cheaper domestic airfares on the back burner. It is in the interests of Virgin and Qantas, and their respective shareholders, to keep this profit party going for as long as possible.

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