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Qantas, Virgin at loggerheads

Qantas and Virgin disagree over how much market share they have in the corporate travel market.

Virgin Australia’s (ASX:VAH) John Borghetti has told Nine Network’s Financial Review Sunday program that the company now has “way north” of 20% of the lucrative market, while Qantas Airways (ASX:QAN) boss Alan Joyce says that his airline still has 85% of corporate market revenues, despite the stiff competition from the upstart Virgin.

Mr Borghetti says that Virgin set itself a target of doubling corporate revenue in 2010, to 20% within three years, and had achieved that in two years.

Despite the claims from both airlines, it doesn’t seem to have done either much good. Qantas reported an underlying profit of just $6 million, with its Domestic division seeing earnings before interest and tax (EBIT) drop 21% to $365 million, compared to the previous year. Virgin reported a ~$150 million drop in underlying domestic EBIT to a loss of $44.4 million.

By comparison Regional Express Holdings (ASX:REX) reported a $14 million profit after tax – with chairman Lim Kim Hai noting that REX was the most profitable listed airline group in Australia, despite revenues substantially below its bigger rivals. Of course, he may have forgotten about Alliance Aviation Services (ASX:AQZ), which reported a net profit of $23 million.

Qantas’ Mr Joyce said there was room for both airlines to be profitable in the Australian domestic market – depending on how much capacity is added to the market. Airlines boost capacity to increase flights and revenues but the move usually means competitors follow, resulting in empty planes and lower revenues and higher costs all round.

In the 2013 financial year, capacity rose by 8% as Virgin went upmarket to better compete for the corporate and government travel accounts. Qantas followed to maintain its target of 65% market share, leading to both airlines being forced to discount tickets to fill their planes.

Foolish takeaway

As we’ve noted many times before, airlines are terrible businesses with many factors affecting profitability beyond management’s control. No matter how good management are, travellers end up the winners, not airlines, nor their shareholders.

With its legendary, fully franked 28 cent dividend, Telstra is the darling of Aussie investors. But with its share price skyrocketing over the past year, is Telstra past its prime? Click here for our brand-new report: Is It Time to Sell Telstra?

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

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