Face off

For not only do we have airlines making radical adaptations to change and competitive threats, their CEOs, one time colleagues at Qantas under Geoff Dixon, are also changing their colours faster than a chameleon under attack.

In the red and orange corner is Qantas CEO Alan Joyce who etched a place in history as the – only – man who did the impossible of building a successful LCC (in Jetstar) under the umbrella of a full service legacy airline, and now finds himself defending the virtues of Qantas, its business class product and all the trappings of a legacy airline.

And in the red and blue corner new Virgin Blue CEO John Borghetti, who when at Qantas developed unquestionably the world’s best domestic class product, and is now singing the praises of the ‘lower cost’ model of Virgin Blue.

But in both cases there is a significant twist. For Joyce it’s full service with a much leaner edge, and for Borghetti it’s lower cost with class – business class.

At stake are the high yield passengers who are returning to the air in droves. For Virgin every one per cent increase in its corporate market share is a one per cent lift in yield, according to Borghetti. And Borghetti is not unrealistic, he just wants to lift Virgin’s share from an almost meaningless five per cent to a very noticeable – not to mention valuable – 20 per cent.

But Qantas is hardly going to give up that 15 or so per cent lightly. In fact it doesn’t want to lose even 0. 0015 per cent, and its passengers are going to take considerable convincing to move to VB.

Working for Qantas are its lounges, frequent flyer program with seven million plusmembers, and on longer hauls its huge fleet of A330s and 767s which are favourites with business for comfort and the number of premium seats that make FF upgrades a ‘reasonable’ reality.

And in a pre-emptive move this year, Qantas went back to Boeing to bring forward deliveries of eight 787-8s for its Jetstar fleet so that the larger A330s could be moved back to Qantas’s domestic operations, allowing for the retirement of, or return from lease, of the older 767s.

On the lucrative transcontinental flights to resource rich WA, Qantas operates eight daily return widebody flights from Sydney to Perth and seven daily return Melbourne to Perth flights, and is dedicating its latest A330s with state-of-the-art IFE to these routes.

One way pricing on Qantas’s Perth to Sydney route starts at $255 for a Red e-Deal, to $1329 for a business class seat on off peak flights to $1761 on the more popular flights. On the same September day surveyed, Virgin’s lead-in fare was its GO Fare at $175, while premium economy was $949.

Interestingly, while Qantas has enjoyed a monopoly on business class since Ansett crashed in September 2001, the fare charged has remained largely static with the government airfare index only increasing marginally.

Joyce is as adamant about the premium product as he is a born again convert to comfort. For those who were concerned about the dilution of Qantas’s domestic premium product or indeed any further erosion of the Qantas route structure, Joyce has a simple message. “It will not happen,” he told Australian Aviation.

Jetstar started operating head-to-head with Qantas some years ago on key routes, with the entry of Tiger Airways into the market having few ill effects on the mainline carrier. So much so that plans call for Qantas to re-enter some routes abandoned to Jetstar while Jetstar will move onto more of Qantas’s routes.

In an interview with The Australian, Jetstar CEO Bruce Buchanan said the move would reflect the group’s confidence that it achieved the best results by deploying both brands on key sectors.

“You may see some announcements where they come on to markets that we are on, and likewise you will see growthof ours on them and we are constantly looking at ways to optimise the markets,” Buchanan said.

“We get the best outcome as a group when we deploy both brands on a market.

Both brands are massively complementary.

The overlap we have between customers is very small. ” The two airlines now ‘compete’ on 30 routes across the Qantas Group’s domestic and international network, and the group has the flexibility to scale up domestic capacity by up to 15 per cent this financial year.

Plans call for 120 additional weekly return flights from Jetstar, with 65 additional weekly return flights from Qantas.

Qantas has already returned to Hamilton Island in the Whitsundays, while both airlines have been adding capacity on the Brisbane-Cairns route.

And Joyce also backs up the commitment to Qantas with major investments in terminals and an ongoing $40 million investment in upgrading lounges which are simply the world’s best domestic lounges with unlimited free drinks, something unheard of in the US.

But what is also unheard of is turning a low cost champion – Virgin Blue – into a full service carrier, a feat that will certainly establish a new paradigm for the airline industry.

The mission for Borghetti is as daunting as it is exciting after being overlooked for the top job at Qantas because the board, at the time, felt the airline needed a lower cost focus, opting for Joyce.

Borghetti’s plan is simple and is built around using Virgin Blue’s lower cost structure melded with a new business class to attack Qantas’s higher cost base. The airline will unveil a new business class offering late this year or early next year to be introduced on the airline’s new fleet of 737s with the widebody look interior. Adding some beef to the offering will be an initial two leased A330-200s for transcontinental routes to enter service in May.

Virgin’s premium economy has been a failure because it didn’t deliver any meaningful difference from the rest of the aircraft with no cabin divider. There is no question passengers want separation and the new product must deliver that or it will surely fail.

While details of the $30 million business class upgrade are a well guarded secret, Air New Zealand CEO Rob Fyfe told Australian Aviation that the airline, which has entered into an alliance with Virgin Blue, had been briefed on the revamp and was happy with what it saw.

But it may be many months or even years before Borghetti can get real traction with a business class product when the time taken to reconfigure the fleet is factored in.

And while there is almost never a good time to do anything in the airline industry, now is not a good time to be preaching lower cost – and thus probably lower offering – travel to corporate Australia as the economy is on the upswing and business confidence soaring.

Another part of the rejuvenation of Virgin Blue is the restructure of its network and its global focus. Borghetti has acted swiftly to give the tick to installed winning strategies, axe losers and nail down potential winners.

Gone is the loss making Pacific Blue New Zealand domestic network and 777‑300ER V Australia services to South Africa, Phuket and Fiji, and in comes alliances with Air New Zealand and Etihad along with a new service to Abu Dhabi.

Analysts such as the founder of the Centre for Asia Pacific Aviation, Peter Harbison, give these all a big tick.

On the Etihad deal Harbison said: “Now Borghetti is in a position to compete, with a partner that turned over $3 billion last year, which has a fleet with an average age of less than three years, and one that will deliver him valuable domestic traffic – traffic that was previously going to Qantas.

That domestic feed and the new international revenue could deliver Virgin Blue up to $40 million in additional revenues, with the domestic feed alone said to be worth up to $10 million – much of which should flow through to the bottom line. ” Harbison suggests that the Etihad agreement “is a massive game changer and undoubtedly the jewel in the crown of what will be Mr Borghetti’s thrust to capture corporate marketshare from Qantas. ” From February, V Australia will operate three Sydney-Abu Dhabi frequencies per week and a further three Brisbane-Abu Dhabi frequencies per week by February 2012, using its three class 777-300ERs.

And from October 1 Virgin Blue/V Australia will start codesharing with Etihad, linking Virgin’s Australian and South Pacific network of 45 destinations with Etihad’s intercontinental network of 65 destinations served from Abu Dhabi.

However, Harbison notes that beyond the planned Etihad, Air New Zealand and Delta partnerships (the latter possibly restricted to codesharing following US DOT objections) the “missing link globally is Asia, but Borghetti is said to be looking at other bilateral opportunities in that region. ” But Virgin already has an alliance of sorts with Malaysia Airlines struck in 2006, which clearly needs a shot in the arm.

There is no interlining and neither airline features codeshare flights. Other contenders are Korean Air, China Southern and China Eastern from SkyTeam, of which Delta is a member, and of course Singapore Airlines, arch rival of Qantas and Emirates. The relationship with Singapore Airlines has been a challenge because of historic issues surrounding the Virgin Atlantic buy in and the aborted buy out of Virgin Blue by Ansett/Air New Zealand in which Singapore had a stake.

However, many of the players are long gone and times have moved on.

A revamped and restyled Virgin Blue with business class could make the perfect fit for Singapore Airlines, which has longed for more Australian domestic feed.

But Harbison believes that will be “too difficult” for SQ while Sir Richard Branson is still around. “Refund some of the [£600 million] amount SQ paid in December 1999 for its 49 per cent stake in Virgin Atlantic and you might have a deal. ” It was widely considered that SQ paid twice the value for Virgin Atlantic, although then SQ CEO Cheong Choong Kong said: “I’m so enthused that I’m tempted to burst into song, which would, of course, turn a happy occasion into unmitigated disaster. ” Cheong was right about the disaster, with the relationship souring quickly with virtually no synergies between the two airlines.

Harbison believes that another challenge for Virgin Blue will be an expected bloodbath on the Australian domestic market with significant overcapacity next year, while the economy may not be as robust as forecast.

“I think the domestic market is going to get pretty ugly next year,” warns Harbison.

“Qantas has more A330s coming in and there will be two A330s in Virgin Blue colours. ” But Harbison, like many analysts, sees the Virgin Blue name disappearing in some form. “The Virgin Blue name is associated with low cost and that is a perception that Borghetti wants to move away from. ” It is likely, say some, that the airline and its international offshoots V Australia and Pacific Blue will take up the name V Australia on all international flights, as Singapore Airlines still refuses to allow the Virgin name to be used from Australia as part of the deal with Virgin Atlantic.

On the domestic front the name Virgin Australia may be used.

To oversee the repositioning Borghetti appointed brand and identity designer Hans Hulsbosch in early September as creative director to develop a new livery and corporate identity.

Borghetti said Hulsbosch, who he worked closely with on Qantas’s 2007 logo and branding update, had more than 20 years experience in brand, corporate and product identity with some of Australia’s best known brands.

“Hans and his team will oversee the Virgin Blue Group brand transformation, creating an identity that can stretch across both the leisure and corporate sectors.

Hans will be responsible for making sure every touch point represents the brand promise and connects with our guests,” Borghetti said.

“Our brief is to take the brand to a new level of modern sophistication, keeping with the brand’s contemporary young spirit.

It will be unmistakably Virgin with a fresh and innovative feel that also knows how to have a little bit of fun,” Hulsbosch said.

Harbison sees other challenges for Borghetti with the speed of the roll out of the new product. “You really need a big bang impact and that is not realistically going to happen. ” Harbison believes it will be at least 12 months before Virgin Blue will be able to really gain traction into the corporate market with new product.

And he recalls the problems Qantas ran into when it was advertising its new lie-flat beds in New Zealand when none were available on the aircraft operating from Auckland to Los Angeles.

Harbison warns that Virgin Blue really needs to have a substantial number of aircraft fitted out before it touts its new product.

It is one of many challenges for Borghetti in his immense task that will without doubt be one of the most watched experiments in airline history. His old colleague Joyce will be watching closely.