Behind the smiles, this will be much more than a food fight

Virgin Australia’s completion today of its moves to offer complimentary food and drinks (as fitting the hour of travel) across its services, as well as free checked luggage is not so much the start of a bun fight between the major carriers, but the onset of harsh performance comparisons.

What it means is that in the next full financial year to 30 June 2016 analysts and owners will be able to see whether Qantas or Virgin Australia runs substantial numbers of the same type of jet, the Boeing 737-800, at superior levels of profitability.

While corporations usually try to hide such naked truths from each other,  they are unlikely to be able to prevent influential owners, like Singapore Airlines, Etihad and Air New Zealand in Virgin, or powerful institutions and funds, in the case of Qantas, from demanding and finding out the real figures.

And even though Qantas will have many more A330s in service than Virgin Australia, their respective wide body Airbus fleets will beg comparison over that full 12 months.

It will be quite a tug of war in each carrier, on the one hand, always trying to maintain a superior value proposition to full service customers, yet striving, perhaps desperately, to drive down the costs of delivering such service or suffer the consequences of investor/owner unhappiness.

This will be a contest that will be between a new Big Two, fundamentally different in nature to the two airline domestic duopoly that was enshrined in law under the Two Airline policy for TAA (later Australian) and Ansett-ANA.

The old big two were by law required to match the quality of their bread rolls, the size of the marmalade pots, their scheduling and even it seemed at times, the numbers of ‘hostess’ smiles per mile to entitled fat cats.

They charged the same fares, and they were fixed on a cost plus basis by benevolent regulators.

Despite Virgin Australia noting this morning that it had completed its transition to being a full service carrier this situation takes them back to what it was like after 1989 and up to 2000, before Impulse and Virgin Blue respectively sold out or survived in ways that Compass and the totally different Compass II didn’t.

Until now, Virgin Australia could be described, but with decreasing accuracy, as a hybrid carrier. No major Australian airline even made as much money on a profit margin basis as Virgin Blue in the immediate years before and after Jetstar was unleashed,  as it turned out, on Qantas as well as the Virgins.

I remember the late Graeme McMahon, former Ansett chief executive and general manager, once saying “They want us to go broke” after ending an exasperating phone call with someone in Canberra concerning the predatory and determinedly competitive Qantas that was then led by James Strong but with increasing strategic input from his successor Geoff Dixon.  (I was hanging on to a different  line to the one McMahon was using waiting for a phone interview.)

This will be the same.  Government, any government, is indifferent to special pleading from the ‘big two’ of today, and it will be a really tough you-are-on-your-own battle between Qantas and Virgin Australia, each with a low cost brand in tow.

This will be a big two contest in which one could conceivably go broke, although that isn’t to predict that either will.  They will instead fight, and fight and fight,  and smart investors will buy shares in airports, or aircraft leasing entities, or terminal retailing opportunities, maybe even bonds, rather than airline stock.

How will it pan out? The full service buyer is a tricky beast when it comes to those on corporate accounts where the company pays and the ticketing rules are less than draconian, allowing personal preference to trump price or scheduling.

Squeeze in an extra seat row here, and you might squeeze out a few rows of regular loyal customers.  Tweak the frequent flyer rules the wrong way, and you might benefit the competitor.

Hold the sauce back, and save $1 per sector per seat and win a big executive bonus from the company by reducing costs by $X millions a year.  And then lose several hundred dollars of revenue per seat per day if its flies say eight sectors Sydney-Melbourne in that interval.

This is shaping up as a contest where any gap widening between brand promise and delivery is going to make the Qantas/Virgin duopoly anything but comfortable for either.

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