Airfare Wars: Battle for the Skies

SYDNEY -- The dogfight between Qantas and Virgin (with Tiger nipping at their heels) means cheaper flights for consumers, but might be bad news for shareholders.

Despite a 5.8% increase in the number of seats available, and a cut in airfares, Qantas flew 40,000 fewer domestic passengers than it did in July last year.

Qantas Airways Limited (ASX: QAN.AX) has reported a 2.6% fall in the number of domestic passengers compared to the previous year. The international division fared even worse, with 8.5% fewer passengers flying overseas in July. Jetstar continues to do well, increasing its international passengers by 17%, while Jetstar Asia posted a 21% rise in passenger numbers. Qantas is looking to get out of flying to Europe as much as possible, due to the enormous costs it faces flying there. The company has been in discussion with Emirates over an alliance to fly to Europe, to cut Qantas' fuel bills and allow its international division to focus on flying more profitable routes into Asia and America.

On domestic routes, Virgin Australia Holdings (ASX: VAH.AX) has introduced larger aircraft and more flights, as it ramps up its fight with Qantas to gain market share. Qantas' CEO Alan Joyce has vowed to protect the company's 65% market share at all costs. Virgin has also targeted the corporate traveller, introducing business class airfares, and marketing strongly to corporates.

The fare war hasn't hurt corporate travel agents, Flight Centre (ASX: FLT.AX) and Corporate Travel Management (ASX: CTD.AX), with both recently reporting growing revenues from the sector. But it is having an impact on Tiger Airways. CEO Andrew David has told the Australian Financial Review that the increase in flights by Tiger's bigger rivals would push back the likely timeframe for Tiger to break even in Australia.

The Foolish bottom line
Increased capacity is good news for passengers, with cheap fares likely to be on offer as Qantas and Virgin slug it out. That's no comfort for investors in either company, as the cheaper fares are likely to result in lower revenues, with neither company likely to score the winning punch.

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Motley Fool writer/analyst Mike King owns shares in Flight Centre. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, while it's still available. This article contains general investment advice only (under AFSL 400691). Authorized by Bruce Jackson.


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