insideStory

insideStory

THE NEW BLUE

By John Borghett, chief executive, Virgin Blue HEN I left the airline business last year, I had had enough. If you had asked me if I had any intention of going back to the aviation industry, I would have said You have got to be kidding! Whilst aviation opportunities kept presenting themselves, I was not particularly interested. But then I was approached by Virgin Blue in their search for a new CEO. I could not help but feel excited. I had watched Virgin Blue as a competitor and had seen it grow from a start-up airline to a strong competitor in the leisure sector. It has about 30 per cent market share, more than 80 planes, more than 6000 staff and is in a strong financial position. Most of all, it has a great brand with huge loyalty from its customer base and its staff. And Virgin Blue did something that I dont think any other airline in the world can claim. It created such concern and competition for this countrys largest carrier, that it forced it to launch its own low cost carrier in response something that traditional carriers have been loath to do. I decided that although this might be the worst time in aviation (or one of them), this was an opportunity that I just could not pass up! So I accepted the role and even after the last couple of weeks, still feel excited when I wake up each morning. We have a lot to do but we are going to come out as an even stronger competitor in more than just one market segment. I want to dispel one particular myth that has arisen in the wake of the earnings downgrade announced just over a week ago. I think its important to dismiss the idea that this is a clearing of the decks to make my life easier as CEO. That is not the case. It is not about writing down assets to the bottom line The downgrade was about a revenue issue driven by the combination of weaker than expected demand and
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Virgin Blues new boss tells how he plans to attack Qantas corporate market dominance
substantial increases in capacity. It is now about what we do and which levers we pull to regain altitude. And I want to assure you that I am very focused on making those adjustments. I have never for a day run anything on auto pilot and that is certainly the case moving forward. So what is our constructive response to the situation and how will we position ourselves for the upturn? I have spent the past few months studying the business from the sidelines and am now in the position to implement a number of initiatives some short-term, and others more long-term in their impact. But importantly, it is the continuation of the evolution of the Virgin Blue group. And this is where I dispel the second myth - that Virgin Blue is walking away from the leisure market. Nothing could be further from the truth.

sector while increasing our share of the corporate and government market. Because, you see, we have a very nimble business model and we can walk and chew gum at the same time. We will do this by ensuring the customer experience is tailored to what the leisure market and the corporate market want, both in the air

Zealand. Both are extremely important to us. With Delta, V Australia is waiting for US government approval for a tie-up on trans-Pacific routes. At the Australian end, we have already received ACCC sign-off. We expect to hear from the US authorities by the end of August. With Air New Zealand, we have filed

I dispel the myth that Virgin Blue is walking away from the leisure market. Nothing could be further from the truth. However, we must reduce our reliance on this segment We aim to preserve our leisure market share while increasing our share of the corporate and government markets.
and on the ground. So, expect to find a great experience at extraordinary value at both the front and the back of the plane. Qantas has had a virtual monopoly at the high yield end of the market and we want some of it and of course no one knows better than Virgin how to really shake things up. In fact since stating that we will be going after the corporate market, we have seen Qantas change its direction again and refocus on business travellers after publicly stating only 12 months ago that the business market would never return as strongly after the GFC and it would reconfigure aircraft at a cost of hundreds of millions of dollars. Therefore, without even taking our first step, we have already caused our competitors to react. The strategy for the new Blue is currently being finalised and you will see the results of this over the next 1218 months. While global alliances like Star, oneworld and SkyTeam account for a considerable amount of the worlds network capacity, Virgin Blues preferred strategy is to form one-to-one alliances to achieve similar objectives. However our mind is not closed to other options. In many of the markets that we cannot operate economically by ourselves, we will continue to partner with other airlines to build a virtual network. This makes good economic sense. We have two alliances in the works one with Delta and one with Air New applications with the ACCC and the New Zealand Ministry of Transport for a trans-Tasman tie-up. This trans-Tasman deal is a very different proposition from previous prop osals from other carriers. It will create a second integrated Australasian network giving consumers greater choice and flexibility. Independent economic modelling shows that our networks are so complementary that the combination of the two will stimulate significant new traffic which will in turn support increased frequencies and potentially new direct route offerings. We also expect our improved product offering to stimulate further innovation and airfare competition on the Tasman. The Qantas /Air New Zealand alliance (proposed in the past but rejected by regulators) involved a tie-up of the two largest carriers on the route, accounting for a combined market share of over 80 per cent. Whats more, the rationale for that alliance was to reduce capacity. We are not proposing any reduction to capacity. We will have an incentive to increase rather than reduce capacity. The consumers are the big winners here. Let me now talk a little bit about the Virgin global brand. In order to better understand the past 10 years, and indeed the next 10, you need look no further than the Virgin brands DNA. Because, you see, in our pursuit of the corporate traveller, we are displaying that very

I want to dispel the myth that the earnings downgrade is a clearing of the decks to make my life easier as CEO. That is not the case. It is not about writing down assets to the bottom line.
It is true that I have been very public about the fact that we are doing a full review of our network and I will not shy away from making adjustments to capacity in markets where we cannot make a satisfactory return. Equally, I have no intention of handing over key markets to our competitors. Nor will we take our focus off our cost base which is a source of competitive advantage. The leisure market is, and will continue to be, a core segment where we will continue to focus and bring true competition. However, we must reduce our reliance on this segment if we are to reduce the earnings volatility that goes with it. Over the next two years, we aim to preserve our market share in the leisure

DNA that shakes up cosy markets. In the airline sector, the Virgin Group has made a big impact. From the moment that Richard Branson entered into the airline business, he challenged his management teams around the world to always make sure they thought about the business from the customer perspective. These successes of the Virgin businesses havent been about buying business or copying others, but about being innovative and creative in delivering value for todays market, and this is how we will go about breaking that monopoly on the corporate and government business in Australia. But I repeat, that doesnt mean well let go of our hold on the leisure market. Virgin Blues LCC roots have not been forgotten or neglected. We are looking at how we can best link our international operations to help strengthen our domestic business and we will improve our knowledge of our customers and their needs through a recent $10 million investment in our reservation system. The number one weapon we have is our people. The thing I love the most is that so many of them not only love what they do but are ready to take the next step in the evolution of the airline. I am very optimistic about Virgin Blues future on two fronts: the resilient Australian economy with its strong relationship to domestic air travel AND our own strengths that enable us to take advantage of that resilience. Australia side-stepped the recession experienced by most other countries during the GFC. As a recent Moodys report on the Australian airport sector points out, expectations of improving economic conditions in Australia, Asia and globally will support sustained and steady traffic growth of up to five per cent over the next few years. Despite the GFC, last year passenger numbers across Australias airports grew by about 1.6 per cent. That said, prices at the moment are about as low as they have ever been so my advice to anyone would be to buy them while they last. Virgin Blues model is more valid in Australia now than it has ever been. But it is not about pushing a standardised solution, rather one that is derived from a deeper understanding of customer needs.

Our push into the corporate market is aimed at providing us with more resilient higher margin business travellers Business Class will no longer be the exclusive province of Qantas. We are creating an airline that works in this new world where cost is as crucial for the business market as it is for the leisure market. Although we expect the going will be tough for the next 12 months, given fragile consumer confidence and forecast capacity growth in the market, Virgin Blue has the capability to ride through current market volatility and to emerge even better positioned than before.

Since stating that we will be going after the corporate market, we have seen Qantas change its direction and refocus on business travellers. Without even taking our rst step, we have caused our competitors to react.
We have a strong balance sheet with a very significant cash balance of around $800 million. We have no refinancing obligations and all our debt is secured against aircraft and is covenant free. In short, we are in a very strong position. We must now lift our game and address the needs of travellers to capture the updraft from the recovery when it comes. We have certainly signalled our general intent in this area and over the next 12 months or so, you will see us reposition our brand. We are about to start a pitch process to review and select an advertising agency to help us. Im not going to be any more specific than that, other than to say watch this space for a new Virgin Blue to take shape in 2011. *This is an abridged version of a speech given by Virgin Blue chief executive John Borghetti to the 2010 Annual Stockbrokers Conference in Melbourne earlier this month.
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