Q3: What makes the Australian Airline Industry different? Why do Qantas and Virgin Blue earn high profits when many airlines worldwide operate at a loss?
The airline industry is extremely volatile, with events such as the September 11 attacks and recently the global financial crisis having adverse effects on the profitability of airlines worldwide. Only in 2007 has the international airline industry been able to post a profit since 2001 (Clark 2007), and since more losses have been made, with IATA forecasting overall losses for 2009 of $US11 billion (AFP 2009). With substantial increases in fuel costs over the past 5 years and the constant need to purchase new and maintain existing aircraft, it is rare to find airlines posting large profits for sustained periods of time. Two such airlines however are Qantas and Virgin Blue and it is no coincidence that these airlines operate in the Australian airline industry. This report will investigate the differences between the Australian and international airline industries, particularly the US, and examine the factors into why they have been able to buck the trend of continued financial losses.
What makes the Australian Airline Industry different?
Over the past several decades many international airline industries have undertaken deregulation, resulting in a massive surge in demand for air-travel and an influx of new entrants. In the US, deregulation brought on a range of low-cost airlines including JetBlue, Skybus Airlines, and one of the most successful low-cost airlines, Southwest Airlines. Their success initiated a widespread shift in the approach to airline services, with many Southwest ‘copycats’ emerging and adopting their low-cost model. This however has led to unsustainable pricing wars and consequently the “US aviation industry as a whole has failed to deliver a net proﬁt for ﬁve consecutive years” (Fojt 2006, pg 7).
In Australia post-deregulation meanwhile, there have been considerably fewer new entrants, with the first, Compass Airlines, collapsing in its first few years of operation and the next low-cost airline Impulse eventually being bought out by Qantas (Galvin & Tywonials 2006, pg 5). Their existence however led to a sharp drop in fares, and coupled with their already aging fleet, Ansett folded in 2001. Ansett’s demise meant that the airline industry was occupied by the two remaining airlines, Qantas and the new entrant Virgin Blue, with these two being the only major airlines operating domestically in Australia until fairly recently with the advent of Tiger Airways and Qantas’s own incarnation Jetstar. This is in stark contrast to the US airline industry post-deregulation, with the US having a multitude of airlines, with its legacy carriers including United Airlines and American Airlines and its range of low-cost carriers.
The duopoly in the Australian airline industry with Qantas and Virgin Blue has meant that both airlines hold a significantly greater share of the market than their US counterparts, with “Qantas [controlling] about 65% of its domestic market. In contrast, the U.S. market is highly fragmented. The largest player, American Airlines, has a 17% market share” (Johnsson 2007). With the increasing costs of fuel and falling airfare prices, airlines with smaller market shares will find it increasingly difficult to earn reasonable revenues to return a profit.
The Australian airline industry is also unique in that the continent of Australia is so large, with the large distances between Australian capital cities making air travel often the only viable option for interstate travel. Additionally, on a broader scale Australia is distanced far from most other nations, especially its major trading partners in the US, UK and even Asia. The sheer distances involved means air-travel is the only practical method and, with growing globalisation, international flights have become higher in demand. Other markets however do not...
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