Qantas's and Virgin Blue's duopoly of the Australian domestic market may persuade them to abandon aggressive mutual competition
Just in case any more evidence was needed to demonstrate exactly how prettily Qantas and its upstart rival Virgin Blue are sitting in the Australian domestic market, the flag carrier last week revealed a 134% increase in annual pre-tax profits from domestic operations.
The question now is whether the two airlines will be able to resist the temptation to abuse their market dominance by no longer competing quite as vigorously, or whether yet another would-be new-entrant will be unable to resist the urge to launch a fresh attempt to break into Australia's domestic market.
On the face of it, Qantas and Virgin Blue look set to achieve the ultimate duopoly in the wake of Ansett's collapse. The regulators are happy because Australian travellers get to sample the thrills of no-frills flying. And punters can still shell out more to get in-flight service on Qantas if they want to, or use the full-service airline to connect to long-haul flights.
Qantas and Virgin mostly compete head-on, but in many ways do not. Virgin will get some price-conscious business travellers, but it will also tend to generate new traffic from the ranks of those who would not previously have been able to afford to fly frequently - or at all. Qantas will continue to target the frequent international traveller as its core market, because its long-haul operations have traditionally been even more profitable.
Perhaps the Australians have discovered a formula to rescue the airline industry from a death spiral of over-vigorous competition, senseless pursuit of market share and falling yields. This duopoly must be the envy of struggling carriers in Europe and North America.
Unfortunately, Australia is in many ways a unique market - and even so the status quo might not last much longer.
The country's domestic market is far too lucrative and important to be ignored by other would-be players. It now appears certain that Star Alliance members, probably led by Singapore Airlines, will do something to re-establish their presence, following the collapse of Ansett. But while the entry of a third strong competitor might destroy everyone's chances of turning a profit, the alternative could be every bit as unpalatable.
Given the relative lack of direct competition between Qantas and Virgin Blue because of the different products they offer, it is difficult to see how in the longer term the pair can have any good reason to continue competing vigorously on price. Australians may notice the average cost of their air fares gradually rising.
Qantas will have to tread carefully if it wants to avoid regulators blocking its ambitions for linking up with Air New Zealand through the acquisition of a minority stake.
For the good of all
After five years of moving in the right direction, Star Alliance appears close to achieving one of its main ambitions - joint procurement of systems and equipment. Although Star has been purchasing fuel and other general supplies for some time, its strategic sourcing agreement with Rockwell Collins for avionics and in-flight entertainment (IFE) systems is a clear sign that Star still believes it can generate cost savings through bulk buying and the simplification of its supplier base in every aspect of its operations.
But is the alliance's long-stated ambition to elevate its joint purchasing strategy to the ultimate level - the acquisition of new aircraft - achievable? It's hard enough for 14 carriers to agree on the same avionics and IFE specifications, but agreeing a common specification for the platforms those systems are going to fly on is a quantum leap in co-operation and concession. Even Star chief executive Jaan Albrecht concedes this is an ambitious task and any joint deal is at least five years away.
But how realistic is this? In the past, aircraft manufacturers have pushed for airlines to agree to common cabin configurations to reduce production cost. And the dream was achieved 30 years ago by four European flag carriers when determining the specification of their McDonnell Douglas DC-10 fleets. Austrian Airlines, Sabena and Swissair also achieved the goal in the 1990s with an Airbus A320 deal through their European Quality Alliance.
But the cost benefits will have to be huge to persuade 14 airlines to relinquish the individualism of their cabins or the ability to negotiate additional price reductions by playing one engine supplier off against the other.
Time will tell whether the bond that ties Star members together is strong enough to achieve the ultimate goal.
Source: Flight International
