The Australian domestic airline industry has experienced major changes in the past decade. These changes include, the collapse of Ansett airlines, the amalgamation of Impulse airlines into Qantas and the entry and rapid growth of Virgin Blue, to name a few. These events have subsequently altered the makeup of Australia's aviation line-up from a four-player airline structure- Qantas Airways, Ansett Australia, Virgin Blue and Impulse Airlines, to just two (Qantas Airways & Virgin Blue). .
With the collapse of Ansett Airlines in September of 2001, Qantas reacted with sound strategic initiatives, which saw its efforts pay dividends. Its share of the domestic market rose from 55% to 70% (Qantas 2004). However, this sound dominance over the domestic airways is quickly eroding, due to the emergence of Virgin Blue's low cost pricing strategy, whose strategic savvy subsequently snatched a huge share of the domestic market. .
In response to the growing popularity of discount air travel in recent years and to meet the competitive challenge from Virgin Blue at the "Low fare" end of the market Qantas has incepted a low cost operating airline and named its new budget airlines; "Jetstar". Qantas's new inception Jetstar intends to compete head on with Virgin Blue in the low cost Leisure sector. .
With the understanding of the fact that within last 10 years Australia has seen collapse of number of low-cost airlines including Compass-I, Compass-II, Impulse and Ansett therefore success of Jetstar as the third airline in the domestic sector is a big question for Qantas. In addition to that, Qantas intention to have dual and conflicting business model in the same industry opens up risk of mismanaging both and destroying value. .
Thus one of the inherent strategic challenges facing Qantas is, even in the best-case scenario when Qantas is successful in embracing its subsidiary, is that the end result might be cannibalisation of its existing market share and much lower margin.