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Fri, Aug 22, 2003 - Page 12 News List

Qantas may start discount airline to take on Virgin

A NEW STRATEGY The Australian flag-carrier is planning a discount airline to compete with Virgin Blue, as it starts cutting costs in an attempt to retain its share of the market

BLOOMBERG

Qantas Airways Ltd, Australia's biggest airline, said it may start a discount domestic carrier to take on Richard Branson's Virgin Blue Pty, after posting its first loss in eight years in the second half.

Qantas had a net loss of A$9 million (US$5.9 million) in the six months ended June 30, from a A$274.5 million profit a year ago, and a record first-half profit, the Sydney-based company said. Second-half sales fell 3.5 percent to A$5.5 billion on increased competition and the outbreak of SARS.

Virgin Blue has grabbed 30 percent of the domestic market and expanded its fleet to 32 planes since it began services three years ago with just two aircraft. It's aiming for 50 percent of the domestic market. Qantas chief executive Geoff Dixon today said he "must defend" a market share of between 65 percent and 70 percent.

"Brand loyalty isn't what is it used to be," said Rob Turner, who owns Qantas shares for the equivalent of US$1.1 billion he helps manage at AMP Henderson Global Investors' Value Plus division. "People will go where the cheaper prices are."

Qantas has been working on a plan for a discount carrier for five months, Dixon told reporters at a press conference. A decision will be made by November, he said.

A discount carrier "won't be anything to do with the main line at all," Dixon said. "It will have a totally separate management that will be allowed to run it as it should be run as a genuine low cost carrier."

Domestic pretax earnings fell 35 percent to A$223 million in the year ended June 30.

"We certainly welcome competition," said Virgin Blue spokeswoman Amanda Bolger. "We are very flattered that they seem to have altered their opinion they had a few years ago when they didn't even think we'd survive, let alone be profitable."

As part of a plan to slice A$1 billion from costs in the next two years, Dixon said he plans to replace workers with part-time staff to cut labor costs, replace business class seats with more coach seats and spend A$6 billion on more efficient planes in the next three years.

Qantas will save A$385 million from improved labor productivity, A$200 million from simplifying its fleet and overheads, A$135 million through distribution and A$80 million from improvements to domestic services. It plans to achieve A$350 million of savings this year.

Along with Virgin Blue, Qantas has to contend with Singapore Airlines, Emirates and Virgin Atlantic Airways Ltd, which want to expand services to Australia.

Air New Zealand Ltd last week slashed fares to Australia by an average of 20 percent. The two airlines are seeking regulatory approval for Qantas to take a 22.5 percent in Air New Zealand, and share flights and services. Their initial proposal was rejected by regulators in both countries as anti-competitive.

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