Australia's second largest airline said it would remove eight per cent of capacity, or as many as five aircraft, from its domestic fleet from May in response to a continued forecast deterioration in domestic demand.

Virgin Blue spokeswoman Heather Jeffery said on Tuesday that it was too early to say whether any actual job losses would occur but involuntary redundancies would be an "absolute last resort".

Ms Jeffery said Virgin Blue would reduce its equivalent full time head count by as many as 400 positions because of the capacity reduction.

She said each aircraft taken out of service equated to 80 full time equivalent positions within the company.

"We are doing all we can to explore a range of initiatives to minimise the headcount reduction," Ms Jeffery said.

Redeployment possibilities within the group included transferring staff from Virgin Blue to the new international long-haul airline V Australia, part-time work, job sharing, and leave without pay.

"The aircraft will be managed as operational spares but will not be redeployed until next year," the airline said.

The latest cutbacks follow the paring back of schedules last year Virgin Blue, which is almost 25 per cent owned by UK billionaire Richard Branson.

The company, along with other airlines, was hit by high oil prices last year and there is now concern the global financial crisis will continue to dent demand for air travel.

Declining demand has also affected Qantas Airways Ltd, which said on Tuesday that low-cost offshoot Jetstar would replace the Flying Kangaroo throughout New Zealand's domestic market from June 10.

Qantas will also cut its Melbourne-Shanghai and Sydney-Beijing flights, but the Sydney-Shanghai service will be increased from five flights per week to seven from March 31.

On Monday, Singapore Airlines confirmed it would cut capacity by 11 per cent from April and decommission 17 planes.

Virgin Blue chairman Neil Chatfield said in November that 2008/09 would be "the most difficult Virgin Blue has yet experienced".

The company had 76 aircraft in its fleet on average during November, up almost 36 per cent from 58 aircraft for the same month in 2007.

Virgin Blue was forced to postpone the launch of its long-haul offshoot V Australia from December until February following strikes at Boeing's manufacturing plant in the US that delayed the delivery of 777-300 aircrafts.

Shares in the company inched one cent, or 3.92 per cent, lower to 24.5 cents.