Virgin Blue is quitting the NZ domestic market from October 18, but adding flights to its Australian domestic network and trans-Tasman, US , South African, Bali and Phuket routes.

The changes will see the redeployment against key Qantas routes of the nine Boeing 737-800s flying under the Pacific Blue brand, an identity it uses to overcome a veto Singapore Airlines has on the use of the Virgin brand on international services.

The decision by new Virgin Blue CEO and former Qantas executive general manager John Borghetti has been flagged this morning as the first instalment of a network shake-up for existing Virgin Blue, Pacific Blue and V Australia services.

Borghetti said the changes would result in an increase of jobs for Pacific Blue in New Zealand rather than losses, because the redeployed jets will be used more fully than now to add flights between NZ and Australia, lift Bali flights from Melbourne to daily frequency, and further expanded regional South Pacific services and especially to Fiji.

But the changes also “tidy up” the proposed route-sharing alliance between  Virgin Blue and Air New Zealand, under which each carrier will sell their combined trans-Tasman schedules and onward connections on each other’s domestic routes, subject to competition authority approval in each country.

In December the V Australia long-haul fleet of Boeing 777-300ERs will increase flights between Sydney and Los Angeles to daily frequency, and add an extra flight a week between Melbourne and Johannesburg, Los Angeles and Phuket.

Airline insiders shocked by last week’s poor Qantas profit performance had been wondering where Borghetti would strike first as he restructures the Virgin Blue operation.

Qantas made only $17 million underlying profit before tax  from flying passengers under the various Qantas and Jetstar brands  for the six months to June 30, a result that revealed that its low-cost brand  had stumbled badly at a time when it was expected to bolster the full service Qantas operations.

Virgin Blue reports its full-year result on August 26, and on the Qantas figures, may have retained its place as the more profitable airline group if measured by earnings from flying rather than the sale of frequent flyer points to banks and retailers.

This morning’s out-of-NZ transfer of capacity, and the promise by Qantas CEO Alan Joyce last week to grow domestic capacity by 9.6% in the current half year, could signal the onset of a massive fare fight between a unified Virgin Blue product offering, and a divided Qantas/Jetstar offering.

It’s going to get brutal for shareholders, and good for consumers.