Virgin Australia CEO Q&A

Transcript

Peter Harbison:Where should we start? I mean, what's topical at the moment, Rob?

Rob Sharp:Well, topical—

Peter Harbison:Take us through it. I mean, I'll let you do it in your sequence rather than asking you questions.

Rob Sharp:I'm talking about, obviously, about Air New Zealand and Qantas and the Well, there's a number of themes that have been jumping out at IATA. We, as an airline group, and I think everyone's been speed dating, meeting with their opposites and chatting through codeshares and opportunities. Air New Zealand, we're in the middle of a divorce. In fact, it's an alliance that's come to an end. It's lapsed.

Peter Harbison:Mm-hmm. And Air New Zealand has certainly Just to be clear on that, so that agreement did expire unless it was renewed in October this year?

Rob Sharp:Correct, yes. So we would have to have applied to the competition authorities on both sides to continue that alliance, and the decision was made by New Zealand not to. Look, it's a situation that I think is going to create a very negative customer impact, particularly in New Zealand. When you look at it, you've got 2 major partners, 70% of the market across the trans-Tasman, that are effectively working together domestically. So that is an issue. It will flow across onto the trans-Tasman where we fly. So those 2 partners will codeshare on either end in their respective airlines.

Peter Harbison:But it doesn't include the trans-Tasman segment specifically, does it?

Rob Sharp:It doesn't include trans-Tasman, correct.

Peter Harbison:Can you separate them?

Rob Sharp:So on the middle line, there's a full codeshare on either end. So look, from our perspective, disappointed, Disappointing. However, you do need to have 2 players who are willing to work together in an alliance, and 2 to tango. So from our perspective, we'll be the challenger brand. We're certainly the 3rd airline there, and we'll be bringing a lot of competition. So we've announced a network shake-up, extra frequencies to the business market in Auckland, and also 2 new routes, Sydney to Wellington And Melbourne to Queenstown. We'll bring our full suite of products across the trans-Tasman, and we'll make some announcements about that in fares in coming weeks.

Peter Harbison:The full suite meaning both carriers?

Rob Sharp:Potentially. We've indicated that Tigerair, our low-cost carrier, could be part of that equation. But look, we'll announce the products. We'll be bringing business and obviously the economy part of the cabin. And in coming weeks we'll announce that proposition.

Peter Harbison:This sounds like good news for the traveller because already Air New Zealand has added capacity, or announced it's going to add capacity to the market, so you're going to add even more. This is a pretty tough market, isn't it, anyway, from an airline point of view? How's it going to go?

Rob Sharp:Yes, well, trans-Tasman's been a tough market for a number of years and there's been multiple alliances and the piece of the jigsaw puzzle of to move. This is just the next step in that process. Look, it's the number 2 tourist— source of tourists into Australia.

Peter Harbison:Mm-hmm.

Rob Sharp:And Australia is the number 1 source into New Zealand. So there's millions of people fly between the 2 countries. So it's a very important market, very important part of our network. So for us, if you look back at the alliance when we came together, we were very heavy in our hub in Brisbane. New Zealand— Air New Zealand had capacity in Sydney, and so the network proposition was well balanced. So obviously with the alliance coming to an end, a lot of the capacity moves that you saw were seasonal, and they relate to effectively each of us balancing the network so we're serving all of the cities.

Peter Harbison:Mm-hmm.

Rob Sharp:So for us, it is a prime offence facing headline increase in capacity. But there's been a lot of moves. Emirates have pulled off and reduced capacity. The Qantas Group has changed their mix. And Air New Zealand has also put some capacity into the market. So all up, if you look back a couple of years ago, the capacity is actually relatively flat.

Peter Harbison:OK. I mean, looking— always trying to look on the bright side of things— is this the big opportunity? Is this the opportunity for Tiger to blossom a little bit? I mean, it's been a bit subdued. I mean, you know all about it very well. Is this the opportunity for Tiger really to start to become almost a Jetstar competitor?

Rob Sharp:Well, Tiger is in the current focus is on actually a fleet renewal. So it's got some legacy A320 aircraft which go right back to its very early days when it was Singaporean owned. Those leases are coming to an end and it's moving across to a 737 platform. That's taking a lot of their focus at the moment because those new aircraft have been kitted out with new product. You're putting new systems and training in. So for the next little while, that will remain their focus.

Peter Harbison:Mm-hmm.

Rob Sharp:It's bringing a very competitive product for Tiger into the market with slimline seats, onboard Wi-Fi, quite a few products that you wouldn't expect a low-cost carrier to necessarily have, but it's serving the customer's demand in that space. We've indicated that it is an option for us to put Tiger across to the Tasman, but we haven't announced when. I don't think it's going to be immediately though.

Peter Harbison:No. I mean, Tiger's still suffering from its old reputation in a lot of ways. I mean, it's starting to wash out now. Is there a way you can actually have a quick Quick redemption for it. I mean, even a rebranding, I don't know if that's on the cards, but how do you get Tiger up to be regarded pretty well as Jetstar is, for example?

Rob Sharp:Yeah, look, there's— if you go back through history, when we acquired Tiger, the option was to rebrand, and the view was very strongly not to. For better or worse, it was very well known. It costs an awful lot of money to rebrand.

Peter Harbison:Right.

Rob Sharp:And in a small market, people would just say, oh yeah, that's the old Tiger. So you've really got to question whether that was worthwhile. And our view at the time, and still is, that we wouldn't be changing the brand. The really early days, there were 2 things that really impacted on it. One was the grounding of the airline back many years ago. And the other was that it had a reputation for being— cancelling your flights, poor on-time performance.

Peter Harbison:Overoptimistic, basically, in terms of operational capability. Yes.

Rob Sharp:So about 4 years ago, there was a huge effort put into rebaselining and putting in an operational stability and looking at what customers needed. So if you look at the customer base and you go back to what a low-cost carrier actually is, it's a price-sensitive market, but it's not just about price. And I think that was the missing link. The customer needed to be a key focus. So for Tiger, it was around a value proposition. So an analogy I give is backpackers have standards these days. So backpackers—

Peter Harbison:Since the cigar line.

Rob Sharp:—want the bar on the roof. They want someone to tidy up after themselves. And there's a change in the dynamic. And what we read was that it's actually a value for money proposition. So for Tiger, it's actually serving a purpose for the Virgin Group at that budget end, bringing competition to Jetstar. And the name of the game these days is to have business models that are really targeted at specific market segments. So we have a charter business, a regional business, a loyalty programme, a low-cost carrier— obviously Virgin Australia Airlines— focused on the premium end.

Peter Harbison:Mm.

Rob Sharp:What that allows you to do though is to mix your cost bases and the actual— and be very targeted in the customer and what you're delivering. So it's really a portion or a part of that suite of business models that we run here.

Peter Harbison:Right. So as you mentioned, you are rationalising your fleet to some extent. It was, I mean, frankly a mess before. How far down the track is that and where do you see it going? Is it just a matter of reducing the number of aircraft types? Would you go back into the narrow-body jets? The smaller jets?

Rob Sharp:Yeah, look, pleasingly, the, what we badge the fleet simplification program, is basically complete. So we're largely through it. A number of acquisitions as well as the mining boom in the west that came off. So I think all this—

Peter Harbison:Which had to be done quickly.

Rob Sharp:Needed to be done quickly. And once you do that, you're really looking at what routes have you got? Are those aircraft the right aircraft? And the view we came to was that We weren't having the utilisation on some of our major platforms. So the Airbus 330 fleet in particular and the 737s. So that's been a 2-year restructure. And it's allowed us to relook at our approach into regional areas. So we entered into an alliance with Alliance Airlines. And that's been very successful for us in the Queensland market.

Peter Harbison:Great little airline.

Rob Sharp:Yeah.

Peter Harbison:One of the things that I guess will be a little bit warming to your heart, I mean aside from fuel, is that we're seeing some pretty substantial price increases, particularly on the East Coast, fare increases. How do you see that progressing?

Rob Sharp:Well, pricing is driven by a large number of factors. One of the topics here has been fuel and when And will that pass through into fares? It's not an automatic equation. It depends on capacity in the market. It also depends on how competitive a particular route is. But look, it is certainly a factor. And for the industry here, that price increase that has taken place really reflects the fact that— and I'll call it rational, disciplined network management—

Peter Harbison:Mm-hmm.

Rob Sharp:We've been very focused on We're trying to optimise that demand-capacity equation.

Peter Harbison:Mm-hmm.

Rob Sharp:And what you're saying is that sweet spot in reality where if the capacity really does marry closely to the demand, everyone does well. So from our perspective, I think economy's picking up. We're certainly seeing the business market pick up.

Peter Harbison:That's allowing us to have that price increase on the capacity that's been held relatively flat for a So I mean, talking premium, you, under John, made a big push for the corporate market once Virgin went up into that new bracket. Qantas fought back, and so there's a bit of an equilibrium I guess now. But, and now Qantas is making no bones of the fact it's going strongly after the SME market, which is where you've been particularly strong, where Virgin Sort of tangential question to that. The— what impact will the Qantas Air New Zealand alliance have on that? I mean, presumably, I mean, they're both carrying a lot of premium stuff that they can switch to each other. Does that— is that going to hurt you?

Rob Sharp:Look, at the end of the day, you play to your strengths. We have, you know, 35-38% market share here. We do have a good, strong brand. strong foothold, a good client base there, customer base, and ultimately we'll leverage that. So we have 8.5 million members now in our Velocity loyalty program. So we also have a strength in that area. Obviously there'll be competition in that space, and for us, part of the suite that we're bringing is the Velocity program and what we might be able to do more in New Zealand. So our presence brand presence in New Zealand will certainly rise off the back of this change. And that'll be supported with marketing and the typical brand exercises you'd be familiar with. So for us, the base is the base that we already have. We have quite a strong domestic base and we'll play to that.

Peter Harbison:Did you get much corporate flow-on from Air New Zealand when you were partnering with— when you are partnering with them? Yeah, look, That you might lose?

Rob Sharp:We were both playing to our strengths. So they had a strong distribution and home market strength in New Zealand, and that's what we brought to the table here. So clearly, one of the areas that we will need to address is that New Zealand distribution side. Now, we have direct channel there, which does very well. And the corporate side, there's quite a large number of corporates that straddle Australia and New Zealand. So we'll play to those markets. strengths initially.

Peter Harbison:Would you ever— I mean, this is a long way down the tube, I guess— but would you ever contemplate going into the New Zealand market like Qantas has with Jetstar?

Rob Sharp:Well, certainly no immediate plans. I think it's a very tough market. You've got an incumbent there. At the moment, with no competition though, maybe we should.

Peter Harbison:Well, yeah, there you go. Let's stay on the topic of partners. You've got some fairly substantial shareholders, each in different sort of phases in their own existence. Etihad, Hainan, other pure investors, and obviously Singapore, which is probably best positioned to be a strong supporter for you. Is that the way you see the, the equity shareholders? And in this case, the equity shareholders are very much thinking in terms of partnership, aren't they? I mean, Etihad's buying access to the domestic market. Singapore has an array of reasons, but it really wants to be an Australian carrier as well. What are the dynamics of this going forward? I mean, lots of opportunities there.

Rob Sharp:Well, it's a challenging board.

Peter Harbison:Challenging's the word, isn't it?

Rob Sharp:You have a number of shareholders who actually run airlines in their own right, so they do invest. They see Australia as an important market, and we're an important player in the Australian market. So the relationship works. Our chairman does a wonderful job in terms of managing the folk at the table, but it is a large board.

Peter Harbison:Yeah.

Rob Sharp:And in fact, John's living the dream at the moment in terms of that structure. However, they're very supportive. We're very happy with the shareholders. They bring knowledge and expertise around their relevant areas. There's certainly synergies. Some of those have got direct alliances or codeshare arrangements arrangements, some don't. So for example, in the US, Delta has a JV with us, but they don't have an equity position.

Peter Harbison:No.

Rob Sharp:So it does vary. Each, each of those airlines are in quite different regions and are going through different parts of the cycle themselves. So it does bring an interesting dynamic, but by and large it's very positive for us. You mentioned Hainan Airlines, part of the HNA Group, so we've got 40% of our business owned by Chinese entities, Nashan and HNA Group. The Greater China strategy for us, it has been important to have those as key partners, and we announced 2 days ago a codeshare arrangement into China, direct flights from Australia. Hong Kong Airlines—

Peter Harbison:Congratulations, yeah.

Rob Sharp:We have 10 destinations, so we've now got 19 destinations where we leverage that relationship. So that's phase 1 of our Greater China strategy. China strategy. We're just launching Sydney-Hong Kong, so the Hong Kong hub and the direct point-to-point for us is very important.

Peter Harbison:Yeah, I mean, that's, that's where you probably, in terms of your competitiveness with Qantas outside Australia, is probably one of the strong points, potentially anyway. I mean, it depends obviously where HNA goes. The group's having a few struggles at the moment.

Rob Sharp:Our investment is largely domestic. That's our strength. But the reality is you have a large international feed that comes into Australia. You have to be in that space. The reality is aviation is global. You can't, you can't just sit in your, in your corner. So those relationships are important. They're very deep, and we're very fortunate to have, have that array of investors in the business.

Peter Harbison:Well, I'm talking as we were before about having a sort of mutuality of interest. The thing that you hold out for any of these partners is access to the market in Australia, and we're highly peripatetic Australians, aren't we? We're a pretty valuable crowd in a lot of ways. So you do have that, and you're not going to lose that ever.

Rob Sharp:No, and in fact, it's something we're investing heavily in. I would describe our strategy as consolidating here in Australia. We're not chasing market share. We're here to serve a customer base, and coming into the business, there were some of 3 areas that I thought we needed to sharpen our focus. There's sort of 3 pillars, if you like, of my current strategy. And the first one's just customer, customer experience.

Peter Harbison:Mm-hmm.

Rob Sharp:As soon as you take your eye off the customer in this moving industry, you've got a problem. So we've been investing heavily there, more recently in airports. So we've announced the Melbourne Airport, a brand new domestic terminal there, state of the art. A lot of new check-in automation coming through the airports. And yesterday we announced our live connectivity, broadband connectivity on the 777s to the US. So we're the first Australian carrier to have that on there. So you can no longer stay off-grid, which has its pros and cons.

Peter Harbison:Yeah.

Rob Sharp:However, customer experience is a really important part of it. Digital capability is the other. We all fly a metal tube, we all have seats on the aircraft, but at the end of the day, I think digital is going to be a very big differentiator. So we're focusing in there. In fact, we've got a skill set of members on the executive committee.

Peter Harbison:It'll be a big differentiator if you don't move ahead quickly, won't it? Because some airlines are, and some aren't.

Rob Sharp:Well, I think if you stand still, you're going to be out of the game. It's a very fast-moving space, and it's not just about the customer. It's about efficiencies and cost as well. So we're investing heavily in state-of-the-art crew management systems, things that actually drive efficiencies behind the business.

Peter Harbison:Yeah. Let's, um, you, you talked about the, the Velocity program. If you had your druthers, would you not have sold down— sold it down?

Rob Sharp:Velocity is a very important asset. Uh, the fact that we had a frequent flyer program and now have a loyalty program is in no short part to having that third party involved. So Affinity has brought what I'd call that hunger and drive and agitation that you would expect of an equity partner, and the business has grown immeasurably over the 3 years. So the portion that we still own is highly valuable. So no, it was the right decision. It's fast-tracked the evolution of that business. We're investing heavily in IT systems there, taking it from a frequent flyer program to a true loyalty business.

Peter Harbison:Right.

Rob Sharp:There's a couple of hundred partners Now we've got large numbers of people involved. Having the systems to enable engagement with those members is the key.

Peter Harbison:Because it's now pretty much the most profitable part of Qantas' business, isn't it? Its frequent flyer or loyalty programme, whichever you want to call it. Sometimes I don't feel all that loyal with any of the loyalty programmes around, and they seem to be more inclined to try and milk me for money. But anyway, that's another issue.

Rob Sharp:It's not just Qantas. One complaint that a lot of people have is, can they actually access the benefits? So if you're talking the cornerstone element of a loyalty program, which in the airline industry is the flights, we have the most access availability. So we tend to play to that advantage.

Peter Harbison:Mm-hmm.

Rob Sharp:But more and more, it's the other partnerships you have that develops the loyalty as well. So you don't just have to buy a flight ticket. Acquire your toaster or whatever else it is you want to buy through these programs.

Peter Harbison:Yeah. I mean, and that, that takes us into the whole area of data and, and knowing your customer. Having the equity partner in there, is that helping in that process? Qantas is obviously leveraging it with their non-equity partners in that area.

Rob Sharp:Look, in terms of data, we didn't have the capability, so we actually bought it in. We bought a company called Torque. So they're a data analytics business. It actually sits in the Velocity organization, although it's providing services across the group. But that was the primary focus initially, was to actually change that business from frequent flyer into a loyalty program. So Torque is bringing a bunch of technical nerds. It's really quite interesting how people get so excited about data. Never see It never ceases to amaze me. However, what is interesting is that the insights you get are amazing, and I think on the operational side as well, we're starting to see a lot more sensors in aircraft. There's huge amounts of data. You'll start to see artificial intelligence and other tools coming in to cut through that noise and all the data and give you insights, and that's really what it's about.

Peter Harbison:Any examples of that?

Rob Sharp:Yes, look, one of the insights we had was actually around our marketing. So if you've got 8.5 million people and you're sending emails, you're pretty much spamming them at the end of the day if they don't want that. So as we become focused on value propositions, how do I present you with something that you want? So we had a bit of fun. We sent an email out just looking at the top 1 or 2% of our flyers. Just went back through all the data, how many times they'd flown, where to, and we just sent a cute little email which pretty much just said, look, thanks for your 1,000th trip, and by the way, you're in the top 1%. So what transpired was we hung an offer off the back of that, and we had a 50% increase in sales. But the social media feedback we got was huge in terms of something that was relevant, generated interest, and so what we're looking at doing is cutting down on communications that really aren't that relevant and trying to be much smarter at tailoring that communication. So it was an interesting little vignette. For all of the 1% who were spotlighted as being in the top 1% started ringing John Borghetti saying, can I get into the, into the club? So it was quite humorous, but the value of it's quite enormous.

Peter Harbison:Yeah.

Rob Sharp:And there's a lot of other examples. We're using artificial intelligence, for example, in the loyalty program as well. So what it's doing is it's looking at how we target the marketing. So it's looking at font, colour, the topic, and looking at the demographics of the customer, and it's automating the style and type of marketing we're sending to an individual. And that's, that's also giving us a massive uplift. And literally, it's artificial intelligence that's developing the themes and the trends behind the scenes in how we're dispensing that marketing.

Peter Harbison:Yeah, it's interesting, isn't it? We all want to be loved, even if it's only by a machine. But machines seem to be better at loving us than airlines are.

Rob Sharp:Well, airlines are in the volume game, so you need technology and machines to manage that efficiently. What I've found though is if things go wrong, humans want a person to talk to. So the concept we have is more around concierge call centres that have people there that you can connect to. Ultimately though, disrupt management is where communication is critical. Everyone's on social media now, so you need to be able to communicate immediately to your customers, and you can't do that through having one person out at the airport at the gate, for example. So we've got a new app, Virgin Mobile app, which is about to have functionality around improved disrupt management communication. It's still driven by humans, and the message is from someone providing information on why a particular flight, for example, might be late or it's still sitting there when you're expecting to depart. But that communication is the key to it.

Peter Harbison:That's, I mean, that's an interesting area. I mean, that's from personal experience too. You have, you run this real risk of creating a So I've got your nice new app now and it's going to tell me when my flight's delayed, but actually I find out from somewhere else first and it takes another hour before your app can do it. That's the connect you've still got to make, haven't you? So you can actually feed in that external news.

Rob Sharp:So at the moment we've deployed iPads to our frontline staff, so if they're actually at the gate, our operational control centre can push a message straight to the gate in respect to a delay. So that time lag now is in minutes as opposed to hours. And the feedback we're getting from the frontline staff is that they feel that they actually have the information. And it's about information at the right time and communication. We've still got a way to go. However, these tools are actually really exciting because it is actually— everything's real-time these days. And that is a space we can work in.

Peter Harbison:Yeah. Good. Okay, well, um, I'll give you the opportunity to say anything nice about your group before you leave.

Rob Sharp:Anything specific that I forgot to talk about? Oh, look, it's exciting. I came into a business that's associated with the Virgin brand. Richard Branson is about to head off into outer space and with his Virgin Galactic, somewhat successful astronaut training. It's a very passionate business, so I'm enjoying that part of it. Aviation, I've been in it 20 20 years, and it's fast-paced. Everyone in it's passionate, and how could you not like it?

Peter Harbison:Yeah, exactly. I've had a bit of fun in it, I must say. Rob, thanks very much for joining us today and for being so candid.

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