David Knibb BRISBANE

Australia's skies have become a war zone as airlines slash fares and add flights in a battle to dominate the domestic market.

Amid this fight, predictions have emerged that one or more of the combatants may not survive. Startups Impulse and Virgin Blue Airlines have led the fare war. Qantas and Ansett are matching those discounted fares, but are also engaged in a battle of their own over high-yield business traffic. Qantas seems determined to defend its current lead, while Ansett and its Air New Zealand (ANZ) parent seem equally determined to cut into it. Because of this, the major carriers are foregoing short-term profit by adding capacity in a long-term grab for market share.

Qantas and ANZ have issued warnings of likely losses for their year ending in June. Both blame this combat as the major cause. Analysts predict Qantas will slash its dividend and Ansett will drag ANZ down so far that it pays no dividend at all. Standard & Poors has put ANZ on negative credit watch because of Ansett; Moody's has cut its Qantas ranking from stable to negative.

This bloodbath comes at an especially bad time for Qantas and ANZ. Both need capital to finance major aircraft orders. For Qantas, the first of 31 new jets are set to arrive next year. ANZ plans to place its own large order soon. Yet another grounding of Ansett's early-generation Boeing 767s over Easter highlights the urgency of that order.

Qantas and ANZ have both started selling assets to raise cash. First to go were their jointly-owned licences for two computer reservation systems. The sale and lease back of airport terminals is also being contemplated. Qantas may sell its catering division; ANZ is trying to offload its stake in Equant.

Several commentators predict one or both of Australia's discount carriers may lack the stamina to survive these tough times. Impulse admits competition has destroyed any prospect of a profit this year, and Virgin has yet to break even. Yet Virgin says it is still on track with its business plan and both claim substantial cost advantages over the majors. No one admits it, but Impulse and Virgin also seem to be expanding their route networks in different directions - Impulse into Tasmania and Virgin into South Australia - in a move to stop hurting each other so much.

Neither startup shows any sympathy for Qantas' complaints about a deteriorating market. Both blame Qantas for aggravating conditions by boosting its own capacity for allegedly anti-competitive reasons. Sir Richard Branson, Virgin's owner, has joined this chorus by urging Australia's competition commission to investigate Qantas for capacity dumping.

Across the Tasman Sea, Qantas New Zealand went out of business on 21 April after receivers stepped in following the failure of Australia's Qantas Airways to buy its troubled franchise partner. The airline's operating company, Tasman Pacific, had accumulated debts of more than NZ$20 million ($8.25 million) since early last year when it bought the Qantas franchise operator, formerly known as Ansett New Zealand. Qantas is considering the establishment of a new domestic airline in New Zealand, however.

Source: Airline Business