A Yielding Appointment

Even if at the press conference announcing his appointment Borghetti was tight lipped about his intentions at Virgin Blue – he takes the reins in early May – his appointment is telling in signalling Virgin Blue’s future path, particularly the continued push for higher yields by focusing on business travellers.

Borghetti’s appointment seems to complete Virgin Blue’s transformation from low cost carrier to what outgoing CEO Brett Godfrey has dubbed a ‘New World Carrier’ – an airline with the low cost base of a traditional low cost carrier, but a product offering that appeals to more profitable business and corporate travellers, leaving the budget end of the market to Jetstar and Tiger.

The key, as Godfrey told AA in our interview with him late last year, is that: “I’ve said this a thousand times and no-one can convince me otherwise – when it comes to low cost carriers your loyalty is purely price . . .

whereas with us, we’ve got more guests who fly us from choice, and they will pay more for that. ” At Qantas Borghetti led a whole raft of product improvements, from new business class lounges at domestic airports and luxury first class lounges at international airports, and the CityFlyer product enhancements on domestic trunk routes, to the Marc Newson designed Skybed business class sleeper suites and A380 interiors.

With Virgin Blue already offering airport lounges, a frequent flyer program and premium economy seating, the airline has already moved away from its cheap and cheerful beginnings. Clearly, Borghetti’s appointment suggests the VB board intends to continue down that path – and why not, given the airline’s strong first half profit results? Borghetti’s appointment is also evidently aimed at giving the airline a more managerial, less entrepreneurial style of leadership after 10 often frantic years under the helm of Godfrey, the airline’s co-founder and author of its original business plan.

It sets up a fascinating time ahead, where Australia’s two major airlines are headed by two former colleagues. The Qantas board passed over Borghetti in preference to then Jetstar boss Alan Joyce to head Qantas after Geoff Dixon’s retirement.

Under Dixon the two were key members of the Qantas executive committee, where they reportedly had to ‘compete’ for capital and the ‘right’ for their part of the airline group to operate certain routes and capacity levels.

So with Borghetti Virgin Blue gets a leader who knows Qantas intimately – even if he will have been out of that airline for 12 months when he begins with VB – and one who knows his now rival CEO in Alan Joyce as well as anybody outside Coward St. And while Borghetti never worked directly on or for Jetstar, being a senior Qantas exec he would have a detailed understanding of how the star performer in the Qantas Group operates, its strengths and weaknesses.

Similarly though, Alan Joyce and other Qantas leaders know Borghetti, his style, his strengths and weaknesses, for now at least, better than anybody inside the ‘Virgin Village’.

It’s a point to ponder that the former head of the low cost Jetstar is now the head of the Qantas Group, while the former head of full-service Qantas mainline operations is now to head up the evolved low cost airline in VB.

So the continued evolution of the Australian airline market will be fascinating to watch – is Virgin Blue, and will it remain, in a sweetspot, without Qantas’s legacy cost structure but able to attract premium paying customers? Or will Qantas’s two brand strategy – Jetstar at the lower end, Qantas at the top, keep Virgin Blue trapped in a ‘pincer’, continuing to limit Virgin Blue’s domestic marketshare growth? But Virgin Blue can’t, and won’t ignore the low cost market segment, and can’t, and won’t lose its push to drive down costs, as Borghetti will inherit, and likely implement, Godfrey’s ‘Airline of the Future’ plans for a third, discount economy, class on its domestic fleet, with a tighter seat pitch and hence lower unit costs allowing lower fares.

For as Jetstar is so ably demonstrating (see our interview with Jetstar CEO Bruce Buchanan from p34 of this issue), efficient, well run low cost carriers can generate profit margins the envy of premium airlines. (But in turn Jetstar’s challenge, which its new customer service guarantee is a first step in starting to address, is its often poor reputation for customer service – where price is the same, Virgin Blue has the stronger brand loyalty. ) It is evident that both the Qantas and Virgin Blue groups agree that both segments of the market – low cost and business travellers – are critically important. It is just that they have different ends to justify the means.