QANTAS has warned the Federal Government Australia's flagship airline could disappear if Etihad Airways is allowed to double its stake in Virgin Australia.

Etihad, which is fully owned by the Abu Dhabi Government, bought a four per cent stake in Virgin Australia in early June and is understood to be seeking to boost its share to 10 per cent.

Qantas chief executive Alan Joyce has led a delegation in Canberra this week lobbying the Federal Government and the Opposition against allowing Etihad to push into Virgin.

They argued Qantas could "go under" if the deal was allowed as it would enable Virgin Australia to undercut Qantas on profitable domestic routes, Fairfax Media reported.

"Virgin/Etihad will be able to flood the market with capacity until its competition is forced to significantly reduce its own operations or worse," excerpts from a briefing paper cited by Fairfax Media said.

Shadow Treasurer Joe Hockey said Qantas won't go under if Etihad expands, but tough choices need to be made about its future.

"I don't think it's going to go under if Etihad increases their stakeholding," Mr Hockey told the Seven Network today.

"Already Air New Zealand and Richard Branson have much larger stakes as foreign investors in Virgin than Etihad."

But he said tough choices had to be made about the future of Qantas.

"We have to make a decision about whether Qantas does become a major international airline with a majority ownership overseas," Mr Hockey added.

"Or whether we want to retain it and pay a price for retaining it as an Australian icon."

Sources have told Fairfax that Qantas pushed to have the Foreign Investment Review Board limit the scope of Etihad's bid for more of Virgin.

The airline also lobbied to be untied from the requirements of the Qantas Sale Act of 1992 that allowed its privatisation by restricting foreign investment.

Etihad has recently bought stakes in Air Berlin, Air Seychelles and Aer Lingus.

Virgin recently completed a company restructure to open its share register to more overseas investors and free itself from foreign ownership restrictions.

Sir Richard Branson's Virgin Group owns 26 per cent of Virgin Australia, while Air New Zealand has a 19.9 per cent stake.

Originally published as Qantas fears Virgin deal will send it broke