Australian Air Wars - Virgin Blue - Fighting National Champions

In 2000, the Australian airline industry was thrown into turmoil with the arrival of two low-cost carriers: the Virgin Group's Virgin Blue, and domestically owned Impulse. Two years later, Qantas and Virgin Blue were the only two carriers still flying the national flag over Australian soil. Had the Australian government botched its liberalisation of the domestic industry? Assistant Prof. of Economics Daniel Traça charts the history of the bitter and intense Australian airline wars.

by Daniel Traça
Last Updated: 23 Jul 2013

In 2000, the Australian airline industry was thrown into turmoil with the arrival of two low-cost carriers: the Virgin Group's Virgin Blue, and domestically owned Impulse. Two years later, Qantas and Virgin Blue were the only two carriers still flying the national flag over Australian soil. The bankruptcies of Impulse and another, well-established airline, Ansett, caused serious harm to the economies of both Australia and New Zealand, with thousands of layoffs. Had the Australian government botched its liberalisation of the domestic industry? Qantas had a history of hyper-aggressive competitiveness. Would it soon take pains to drive Impulse or any future competitors out of business completely?

Assistant Prof. of Economics Daniel Traça charts the history of the bitter and intense Australian airline wars. Virgin Blue's keep-it-simple strategy paid off much better than had been expected initially. But it soon learned a lesson that continues to cause a great deal of pain to carriers around the globe: trying to be too competitive in the aviation industry can be very tough, indeed - and quite often, even fatal.

The price wars followed a by-then familiar pattern. Rivalry tended to soar whenever a new airline entered a market, as incumbents take action to repulse the invaders. Despite its small population, Australia is one of the world's fastest growing markets, with the Sydney-Melbourne route one of the world's busiest. The case highlights the complexities of competition dynamics in industries with barriers to entry, such as airlines. The government's long-established two-airline policy had guaranteed stability on domestic aviation for decades, preventing what it had described as "unnecessary overlapping services and wasteful competition".

Deregulation, beginning in the early 80s, had seen prices drop severely. While Australia's two domestic carriers, Ansett and Australian Airlines, had benefited from economies of scale and scope due to cost cutting, drops in profitability were starting to bite severely by the end of the decade. The author details the controversial decision by the government to sell Australian Airlines to Qantas in 1992, thereby giving the latter a full domestic network while profiting nicely from the privatisation.

When Air New Zealand bought half of Ansett in 1996, the price war commenced. As discounting intensified and an economic downturn worsened, all players began to suffer seriously. Traça explains how Virgin Blue managed to adopt a sustainable strategy during a crisis period, while Impulse simply did not. Qantas's 2001 proposal to rescue Impulse, while fiercely opposed by the remaining competitors, was eventually approved by a government accepting the carrier's argument that industry consolidation was necessary to prevent further serious losses.

The case illustrates the extent to which the activities of senior management in the industry are inextricably interconnected with the activities and decisions of policy makers, for good or ill. Today, a major problem remains how to attract either investors to Australia's domestic airline sector, or a viable third airline to compete with Virgin Blue and Qantas. In retrospect, could the domestic industry ever have structurally supported such competition? Had the government made serious (and foreseeable) mistakes during the deregulation process, leading to the current, undesired duopolistic situation?

INSEAD 2004

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