The full extent of the financial injury sustained from the capacity/fare war that has raged for two years in the domestic aviation market was laid bare this week when both Qantas and Virgin removed their hospital gowns and showed off their full-year results.
Neither were pretty. And both are in cost-cutting and balance sheet repair mode.
Qantas' underlying earnings before interest and tax from its domestic operations was $30 million – down from a profit of $365 million last year. Virgin's domestic operations lost $59 million this year against a loss of $34.6 million last year.
Both airlines clocked up even bigger losses from their international operations and layered a series of non-cash items on top.
In Qantas' case it was the $2.6 billion write-down of the value of its aircraft that saw most jaws drop.
The good news is that the capacity war now has moved into a ceasefire mode. The bad news is that the market can never be sure it won't prove fragile at best.
Virgin boss John Borghetti doesn't make a habit of flagging his capacity moves in advance and on Friday he stuck to that script. Qantas boss Alan Joyce declared he would hold fire until the September quarter. Thus we can expect Virgin will do the same. But there is no visibility beyond that.
For now, at least, it looks like both airlines will be focusing their attention on costs – a battleground that will enhance near-term shareholder value. This is a breather than both sets of shareholders will appreciate.
Joyce is working harder on costs for the very simple reason that he needs to. His legacy airline has a higher cost base and the hundreds of millions that will be saved in costs next year is the primary reason he can be confident of moving back to profit. The other profit certainty is that he will save $200 million in depreciation expenses, thanks to writing down the value of aircraft.
Virgin has a cost advantage – and one that Borghetti told investors on Friday that he plans to retain by taking out $1 billion over five years to 2017. Virgin isn't saying whether it will return to profit this year. However, the irony is if Qantas improves, then Virgin should also. This doesn't mean Virgin will move into profit but it does infer the losses should be lower.
(The longer the ceasefire lasts, the longer demand gets an opportunity to soak up the excess capacity.)
Having said that, Borghetti is not retreating. Indeed, he told media he would be looking to increase his share of the corporate and government market from its present 25 per cent to 30 per cent by 2017 – which is roughly in line with Virgin's share of the overall domestic market.
Readers must remember that it was Virgin's strategic plan to move into the corporate and government market that set off this warfare. The answer to which of them was first to fire additional capacity into the market will depend on which side you talk to. Both blame the other and the truth is now pretty academic.
The bigger questions are was there a winner, who was it and was it worth it?
Borghetti's master plan was to increase his airline's yield and profitability by moving upmarket and capturing the corporate/government market. To that extent he has kicked a goal. He wanted to grab some action in the charter market (the fly-in fly-out business) and the acquisition of SkyWest has allowed him to tick that box.
Virgin's acquisition of no-frills carrier Tigerair to cement a hold in the leisure market is still a strategy with a question mark around it.
The leisure market has been weak over the past year in particular, thanks to fragile consumer sentiment and excess capacity. Borghetti says it is now well-placed to improve its performance along with the overall market, but he is now not promising profits from this brand until financial year 2017.
From Qantas' perspective, it's hard to see any upside from the war. Indeed, it engaged furiously with Virgin because it believed it had the financial staying power to outlast its smaller upstart rival.
That all changed when three large well-financed international airlines, Etihad, Singapore Airlines and Air New Zealand, took shareholdings and provided financial support to Virgin.
Borghetti had a game-changing strategic plan but the financial support provided a game-changer to his ability to stay the course.
For Qantas this war has been particularly costly. It has parted with some corporate customers, had to retreat a little from its famous 65 per cent overall market share line in the sand (at the very least the line moves around a bit with the tide) and it has weakened the financial performance of its domestic business.
However, it has keenly focused the board and management's minds on taking costs out of the business – something they had previously been tardy on.
Virgin announced on Friday it had received another round of financial firepower from the sale of 35 per cent of its loyalty scheme, Velocity. It was a deal the market was expecting Qantas to undertake but didn't or couldn't (again, depending on who you believe) pursue.
Virgin says its prime motive for taking a Velocity equity partner was strategic. But it won't deny that the $336 million improvement in its cash balance was a bonus. And it's a deal that Virgin says will be earnings neutral in 2015 and accretive thereafter.
