SYDNEY — When John Borghetti took the reins of Virgin Australia Holdings Ltd. in 2010 after being passed over for the top job at Qantas Airways Ltd., one of his first moves was to launch a price war to lure travelers away from its bigger rival.

The casualties from that price war are mounting—and not just at Qantas, which is cutting jobs and might sell assets to protect profits. On Thursday, Virgin Australia forecast a loss before tax of around 49 million Australian dollars (US$44 million) for the six months through December, after its shares recently fell to a two-year low.

Airlines often experience turbulence because of factors such as high jet-fuel costs and tepid demand, but investors are now questioning whether Virgin Australia’s woes have been self-inflicted. Its move to boost capacity and cut ticket prices prompted Qantas to defend its 65% share of the domestic aviation market by responding in kind.

The result was a glut of commercial jets in the skies over Australia, and increasing numbers on routes to farther-flung destinations.

So far, Virgin Australia’s biggest investors are staying on board. Australia’s No. 2 carrier counts Air New Zealand Ltd., Singapore Airlines Ltd., Etihad Airways and Richard Branson’s Virgin Group Ltd. as its main shareholders, which together own more than 70% of the company.

Smaller investors, however, aren’t so sure that Virgin Australia’s strategy is on the right path.

“It’s interesting to note that Virgin has competed more heavily, and to its own financial detriment, over the period that Virgin’s ownership by other airlines has increased,” said Angus Gluskie, Sydney-based managing director at White Funds Management, which holds a small amount of Virgin Australia stock.

“Investors should be questioning whether the longer-term interests of these airlines are becoming more important to Virgin than near-term profits,” he said.

Air New Zealand, Singapore Airlines and Etihad compete with Qantas on international routes. Late last year, all three Virgin Australia investors increased their holdings after the Brisbane-based carrier issued new shares to raise around A$350 million.

“We are fully supportive of Virgin Australia and its strategy and are confident that John Borghetti and his team will continue to attract more share of the travel wallet of both business and leisure customers,” an Air New Zealand spokesman said. A spokeswoman for Singapore Airlines said it continued to support Virgin’s strategy, while an Etihad spokesman wasn’t immediately available for comment.

Virgin Australia’s strategy has involved putting business-class seats on domestic flights and targeting routes that ferry workers in and out of mining towns in more-remote regions of the country. By the end of June, Virgin Australia was making more than 20% of its revenue from higher-margin business and government travelers, up from below 10% when Mr. Borghetti took over as Virgin Australia CEO after leaving as head of operations at Qantas.

Qantas suffered from the domestic competition, warning on Dec. 6 that it expected a pretax loss of up to A$300 million for the six months through December and would lay off a further 1,000 workers.

Virgin Australia investors, however, were concerned about the finances at the company. Several brokerages have downgraded their earnings forecasts for the airline, which reported a pretax profit of A$61 million for the six months through December 2012, following the Qantas announcement.

“When I talk to investors, there are some that raise questions,” said Mark Williams, a Sydney-based analyst at CIMB. “But management has done a pretty remarkable job at repositioning Virgin Australia in such a short period of time. It’s pretty tough out there, but over time we’d expect capacity growth will settle down.”

Thursday’s earnings forecast by Virgin Australia—issued following a request by the stock exchange to explain a recent sharp fall in its share price—excludes one-off losses associated with budget carrier Tigerair and restructuring costs, indicating its bottom-line figure may be even worse. However, shares rose 8% to recover some of the steep losses incurred in the past two weeks.

Matt Spence, an aviation analyst at Bank of America BAC +0.18% Merrill Lynch, said he doesn’t expect a turnaround any time soon. He predicts that Virgin Australia will post a pretax loss of A$120 million for the full year.

Still, Mr. Spence noted that Virgin Australia increased fares in December by as much as 4%, a sign the price war with Qantas may be easing,

Qantas is due to report its first-half earnings Feb. 27, a day earlier than Virgin Australia.

– WALLSTREET JOURNAL