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Virgin Blue declares war on the domestic market; global alliance in the wind?

1-Apr-2010
Virgin Blue CEO, Brett Godfrey
Virgin Blue CEO, Brett Godfrey

The 50 firm B737NG orders included in Virgin Blue’s announcement today is no increase on earlier provisional numbers. But the context of the statement and the provision for another 50+ options and purchase orders makes it clear that the airline has no plans to stand still. Rather than merely looking to hold its position in the market as Tiger intrudes further and the Qantas Group flexes its muscle, the carrier will use the orders to “ aggressively ensure market share is not eroded and…provide additional growth options.”

The first new aircraft are to be delivered next year. The full order, the largest Boeing order in the past 18 months, includes 50 firm B737-800NG aircraft (with flexibility to convert to either the smaller B737-700 or larger B737-900), 25 options and 30 future purchase rights. Delivery is scheduled from June 2011 through to 2017.

Not a time to stand still

In reality the airline does not have the option of standing still. It needs to consolidate its corporate position (the Federal government’s contract, worth some half a billion dollars annually, is still to be awarded), which is still languishing well below its overall market share; and it needs to expand its international relationships and network, in order to improve each-way feed with the domestic operations.

Essentially, having progressed through the path from genuine LCC, to “new world carrier” and now to a form of low cost network airline, Virgin Blue will be marginalised if it doesn’t expand. It has joined the big league and needs to have the power to compete effectively.

Foreign partners critical to further growth

The domestic portion of this equation is solely up to Virgin Blue to deliver; and, as it consolidates domestically, so its attractiveness to foreign partners increases. At present, Virgin Blue offers domestic connections to a range of airlines, whose only other domestic choice is to use Qantas, with whom they are generally in more intense competition internationally. So Virgin is a good alternative, as it broadens its in-flight and airport lounge appeal, along with frequent flyer programme and the other trappings of full service operation.

V Australia, the international arm of the group, is about to gain anti-trust immunity to operate on the Pacific as a unit with SkyTeam Alliance leader, Delta and a more expansive partnership, even including Virgin Blue’s participation in the Alliance, is undoubtedly being discussed.

Neither SkyTeam nor Star Alliance is effectively represented in the Australian market (although Air New Zealand, whose home market is increasingly being absorbed into a wider Australasian market, is a member of Star; Tiger is part owned by Star’s Singapore, but that allegiance is unlikely to flow through to an effective alliance feeder role in the near future).

So both global alliances have an interest in deeper relationships, placing Virgin in a useful negotiating position – with the further option of remaining neutral. The advantage to Virgin of a closer relationship with one or the other would however be the opportunity to drive better international deals with its alliance partner. So long as it is a small international operator and organic expansion is a costly and risky venture, alliance relationships are the ideal way to improve overall competitiveness.

This is where the group’s CEO-designate, John Borghetti, will have a key role to play. He knows the international players very well from his many years at Qantas and has a bent towards relationship building. Meanwhile, outgoing Brett Godfrey has dealt him a pretty useful hand to play with.


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