Qantas management is warning the carrier could ''go under'' if the state-owned Etihad is allowed to buy enough of a share of Virgin Australia to allow it to start undercutting Qantas on its profitable domestic routes.
The chief executive of Qantas, Alan Joyce, and a small delegation has been in Canberra this week lobbying the government and the opposition over Etihad's push into Virgin, warning Qantas could not compete with a state-owned rival backed by a bottomless pit of funds from the airline's owner, the United Arab Emirates.
Sources familiar with discussions said Qantas argued that either the Foreign Investment Review Board should limit the scope of Etihad's purchase of Virgin or Qantas should be freed of the constraints of the Qantas Sale Act - which restricts foreign investment and Qantas's business options - to allow it to compete on a level playing field.
Otherwise, the airline warned, ''we could go under''.
Last week Etihad bought almost 5 per cent of Virgin Australia and is understood to be seeking 10 per cent. Qantas believes it is after a greater share.
In a briefing paper seen by the Herald, Qantas argues a Virgin-Etihad partnership would be allowed to ''pick the eyes'' out of the most profitable routes, leaving Qantas to service the lesser routes under the ''quasi universal service obligation''.
Etihad would subsidise Virgin's domestic business with the aim of weakening Qantas, it says.
''Virgin/Etihad will be able to flood the market with capacity until its competition is forced to significantly reduce its own operations or worse.''
The Qantas share price nosedived recently when it forecast a $450 million loss on international routes this financial year. It says much of the reason it is losing money abroad is because it is being undercut by state-owned airlines such as Etihad, Emirates and Singapore Airlines.
Technically, Etihad could buy 100 per cent of Virgin if it wanted. Under the Qantas Sale Act, foreign investment is capped at 49 per cent, total ownership by foreign airlines is capped at 35 per cent and a single foreign investor can buy no more than 25 per cent.
Other constraints in the act make Virgin a less-complicated and more attractive target.
The Nationals senator Barnaby Joyce is backing Qantas. He does not support changing the act but believes investment by state-owned enterprises needs to be checked.
''It's not a case of being xenophobic; it's a case of recognising reality,'' he told the Herald.
The dispute comes as Qantas axed a further 36 engineering jobs after its decision yesterday to consolidate the vast majority of its component aircraft maintenance in Melbourne.
A month after announcing the axing of 535 engineering jobs and the closure of one of three heavy maintenance bases, Qantas has told its workforce that it will transfer most of its component maintenance for Boeing 747 and 767 aircraft from Sydney to Melbourne's Tullamarine Airport.
The engineers affected provide component maintenance such as flight boxes and flight control.