Airlines fighting on two fronts with fares and fuel

By BINA BROWN Sydney correspondent

Rising fuel prices and Australia's languishing dollar are threatening the business models of the country's airlines, but no one is prepared to name a casualty just yet.

Newcomers Virgin Blue and Impulse Airlines remain relentless in their introduction of discount airfares to gain market share, but, like the established Qantas and Ansett Airlines, they have told financial markets to expect lower earnings.

Speculation continues to mount that at least one of the newcomers will either withdraw from the market or merge with another airline.

Qantas, with good management, an active attitude and a majority market share in Australia, appears to be in the pole position but is not without the problems facing the global airline industry.

To add to Ansett's present woes, according to analysts, about 85 per cent of the market share that Impulse and Virgin have taken from the major airlines has come from Ansett.

Since Impulse and Virgin began virtual shuttle services between the main ports of Sydney-Melbourne and Sydney-Brisbane last year, air fares have dropped as low as $38 ($47) one way on each of those legs. Even fares at peak times are half the price they were a year ago, which led to a 25 per cent jump in domestic air travel in the year to March.

Being the busiest routes, these are also the most profitable, but a steep rise in capacity by all the carriers - measured by available seat kilometres - means margins are tight. The latest round of special deals from Virgin Blue and Impulse Airlines are yet to be answered by Qantas and Ansett Airlines. But Richard Branson's Virgin Blue said the weak currency might yet force it to increase its regular fares, although it would continue to offer special deals.

"We pay for our fuel, aircraft maintenance and aircraft leasing in American dollars," said Virgin Blue spokeswoman Amanda Bolger. "So while we will continue to offer special deals, we may have to increase standard fares. It is something we are looking at."

Impulse Airlines is also predicting the price war would start to ease mid-year. Impulse corporate affairs manager Simon Westaway said this week that the Australian dollar was creating a difficult scenario for airlines.

"There may be less discounting out there because of it, but competition is here to stay," he said.

Impulse, which had expected to make a small profit of $A3 million this financial year, is predicting a loss. Virgin budgeted for three years of losses from last year's start up.

Shaw Stockbroking analyst Scott Marshall said the airlines were "running into a brick wall with oil prices," which have risen from about $US15 ($37) a barrel in 1998 to $US23.

ABN AMRO transport analyst Bruce Low predicts the price war between the airlines will get worse before it gets better, but says all four airlines will be around in 12 months.

A Virgin Ansett merger has not been ruled out. Singapore Airlines holds 25 per cent of Ansett Air New Zealand and 49 per cent of Virgin in the UK.

Last month the Air New Zealand-Ansett group forecast a substantial loss.