During my last days at Qantas I remember Alan Joyce was asked how he felt about Borghetti getting the top job at Virgin Australia, to which Joyce replied "better the devil you know". On the basis of the relative performance of the companies in 2012, it would appear that Borghetti is the devil that Joyce, the executive team and the Qantas board, are not so acquainted with after all. Second-half results After digging deeper into the Virgin Australia results, however, the evidence reveals the hazards an airline faces when it chases a greater share of the corporate market. Over the six months to December 2011, Virgin Australia reported a net profit after tax of $51.8 million, which means that over the second half of 2012 it made a loss of $29 million.

Over the same second-half period, Virgin Australia accelerated the growth in domestic capacity by 14.1 per cent, which is almost three times the long-run average. This expansion was on top of first-half growth in domestic capacity of 5.3 per cent. The acceleration in domestic capacity in the second half of 2012 placed significant downward pressure on Virgin's domestic yields. Measured on a revenue-per-available-seat-kilometre basis, Virgin domestic yields fell in the second half by 4.5 per cent compared with the first half. The strong first-half result also reflects the fact that Virgin gained significant load, and to a lesser extent, price benefits, from the Qantas shutdown, which occurred late in October 2011. Corporate travel CEO Borghetti indicated in today's results that he has reached his target of 20 per cent of total domestic revenue from the corporate and government markets, but that can be achieved simply by allocating more capacity to city pairs that have greater government and corporate mixes.

For example, sending more capacity to Canberra, the golden triangle (Sydney, Melbourne, Brisbane) and to regional mining routes will boost the corporate and government proportion of revenue. The real meat in Virgin's strategy sandwich is whether they have stolen corporate and government customers from Qantas. This is difficult to prove because of the lack of publicly available data. My gut feeling is that Qantas has retained a significant number of large corporate accounts, which probably cost them an arm and a leg through cheaper pricing, while Virgin has snapped up a large segment of the disgruntled small- and medium-sized corporate market. Airfare inelasticity The difficulty with the corporate market is that it isn't typically stimulated by average airfares.

Corporates and public servants travel not because there is a good deal on airfares, but because they must hold meetings, or they must attend conferences and other engagements that require travel. Meetings and conferences are primarily a function of the economy - the stronger the economy, the more such gatherings take place. The demand for meetings and conferences will also depend - generally to a lesser extent - on the total cost of travel. This total cost includes airfares, accommodation, food and beverages, land transport and the time/opportunity cost of travel. Airfares will often only represent about 15% to 20% of this total cost. If too much capacity is supplied by an airline to a corporate-intensive segment of the market then the airline must push the average airfare down hard to stimulate customers to travel on those seats because demand is inelastic to the average airfare. Borghetti holds a lever that can only influence 15% to 20% of the total cost of travel to the corporate, and can't influence the number one driver of that travel, which is the state of the economy.

Poaching Virgin can only expand its yields and capacity at an above-trend pace if it is able to snatch a large number of customers from Qantas. That poaching will prove difficult for Virgin if Qantas drops its prices and matches Virgin with capacity increases of its own. This outcome assumes, of course, that Qantas' on-time performance remains high, its frequency at the peak on critical, corporate-dense city pairs remains strong, and its at-airport and in-sky products are high standard. On the basis of recent performances and struggles, these may be strong assumptions. Loading Procurement departments of companies all across Australia that have not yet negotiated their corporate travel contracts should be rubbing their hands with glee over the coming months because the deals emanating from Qantas and Virgin will be the best for years if capacity at the market level continues to grow strongly.

Tony Webber was Qantas Group chief economist between 2004 and 2011. He is now managing director of Webber Quantitative Consulting and Associate Professor at the University of Sydney Business School, and contributed this article to BusinessDay