For airlines and travel booking agencies, a strong business segment is corporate travel for business people and government organisations. Whereas tourists and air commuters might be looking for the cheapest, most affordable flights, business and first class customers expect higher levels of service and more comfortable travel, and are willing to pay a premium for it.
There are also more opportunities to secure repeat business to keep these premium customers, and that spells better profit margins for a company. Amongst airline companies, Qantas Airways (ASX: QAN) holds about 84% of the corporate travel market in Australia, and to keep that market leadership, it has recently announced its Acquire loyalty program for small and medium businesses.
At the same time, Virgin Australia (ASX: VAH) continues its efforts to take some of that market share for itself. Formerly known as Virgin Blue, in 2011 it changed its name to it Virgin Australia to begin shifting its strategy and focus away from being a low-cost airline. It was having difficulty with competing against other discount airlines, so it, too, wanted to shift up to seize more of the upper-end market.
Just recently Virgin Australia announced that it is opening a $350 million non-renounceable rights issue, and three of its top shareholders, Singapore Airlines, Air New Zealand (ASX: AIZ) and Etihad Airways, plan to take their full entitlements.
Virgin Australia CEO John Borghetti said: "This capital raising is designed to enhance liquidity and the gearing position of Virgin Australia to ensure we are in a stronger position moving forward."
Qantas has hit back, saying that it sees it as an attempt by the three foreign airlines to crack open the Australia domestic market, and erode Qantas' market leadership.
As these two airlines slug it out for your air travel patronage, as investors we have look at the business, and see what it has to offer for our investment dollar.
Qantas has increased its revenue over the past three years, but due to larger than average abnormal charges, 2012 net earnings after tax were in the red and 2013 was just over the line in the black at $6 million. Return on equity was 3.73% and net profit margin was 1.4% in 2013.
Virgin Australia itself has been alternating in and out of profit since 2009, with 2013 having a net loss of $98.1 million after abnormal charges. It also has been increasing revenue over the last three years. Its net gearing as of 30 June 2013 was 125.8%, hence the capital raising will be used to bring that down some.
Foolish takeaway
We all need to travel, and mostly likely these companies will be with us for a long time. As investments, the general commodity-type pricing and focus on discounts, as well as high levels of competition and running costs make value investors probably more interested in buying a discount air ticket than shares.
