The downwardly spiralling profitability of Australia’s two grandest newspapers, The Sydney Morning Herald and The Age, raises an uncomfortable question for their owners and for Australian society.

Are Fairfax Media prepared to fund the papers at, or close to, a loss in the interests of Australian democracy?

If the answer is yes, which seems improbable, the future of the Fairfax flagships suddenly becomes a lot more secure.

If the answer is no, which makes commercial sense and correlates to the culture of the current Fairfax board, everyone should start preparing for the biggest assault yet inflicted on the cost base and editorial quality of the two broadsheets.

These issues assume a new urgency in the light of last week’s reluctant admission from Fairfax management that the SMH and The Age are now operating at “low single digit” profit margins — in other words, they’re now each making a few million dollars of annualised profit compared to the $70m+ of a few years ago. This is a devastating earnings collapse for institutions that have been regarded for decades as almost impregnable money-making machines.

Unlike The New York Times and Washington Post, whose family-controlled owners proudly cross-subsidise their flagship newspapers in the interests of quality journalism and its role in society, the Fairfax board and management are an entirely different breed: unimaginative, corporate, bereft of an editorial instinct and privately dismissive of their own journalistic culture.

But not even last week’s shocking financial news was enough to jolt them into any kind of acknowledgement that their famous mastheads are confronting a business model crisis. Fairfax CEO Brian McCarthy continues to insist that the lost classified advertising that has ripped a combined $100m+ in profits from the Herald and The Age in less than a year will return when the recession ends. “I have been around long enough to know this is only a short-term thing,” he said.

McCarthy and his board are living in denial, and in doing so they are betting the future of the two most important newspapers in Australia — and the public interest journalism they embody — on the fiction that their classified advertising isn’t migrating to the internet like everyone else’s.

Eric Beecher is Publisher of Crikey.