Despite its troubles, Qantas remains in profit

The new airline is scheduled to start operations in May 2004 with about 20 Boeing 737 aircraft.

Qantas Chairwoman Margaret Jackson said the airline was recovering well from the effects of the Sars virus and the Iraq war, but needed to respond to the challenge from no-frills airlines.

"Qantas has to find ways to do things better for less," she said.

A name has yet to be chosen for the operation, which will function as a separate company within the Qantas group.

Qantas said it might start the airline afresh or base it on Impulse, a small no-frills carrier it bought two years ago.

A decision on which option to choose would be taken within six weeks, the company said.

Competition

Qantas already runs an international low-cost service under the name Australian Airlines.

But till now it has not responded directly to Virgin Blue, part of Sir Richard Branson's Virgin group.

Virgin Blue has taken a substantial share of the domestic market in its three years in operation.

Qantas said that in order to bring customers back it would have to find ways of cutting costs at the new airline, possibly by replicating the lower salaries negotiated by Virgin Blue with airline unions.

Qantas also said that it expects New Zealand regulators to rule on the airline's plans for a tie-up with Air New Zealand within a week.