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Virgin loses ground to Qantas

Virgin Australia (ASX:VAH) has lost market share to bitter rival Qantas Airways (ASX:QAN), flying less passengers in May 2013, than it did in the same period in 2012.

While Virgin flew less passengers, Qantas reported a rise in domestic passenger numbers in May. The falls are mainly due to Virgin cutting the number of deeply discounted fares, as it attempts to improve its margins.

According to the Australian Financial Review (AFR), Virgin is understood to have chosen to cut the number of discounted seats available, so it can ensure ticket prices remain higher when market conditions improve. Virgin said that load factors had fallen as a result of its focus on higher yield passengers and the weak economic environment.

After a brief period where consumers were more optimistic about the future, they started to spend again. But, it now seems that was short lived, with falls in the market and the Australian dollar, sending consumers back into their burrows, and keeping their hands in their pockets.

In June Virgin warned its 2013 full year profit would be lower than the previous year, with the introduction of its new Sabre booking system the main culprit. The falling Australian dollar is expected to be a double-edged sword for airlines. Australia should see a greater influx of overseas passengers, which should see more domestic flyers, but at the same time the lower Aussie dollar will have a negative impact on Virgin’s fuel bill, with oil priced in US dollars.

Foolish takeaway

Virgin has three airlines as major shareholders in Etihad, Singapore Airlines and Air New Zealand (ASX:AIZ), who will watching from the sidelines and hoping the company can turnaround May’s results in the months ahead. Qantas isn’t going to stand idly by and watch, with its own strategy of maintaining and perhaps growing its 65% share of the domestic market. That’s good news for travellers, but unlikely to be good news for shareholders in either airline.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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