Virgin Blue’s new CEO talks about his Virtual Network strategy, attracting the corporate market and the powerful brand he inherited.
This piece is taken from the Nov-2010 edition of Airline Leader. Click here to view and subscribe to the full publication.
John Borghetti has undergone a baptism of fire in his first few weeks at the head of Virgin Blue. Almost before he took the reins he had been forced to downgrade the year’s financial projections – with only a month left to run of the financial year. Then, after quickly setting in place a new route strategy and hoping to achieve a raft of cooperation agreements, the wheels started to go decidedly wobbly.
First, the US Department of Transportation (DoT) tentatively rejected Virgin Blue’s V Australia partnership agreement with Delta on Pacific and US routes; this was quickly followed by a similarly tentative, but even more questionable, rejection by Australia’s competition body, the ACCC, of a proposed codeshare and mini-partnership with Air New Zealand on Australia-New Zealand routes.
Each of these decisions is being challenged (and may turn out positively for Virgin Blue), but they were unexpected setbacks that slowed the renewal process. But the real pain came in Sep-2010 with a lengthy outage of the airline’s reservations system, disrupting operations for days and leaving thousands of passengers stranded at airports. The damage was much greater than any dollar cost of loss of revenue. It came just as Mr Borghetti was ramping up the airline’s credentials to attract a larger share of the corporate market and this was just what he didn’t need. His old employer Qantas thoughtfully intervened to remind travellers of its reliability and on-time performance.
As the low-cost operators migrate towards full service operation and Virgin Blue metamorphoses through the stage of “New World Carrier” to becoming a full fledged business operator, they are confronted by the enormously complex task of migrating IT platforms. This means moving from a stripped down, no frills point-to point reservation system to something more versatile that can deliver functionality equivalent to the more expensive and comprehensive legacy airline systems – but without all the cost.
This is not a well-trodden path yet and problems occur. In the US, JetBlue made the leap to using a modified GDS system with Sabre; Virgin Blue has chosen to go with an upgraded Navitaire system, “New Skies”. When the service went down and back-up mechanisms failed on 26-Sep-2010, the very credibility of the LCC as a reborn full service operator was cast into doubt – at least temporarily. Fortunately people forget, provided normal service is resumed. There won’t be too many more chances.
Mr Borghetti’s biggest ace, however was to do a deal with UAE-based Etihad, aimed at making his airline an instant virtual operator, one-stop to a host of European cities through a comprehensive codeshare. And Etihad gets to feed its international services through Virgin Blue’s domestic connections. It is unlikely that competition regulators will knock this back, even in light of the legacy airlines’ recent backlash against the Gulf carriers’ expansion.
You inherited a three aircraft-type airline with a number of unprofitable routes. What is your big picture network strategy for the future?
The first thing was to stop the bloodletting in domestic New Zealand, where we lost over AUD30 million in two years. That has to be some sort of record with two B737s. Then, to be operating a three class widebody (B777) service to leisure markets like Fiji and Phuket (Thailand) has to be a no-no; we killed that. And the route to South Africa – well, the two airlines on the route, Qantas and South African Airways – have competition authority approval to collude to fix prices and frequency. We would never be able to compete against that. So that had to go too.
So the design here was to get out of routes which are not complementary. The previous network strategy was, I think, driven more by point-to-point thinking. That involves "if you have an aircraft, get maximum utilisation". My approach is to look at the route and see if it contributes to the system. If it doesn't contribute, don't fly it. I don't know anyone who has gone broke flying too little capacity – but there are plenty who have for flying too much.
And it's vital to have the right aircraft on the right routes if we are to exploit our competitive advantages in the group's three core businesses: domestic short haul, international medium haul and international long haul.
Can you elaborate on the virtual network model and how you see it evolving?
I want to create a virtual network, with the minimum number of hubs possible. Take the message from the way the US airlines worked domestically. My direction is to feed the hub. Don't spoke it, get someone else to do that.
From where we are, we need to go virtual. It has almost no downside – apart from not having to worry about lease costs and raising funds! Certainly, you don't own the customer this way,but then nobody does today; I genuinely don't see any negatives if you pick the right partner.
And we don't have much time. I would rather do something and get it wrong than not take the opportunity. I want to be ready for when things improve, to be able to capitalise on the upswing. We have about six to 12 months to get our ducks in a row. From my experience it takes most airlines about two to two-and-a-half years to achieve what I want, but I am confident we can do it in less than 12 months. And anyway there's not much to get wrong, it is such a compelling case.
This deal with Etihad (and possibly with Delta and Air New Zealand – each still pending) makes us suddenly relevant. We could never have done it otherwise. It puts us in a totally different ballpark. With Etihad, we get one-stop access to major European cities as well as to real opportunities like Moscow and Beirut, and in fact to almost anywhere in the world.
And that all morphs into the frequent flyer programme and your corporate market strategy too?
Yes, the reciprocal FFPs are a huge issue for Virgin Blue. We certainly need to increase our corporate strength. Currently we are sitting on about 10% of our business. I want to increase that to 20%, something that will take up to two years. Otherwise we are left competing for a leisure market against two airlines that each have lower costs than ours. Even with some yield margin and network advantage, that would be a struggle.
With a relevant international capability, the FFP becomes a value proposition. What we have now is a redemption programme. It makes no distinction between passengers and it is a fact that not all animals are equal. Recognition – of the greater commercial value of some passengers – is a major part of that equation. We'll be able to do that from November onwards. (The third plank of the FFP as a revenue earner is to attract third-party partners, but that is more to capture value from the infrequent flyers. That is a longer- term goal. We need the first two first.)
The other parts of the corporate challenge are product – meaning what can you tweak? – and ... branding.
So let's talk about branding. It is a complicated one. You have four brands in the Group, with Pacific Blue, Polynesian Blue, V Australia – a lot for a little airline. And then there are the Branson and Singapore Airlines factors restricting where the Virgin name can be used.
Well first of all I don't think it is vital to have the Virgin name internationally. That said, it is a very powerful brand with benefits we have underplayed domestically. There is massive upside in this market and you will see us invest a lot more in the brand, with the logo and the positioning. It's a brand that people would kill for. We have just taken on a new agency (Clemenger BBDO) and we'll have a brand new style – adding a bit, but not losing the attitude. That's important for our staff too. It will be in place certainly this financial year (to 30-Jun-2011).
I think it's important to refresh the image and 10 years is a good time to do it. There is an emotional part to travel. Sure it's all about price, but it is the repeat business that the brand tries to engender which does go a bit beyond the pure price level. That's where we need to be.
(The bottom line is) I thought there were opportunities before I came here – but nothing like as many as there are.
All Mr Borghetti has to do now is convert them. Recent weeks have shown it won't all be a cakewalk. But the direction has to be compelling.
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