Extreme Makeover: Virgin Blue Edition

Virgin Blue

Anyone been paying attention to things down under lately? Virgin Blue has a new boss, and he’s apparently bringing his Virgin Blue Makeoverprevious experience with Qantas with him. There are going to be a lot of changes in the next year, and those will all be aimed at targeting the business traveler. Virgin Blue is movin’ on up . . .

Lately, Virgin Blue has been under fire for having weak profits as demand softened and capacity continued to grow. (Attention US airlines: profit is what you get when you actually bring in more money than you spend. Yes, it’s possible.) New CEO John Borghetti has come in pledging to shake things up. In fact, it appears that his version of shaking things up is to move closer to Qantas, his former employer.

John had been with Qantas for ages, and he left after he lost in the race to replace the last Qantas CEO. What better way to say “I love you” than go to your company’s nemesis? Nice move.

So now at Virgin Blue, John is trying to bring some Qantas over and that’s something of a gamble. John confirmed that he will be bringing a business class product onboard instead of just a premium economy. New 737s that are on order will get the upgrade first, it seems. They will be focusing on the business traveler now, which is an extension of what had been cautiously started awhile ago.

Why are they doing this? Well, he thinks there’s money to be had. I thought it strange when he suggested, “we must reduce our reliance on [the leisure] segment if we are to reduce the earnings volatility that goes with it.” Throughout this recession, it has been business travel that has seen the greatest volatility. Maybe things are, um, upside down in Australia.

But he’s not ignoring the leisure market which has strong competition from Jetstar and a lot less strong competition from Tiger. It really does sound like he wants to be all things to all people. That’s a strategy that has rarely worked well.

We do know that he’s hoping to rally around the Virgin Blue name. Thanks to an agreement around the Virgin name, the airline isn’t allowed to use it outside of Australia. That’s why South Pacific and New Zealand flights fall under the Pacific Blue name while long haul flights are as V Australia. John seems to be hoping to find a way to use the one Virgin Blue brand and created a unified presence.

We also know that the airline is trying to cozy up with Air New Zealand for Trans-Tasman flying. This could be their effort to harmonize products between the two.

In the end, I find myself wondering how this strategy is going to work. I understand that with earnings suffering, you have to do something. (Take note, American.) I don’t know enough about the market to know if this is the right thing to do, but it is a big change and it does carry some risk that instead of serving one segment well, they’ll serve all segments poorly.

12 comments on “Extreme Makeover: Virgin Blue Edition

  1. This might work. Qantas has been cutting back QF mainline services on secondary (leisure) routes in favour of Jetstar. Some of those routes serve pretty affluent markets and there could be unmet demand for a premium product. If the rumours that Virgin Blue is considering joining Star or Skyteam are true, being able to offer a premium product within Australia might help seal a deal.

  2. A Deja Vu post – I could swear I read it before ;)

    Any idea why they aren’t allowed to use the Virgin name on international routes? Does Virgin America have similar restrictions? They can obviously use it on flights to Canada, but are they prevented from flying to other markets using that name?

    1. Yeah, I know. I made the mistake of publishing it a day early and then it got swept up in the email newsletter even after I pulled it down.

      Anyway, yes, it’s part of the brand license agreement. I believe the restriction for Virgin Blue was primarily due to Singapore Airlines (which owns a large chunk of Virgin Atlantic). Virgin America has restrictions in that it can only use the name within North America.

  3. I hardly think this is being all things to all people. There is really only one “full service” airline in Australia and Virgin Blue probably has some real opportunity available by providing some competition in the business class segment. Even Jetstar is providing a “business class” like product on its widebodies now.

    There is a tremendous amount of leisure travel in Australia (it’s not easy traveling via car or rail in that country) but it is seasonal (and out of sync with much of the rest of the world) and disposable income for such travel fluctuates more there than, say, in the United States.

    I can’t see any reason why they shouldn’t be able to compete in business class particularly between major cities given their very strong intra-Australian network. With V Australia and Pacific Blue and potential partnerships available to provide feed to a desired product, they should be able to fill seats at a good price frequently enough to earn a real profit.

    Further, while they are a LCC within Australia, the Virgin brand itself is known pretty well for having good products in both economy and business class. I don’t see it as disconnect, not entirely anyway.

  4. You have to be careful about the term ‘business class’ in Australia.

    Business class domestically is the same really as premium economy internationally – slightly wider looking seats (they broaden out the back, but the butt is about an inch wider only), 38″ pitch (compared to 50+ inches internationally), mildly better meal choices and no real difference in IF entertainment.

    The only difference is that they charge a hefty premium.

    I see Borghetti’s statement as code for ‘an ad campaign to convince people that there is a real difference in comfort that might justify the exhorbitant price difference.’ However, in the Oz experience that difference in comfort is illusory.

  5. Their domestic business is already very strong with good profits. What is dragging them down is their foray into the long haul international market with V Australia and domestic NZ market. A new CEO always talks down the business when they first come in. I suspect that they will reduce or move out of NZ with a codeshare agreement in place with ANZ and with a domestic business class ANZ will probably codeshare on to VB flights.
    Internationally they have a great product (worth trying) but woeful network planning. I suspect, and other analysts agree, that they may leave SYD – LAX to a codeshare with Delta and concentrate on BNE and/or MEL – USA where QF does not have a stranglehold. No-one wants to transit through SYD as it is worse than LAX. Coded flights PER – MEL – USA and/or ADL – BNE – USA (or of the like) would be a winner. And please look at other US gateways other than LAX! Connections with Virgin America through SFO would be infinitely better.

  6. I’m not sure if I’m remembering this correctly, but I think ANZ is pulling out the biz class seats on the trans-Tasman aircraft due to a lack of demand.

    1. Only A320s. The main trans-Tasman business routes from Auckland still have some 747, 777 and 767 flights with business class.

      A major challenge Virgin Blue faces in Australia chasing the higher end corporate market is that Qantas has tied up government and most major businesses with contracts.

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