Virgin Australia outperforms Qantas

Photo: Facebook

Photo: Facebook

Virgin Australia’s statement on its half-year result (Jul-Dec 2013) issued soon after Qantas posted a dismal half-year performance could irk Qantas chief Alan Joyce, as if Virgin CEO John Borghetti was rubbing salt into an open wound. It was definitely not intended that way, but the way that performance reports go, Virgin’s statement is as much about Virgin as it is about its major competitor, which is not mentioned by name.

Qantas posted a loss of A$252 million (US$225 million) (See Qantas’ dismal performance: The singer or the song? Mar 3, 2014). Virgin too posted a loss of A$83.7 million after tax. But while while Qantas lamented a deepening loss from a loss of A$91.million of the previous year, Virgin was quick to point out that it outperformed its rival on the key measures of growth in Total Group Revenue, Domestic Yield, International Yield and Group Revenues Load Factor. What matters is that Qantas did worse but Virgin did better. Mr Borghetti said that despite the tough economic conditions that affected the industry and the increased capacity that impacted the Australian domestic market, Virgin continued to improve its proportion of domestic revenue from the corporate and government segment. He added: “We remain on track with our consistent strategy and have delivered on all the first-half targets.” So it looked like Virgin’s five-year Game Change Program is working, while doubts have already begun to cloud Qantas’ five-year transformation plan.

The mood was different in both camps. Mr Joyce reiterated an old call: “We must change.” He announced plans to cut 5,000 jobs as one way to reduce costs by A$2 billion in three years. Mr Borghetti paid tribute to his staff, but added: “We have also identified several additional cost saving initiatives over and above this program, to be implemented over the next three years.” If there was any subtle difference in the approach of both men at the helm, it would appear that for one of them the strategy was not working as expected and for the other, it would continue to build upon its successes.

During the first half of the current financial year, Virgin focused on consolidating its position as an effective competitor in all key market segments while not expecting the full impact of the initiatives that it had introduced. The result was capacity growth of 1.4% and an increase in total group revenue of 5.6%. On-time performance (OTP) improved, with Virgin outperforming Qantas in the month of Jan 2014. The pride of Virgin during the review period must be that of winning the accolade of Domestic Business Travel Airline of the Year for 2013 for the first time. So much it was for Qantas claiming to be the preferred choice of Australians because of its domination of the domestic market, raising the question as to whether the preference is slowly shifting.

An interesting development is the improved operating performance of Tigerair Australia since Virgin acquired a 60%-stake in the ailing budget carrier. Tigerair’s aircraft utilization improved 12.7%. Load factor went up 4.7 points to 88.0% through maintaining a low cost base and delivering improvements to OTP, which achieved 80.4% in Dec 2013. It seemed Virgin was able to do whatever Tigerair and erstwhile majority shareholder Singapore Airlines (SIA) could not do. Mr Borghetti said: “The goal is to ensure Tigerair Australia remains an effective and sustainable competitor in Australia’s budget travel market segment.” The carrier is launching a base in Brisbane to address what Mr Borghetti thought is an underserved market. Perhaps Jetstar might now heed the challenge, especially after the group has posted its first loss.

Already observers are criticizing Mr Joyce for the lack of directions in the months to follow. But for Virgin, Mr Borghetti said the airline would focus on optimising the business for consistent and sustainable performance through “accelerating efficiency and productivity initiatives” and through “leveraging the scale of our alliance partners.” He really got Mr Joyce’s goat there, particularly when Mr Borghetti reported a positive cash flow and his rival would be quick to point out the unfair support provided by investments of foreign partners, long time a sore point and the contention that the restriction imposed on Qantas on foreign ownership has disadvantaged the flag carrier.

Virgin may turn out to the turtle in the race. While it is ambitious to spread its wings internationally, its strategy of first consolidating its home strengths and expanding its network through codeshare partners such as Air New Zealand, Etihad Airways, SIA and Delta Air Lines is probably a wise move, particularly in the context of present times when the airline industry is still on the mend.

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About David Leo
David Leo has more than 30 years of aviation experience, having served in senior management in one of the world's best airlines and airports. He continues to maintain a keen interest in the business, writes freelance and provides consultancy services in the field.

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