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Open skies in Australia: Will it draw carriers?

Greg Wood | AFP | Getty Images

Australia may be weighing the possibly unprecedented step of allowing foreign airlines to offer domestic flights, but it isn't clear the skies down under are particularly attractive to outside carriers.

"Virgin Australia and Qantas are already barely making profits. If you introduce competition, it would bring fares down further," K Ajith, an analyst at UOB KayHian, said. "Why would foreign carriers operate routes when domestic ones see little economic benefit in doing so?"

The plan under consideration, which was reported in the Wall Street Journal, wouldn't give foreign airlines carte blanche to operate in the country. Instead, the government would be targeting domestic routes in Australia's north, including smaller tourist destinations such as Cairns and Broome, while excluding the busier, more attractive routes from Sydney, Melbourne, Brisbane and Perth.

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Both Qantas and Virgin Australia returned to profit in their most recent earnings releases this year, with their domestic businesses getting a boost after the two essentially called off their capacity and price war.

Any new entrants might be fighting over a stagnant pie. Last year, around 60 million passengers flew on Australia's domestic commercial flights, nearly unchanged from 2013, and load factors actually fell slightly.

While whether the skies down under will actually crack open for foreign carriers remains uncertain, previous "backdoor" attempts by outsiders have hit serious turbulence.

Late last year, Virgin Australia bought the 40 percent it didn't already own of Tiger Airways Australia for a whopping one Australian dollar after the joint venture operated there largely unprofitably for more than five years.

"There was no way that Qantas and Virgin and all the other domestic airlines were going to allow them to survive," said Mohshin Aziz, an airline analyst at Maybank. "They pulled all the nine lives out of that cat." He expects any new entrants will face similar aggressive competition from the incumbents.

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To be sure, some expect that if the government approves to opening the routes to foreign airlines, the carriers will come to the market.

"Foreign carriers would not look at these routes in isolation, but as an addition to their network," Shashank Nigam, CEO at consultancy SimpliFlying, said via email. "They would be able to realize the network effects, which are usually not significant for domestic carriers only, who tend to focus on more profitable routes."

It's also not a zero-sum for the domestic carriers, he said, noting, for example, that Virgin could use codeshare deals to still derive revenue from selling those tickets.

Some of the sound and fury over the proposal may signify little as foreign carriers are finding backdoor ways to access the market. While Virgin Australia is considered a domestic airline, its biggest shareholders are all foreign carriers, with Singapore Airlines, Etihad Airways and owning more than 60 percent of the airline.

It isn't clear whether the cabotage proposal's prospects are particularly strong.

"While it is a matter under consideration, there is no final proposition," Trade Minister Andrew Robb said via a statement from his office.

Virgin Australia referred to its previous comments, which said it expected foreign carriers would add significant capacity while earning marginal revenue and damaging domestic carriers' profitability and it urged the government to consider that "requests for capacity by airlines are not confused with actual economic demand for air services."

Air North, a regional carrier operating in the region the proposal is considering, and Qantas declined to comment.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter