Originally Posted by liv
Hi Romulus,
I could be wrong but I thought that the 65% related to maximising revenue not profitability. So to use an extreme example, QF could double it's capacity, maintain 65% market share but now with 40% load factors and lose money hand over fist. Which it appears is exactly what they've done.
Yes, that's kind of the point. In a capital intensive business revenue is directly linked to profit more than in a variable based business.
You are also correct with your example. Sometimes you have to be prepared to take that kind of action to protect your position as a direct threat to your competitors. Using "Game Theory" as the dominant market player you run your business in the manner you so desire but if a junior player starts getting "uppity" you put them in their place by showing them clearly where you draw the line. The junior then has a choice - do they have the pockets to fight you or do they want to"be sensible" and accept the 35% or whatever market share as the basis for their business model and maximise their profit at that point.
If the junior believes the dominant player is weak or unable to maintain the fight for some reason (capital constraint, cash flow issues, whatever) then they will logically attack and seek to become the dominant player. If the junior believes the dominant is willing to run a major fight they will analyse how to maximise profit at the position they see the dominant player "tolerating".
So Qantas sacrifices a cool $100M or so now in order to preserve their dominant market position well into the future, and that is worth plenty more than $100M.
Virgin have made some interesting moves aligning multiple players to confront Qantas, the decision they are undoubtedly wrestling with now is how hard do they push the boundaries, i.e. how much money do THEY burn before they admit Qantas has deeper pockets etc and tactfully withdraw from that battle and focus on making the best profit they can with their lower cost base.
That is why incumbents, with their higher cost base, have not been overrun by LCCs utilising their lower cost bases to move up into premium service.
VB may be doing so, but they simply don't have the pockets to fight QF to the extent they need to in order to usurp the dominant position. Hence a lot of JB's signalling to the market that he is focussing on yield, profitability, premium customers etc. He is (in my opinion) gaming the industry himself and signalling that he is looking to OPTIMISE his profit by taking that 35% position and owning it with his better cost base.
The level of maturity required to optimise profit rather than maximise it is significant. Human beings are conditioned to maximise, the bigger the number the better, obviously, surely that goes without saying. But it doesn't. If you can take a position that optimises your profit then you have a world class business. You are protected far better than a maximised business, you are less susceptible to shocks like 9/11 or SARS etc.