Investors and commentators have long questioned Qantas’ stubborn defence of a 65 per cent domestic market share in the face of rising costs and ballooning debt.
The airline last week posted a $252 million half-year, before-tax loss and announced plans to cut 5,000 jobs as a consequence of its position.
Addressing the Australia-Israel Chamber of Commerce today, Qantas boss Alan Joyce pinned its woes on rising fuel costs and a loss-making capacity war with foreign-owned competitor Virgin Australia.
But he insisted that Qantas had to maintain its self-imposed target of a 65 per cent share of the Australian domestic market. Here’s why:
There’s been a lot of commentary written about the 65 per cent; sometimes that’s simplified into two [new Qantas] aircrafts for one [addition by competitor Virgin].
The reality is that our competitor has, in the last two-and-a-half years, had 18 per cent capacity growth. Qantas has added half of that. We call that ASKs – a seat that travels a kilometre. In absolute numbers, we’ve added 4.3 billion ASKs and our competitor 4.5 [billion].
Proportionally, they’re losing more money than Qantas is. This is what we’ve been calling the loss-making strategy driven to try and break through and grab a position in the domestic market.
Why is it important for us to add [seats] in this occasion? Why are we adding anything?
Take the premium end of the market. The reasons why people travel with Qantas is because of our loyalty program, lounges, terminal, check-in, brand, people, service.
But it’s also because we have the best frequency, the best network across Australia. If you narrow that advantage, you narrow the desirability of our product, compared to our competition.
[An example] I sometimes use is the Apple iPhone, where the camera may not determine absolutely everybody that’s going to buy the iPhone, but for some people, if you’ve got a 1-megapixel camera, and Samsung has got a 10, they’ve got to move.
We’ve got to make sure we’re competitive in every single space, and make sure we keep people aware of this at the premium end.
If we pulled back 10 per cent of capacity, do you think our competitor, seeing that, will [reel] 10 per cent in? Where would that get you at the end of the day? The market would still be oversupplied and Qantas will be a smaller player in that market.
Qantas’ revenue advantage will start to disappear because its network advantage is removing, and Jetstar’s cost base advantage will start to disappear because its scale advantage is removing, and now there are a lot more jobs being lost for Qantas.
That will result in a much more difficult decision for Qantas and that’s what we’ll have to avoid, and that’s why we’re very focused on maintaining the strength of our domestic position.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.