Into blues skies?

In the past six months the airline has launched a host of new destinations at the rate of almost one a week both within Australia and internationally, garnering for the airline a swag of publicity.

The “expansion to new fields” mantra, which replaced the “frequency at all costs” policy, started last September, when Virgin Blue announced its first foray into Asia with 11 direct flights a week between Perth, Adelaide and Brisbane to Bali to be operated bringing the airline’s weekly international flights to New Zealand, South Pacific and Asia to 73.

As usual the Virgin Blue team thought up a great sale name and launched a “Gnarly Bali” sale fare of $199 from Perth and $299 from the other two capitals.

Next on the agenda was the airline long awaited foray into the WA resource market with double daily flights from Perth to Karratha and Perth to Newman on October 21 with “ore-some” fares for $9.

Spearheading that push was the introduction of the airline’s new Embraer jets which have proved popular with travelers says CEO Brett Godfrey.

A few days later Virgin Blue upped the number of flights to Nadi from Brisbane from 14 to 16 a week

Nadi has been a great success story for Virgin Blue (Pacific Blue) and since launching services to Fiji in September 2004 with three weekly flights from Brisbane the airline has increased tourist demand for flights from Australia to Fiji.

According to government figures Brisbane – Nadi market has grown by 82,198 passengers or 101% since Pacific Blue launched on the route till year ending June 2008. The Australian visitor arrivals into Fiji have grown by 38%.

On November 3 Virgin Blue’s first flight from Brisbane to Port Moresby, lifted off starting a four times weekly code-share service with Airlines PNG. The service was the sixth Pacific island destination for the airline.

And just a month later on December 2, Virgin Blue took off for a twice weekly Solomon Airlines service replacing Sky Air World.

Next phase of the broadening of Virgin Blue’s wings was announced on February 11 with daily flights on five new routes; Canberra – Hobart, Canberra – Townsville, Townsville-Gold Coast, Townsville – Rockhampton and Townsville – Cairns from April 6.

At the announcement Godfrey said that the new routes were “a result of the company’s strategic review in 2008 which highlighted an opportunity for the airline to redeploy aircraft from under–performing markets onto other routes.”

“Like all businesses, in these challenging times we need to keep our finger on the pulse and position our resources where they are most needed. The redeployment of some of our Embraer fleet to previously un-serviced routes is good news for these ports, in particular Townsville which has jagged four out of the five new services, because it means more convenient, regular and affordable direct air services which will provide plenty of choice for travelers.” Godfrey said

Again more opportunities flowed for publicity with fares such as Canberra – Hobart for $99 and Canberra – Townsville for $149.
In March Virgin Blue announced flights from Adelaide and Melbourne to Fiji from June effectively lifting its capacity into Fiji by 25%.
“Fiji Frenzy” fares started at $249 from Adelaide and $239 from Melbourne.

A few days later the airline announced Melbourne – Darwin and Perth – Darwin, with headline grabbing lead in fares.

The model that Virgin Blue has adopted is similar to that of AirAsia of just connecting the dots (existing destinations) wherever possible to keep down costs. And with Bali a new dot on the Virgin Blue map from December last year the airline announced Sydney Bali and Melbourne Bali services from June 1.

Godfrey was able to claim at the launch that that Virgin Blue’s entry into the market in December, that the airline had pushed Australia past Japan and Korea as the country bringing in the most tourists with 27,873 visitors.

But despite the flurry of new destinations and flagging the depth of the downturn Virgin Blue was forced to effectively grounded five 737s and cancelled 28 domestic daily flights in late March.

Virgin Blue did not withdraw from any destinations but consolidated flights where bookings are expected to be down.

Godfrey said at the announcement that reductions were prudent because of the deterioration in domestic demand.

“We have been very open with our team, outlining in a realistic manner the operating environment and what we have to do to keep our business sustainable during the economic downturn,” Godfrey said.

“We are encouraged by the attitude of people. While we started March with a challenge to reduce our operational fleet by five aircraft and therefore 400 positions, it is because of their flexibility and spirit of co-operation that we will likely manage through this phase with fewer redundancies than initially indicated,” he added.

However Godfrey warned that worse may be to come.

“All in our business appreciate that we must remain vigilant and continue to adjust to changing market conditions and if that means we must implement further austerity measures, we will do that in order to keep our business strong,” Godfrey told Australian Aviation.

Godfrey had warned earlier that the airline industry was in “an exceptionally challenging and historically unprecedented operating environment”.

He also told Australian Aviation that the airline wanted to raise fares from the unsustainable lows of January, which caused the number of people travelling to rise.

Passenger numbers jumped per cent in January but that was largely on the back of the lowest sustained fares ever seen in Australia. In the past 12 months fares have dropped 30 per cent.

According to the Bureau of Infrastructure, Transport and Regional Economics, 4.23 million passengers flew on Australian domestic airlines in January and the number of passengers for the previous 12 months broke the 50 million barrier — a rise of 6.4 per cent.

Clouding the outlook for Virgin Blue is the airline’s stock price which has plummeted in the past six months to lows of 15 cents. In mid-March however the shares started a slow rise as investors digested a stronger-than-expected 7.4 per cent increase in Virgin Blue’s January passenger numbers.

At the time Peter Harbison, chief executive of the Centre for Asia-Pacific Aviation, tipped continued volatility in the stock as “long as the uncomfortable position with its (Virgin Blue’s) ownership remains unresolved”. “Virgin Blue’s problems are not in the travel marketplace, but on its share register,” Mr Harbison said.

Sir Richard Branson’s Virgin Group retains a 25.5 per cent stake in the airline, enough to block any other interested party taking control of the carrier.

In February, Sir Richard told Australian Aviation he had no intention of selling out, although his reluctance probably has more to do with Virgin Blue’s low share price.

That low price is reflective of Virgin Blue’s $101.4 million first-half loss, which in a headline sense does not compare well with the $113.3 million for the same period in the previous year.

Drill down however and the loss is made up – like so many in the industry – almost entirely to hedge losses related to last year’s wildly fluctuating fuel prices plus a non-recurring charge of $60 million related to start-up costs of its new international airline V Australia.

The loss came despite a 13.2 per cent increase in passengers and revenue was up 11.5 per cent to $1.35 billion.

Godfrey was upbeat and told Australian Aviation that the “underlying business is robust with a $60 million operating profit and we have identified savings of $90 million and expect Virgin Blue itself to break even this year.”

He also announced a salary cut of 30 per cent for executives, a hiring freeze and a 10 per cent cut for board members.

Godfrey emphasized that Virgin Blue had cleared its books, faced no refinancing obligations or covenant issues over its existing facilities and that its fleet of six Boeing 777s for V Australia were financed.

He added that the airline was cashed up with “reserves of over $500 million” and had identified $150 million in possible asset sales.

Some of those assets were in fact four 737s that were sold to BOC Aviation which were sold and leased back over 10 years. The deal involved one 737 in the fleet and three yet to be delivered this year.

Godfrey used the deal to sell the strength of the airline saying that “financing of these aircraft amidst the challenging economic environment is an affirmation of Virgin Blue’s strong reputation in the market. We look forward to a long-lasting business relationship with BOC Aviation.”

BOC Aviation is the leading Asia-based aircraft leasing company with a portfolio of 104 aircraft. The company also has 70 aircraft on order for delivery through to 2013. BOC Aviation is owned by Bank of China.

Virgin Blue and other airlines also expect a big boost to traffic if Australian and New Zealand authorities agree to scrap the time-consuming and costly Customs checks for flights between the two countries.

Flights across the Tasman would be reclassified as domestic with passengers either partially clearing Customs before boarding via automated border processing smartgates or having no Customs checks whatsoever, thus eliminating up to $100 in charges on a return fare.

The streamlining of flights could lead to the proliferation of new non-stop services suggests Godfrey.

Customs officials from both countries have been in talks for more than 18 months but the sticking point, now resolved, had been Australian Customs Service concerns that New Zealand’s screening was not as robust as Australia’s.

Godfrey said that removal of the Australia passenger service charge of $48.42 on one-way fares would be a great boost to trans-Tasman travel.

Another big plus for Virgin Blue is the global tie up with Virgin Atlantic and Virgin America through V Australia.

In February Sir Richard Branson told Australian Aviation that the airline group will be announcing round-the-world fares that link all our airlines including Virgin America.

“We will be offering some of the best deals ever seen. Consumers will never have had it so good. But they need it to be good, as life is tough out there,” Sir Richard said.

Godfrey also promised travellers seamless service. “You can go to the Internet and book Perth to Anchorage with Virgin Blue, V Australia and Alaska Airlines. We have signed up with Alaskan and Northwest Airlines. Of course, the most important will be our round-the-world fare with the Virgin Group airlines,” Godfrey said at the time.

The global link will be complete when V Australia starts its operations to South African in November this year.

Sir Richard also sees Virgin Atlantic’s corporate accounts a big plus for both V Australian and Virgin Blue.

“One of the advantages that Qantas has had over Virgin Blue is its long-haul network. Now Virgin Blue can compete and get some of the corporate accounts to come across from Qantas. Business wants to fly to the US, China, the UK and South Africa. With V Australia and Virgin Atlantic we can offer a range of long-haul options and level the playing field.

“We have spent 25 years building up the brand and a fantastic reputation and are the preferred airline for many companies on the West Coast [of the US] and V will just tag into those deals. The Virgin brand is widespread in the US with Virgin mega stores and Virgin Mobile,” Branson said.

Godfrey said that Virgin Blue and V Australia will be tapping into those accounts and brand recognition wherever it can.

“Johannesburg is a huge Virgin market and we will get a free kick. We are also going to pick up business from travellers who have been taken for a ride on the Pacific and that will flow through to Virgin Blue.”

Virgin Blue had a big win in March with Delta Airlines getting on board the code share between Virgin Blue and its merger partner Northwest Airlines. The deal is far reaching and not only involves code-sharing on each others trans-Pacific flights but also within the US and Australia.

Regardless of share market sentiment, which is fickle at the best of times, the fundamentals at Virgin Blue and the wider Virgin Group are strong. Excellent brand, great product, superb staff and enlightened management.