David v Goliath?

While the Australian economy is steaming along nicely filling business class seats, Qantas has done the unthinkable and reverted back to the very unpopular seven-abreast business class configuration on its flagship A330s on the latest deliveries VH-EBO and VH-EBP.

Certainly Virgin Blue are yet to reveal what configuration it has adopted and it is quite possible that it may adopt the same cross section, Qantas knows it is not popular with savvy and high yielding business travelers.

Australian Business Traveller criticised the move saying that “Qantas’ much-vaunted ‘new domestic experience’ appears to have backfired in one vital area: making long-haul flights a less comfortable experience for business travellers.”

ABT added that travellers facing the five hour coast-to-coast trek have been dismayed to discover the new A330s have added a much-hated middle seat to the business class cabin.”

Responding a Qantas spokesman said that surveys “had showed that passengers were more interested in the IFE,” which is certainly correct but it is highly unlikely it was an either or question [Better IFE and seven-across seating].

The intention appears to be based in aligning the Qantas domestic and Jetstar international A330 Star Class to allow for greater aircraft flexibility, which is great in theory but as so often the reality doesn’t stack up.

One of the biggest gripes when Qantas introduced the A330s in 2003 with a seven-abreast cross section was the lack of overhead bin space for the 42 or so passengers in the business class cabin – particularly the ones occupying the first two rows.

Some insiders at Qantas revealed to Australian Aviation that the seven-abreast decision was made before the airline understood that Virgin Blue would be entering the domestic business market.

“I think we will be changing it back,” one said.

And if that was a backward enough step Qantas has introduced a range of what appears to by silly punitive changes to its “gold egg” the frequent flyer program just as Virgin Blue is to ramp up its offerings.

To deny its Platinum card holds access to the lounges when they are not travelling has upset the elite card holders who have spoken to Australian Aviation.

And silver members lose their priority check-in and access to Qantas Club check-in desks will also be removed.

One disgruntled FF member in a not so lighted jibe said that Frequent Flyer privileges are like pilot’s seniority –“mess with it at your peril.”

The changes come as the airline rolls out its Next Generation Check-in but the problem is that the next generation of passengers may not include as many business flyers which may opt for the new sexy edgy Virgin makeover.

ABT magazine said that the “logic behind the decision to remove the check-in benefits is difficult to understand.”

“What a great idea! Mess with the business traveller’s privileges just at a time when Virgin Oz is gearing up to seduce those business customers to its upcoming seriously revamped product and services,” the magazine warned.

And it would appear that passengers are continuing to abandon Qantas, even without the impact of these measures.

In January the government’s traffic figures showed that LLCs now account for a fifth of the Australian international market a figure equal to Qantas’s market share of just 19.5%.

Added to its LCC Jetstar – 8.1% – the overall share for the Qantas group is 27.7% – a drop from 28% in the prior period.

In the past year Qantas has lost more than 5% of its international market share and the recent A380 and 747 engine problems are not going to help going forward.

The airline has responded to the international slump by setting up a special team headed by Executive Manager Customer and Marketing Lesley Grant.

However initial indications are that Grant will only be able to tinker around the edges with evolutionary not revolutionary changes.

Virgin Plans

As Australian Aviation went to press Virgin had not announced any details of its assault on Qantas, although many tantalizing tidbits have leaked out.
In September last year the airline appointed world renowned Sydney brand and identity designer Hans Hulsbosch as creative director overseeing the transformation of the Virgin Blue brand, which includes the group’s new livery and corporate identity.

Hulsbosch has over 20 years experience in brand, corporate and product identity and it shows according to insiders in London who have spoken with Australian Aviation.

“He has done a brilliant job,” said one London-based executive.

His makeover of Virgin Blue apparently needed Sir Richard Branson’s approval because it was so radical but it received the big tick.

And the name changing includes all the airline brands based in Australia and brings them “more under one name” said the executive.

Australian Aviation understands that Hulsbosch has developed an entirely new colour scheme and livery to go with a makeover of the flight attendant’s uniforms.

Colours are thought to be a deeper red and silver combination.

At the announcement of the appointment Hulsbosch told media: “Our brief is to take the brand to a new level of modern sophistication, keeping with the brands 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.”
The London executive said that Hulsbosch has “succeeded beyond our expectation.”

The appointment of Hulsbosch was followed by the engagement of advertising agency Clemenger BBDO to help reposition the brand in the Australian and international market.

However Borghetti told Australian Aviation in December that the makeover would not create a me-too airline compared to Qantas.

“It will be very different to Qantas. In fact, quite the opposite.”

And with a smile he adds: “If there is one thing we don’t want to be it is Qantas.”

“We are driving to be an airline that is relevant in today’s world for business and leisure sectors across all routes.”

Borghetti is clearly – and deeply – impressed by what he terms the “fresh” staff attitude at Virgin Blue, which while hesitant at first has now embraced the new order of things.

And “fresh” possibly best describes what he has in store for travellers.

“I can harness the staff enthusiasm and combine with a product that is relevant to today rather than a product that has been around for decades.”
Borghetti’s move to introduce business class with larger aircraft was first mooted in June last year and touted as “business class for today.”

At the time the Centre for Asia Pacific Aviation Chairman Peter Harbison commented that Virgin Blue’s premium economy “hasn’t worked” because there is no clear distinction between it and the rest of the cabin. Fundamentally, Virgin Blue’s premium economy is failing to wrest corporate and business travel away from the Qantas Group, leaving Virgin Blue at the bloody low end of the market.”

The airline committed to two A330-200s from Emirates which has since been increased to four with plans for up to 10 aircraft from the same source say insiders.

First two are ready for delivery in an all white scheme and are A6-EAB c/n 365 and A6 -EAC c/n 372, delivered to Emirates in November and December of 2000.

On the ground Virgin lounges are currently undergoing a facelift that will be revealed in March.

After some early rejections Borghetti’s grand plan for a virtual international airline, with Etihad, Air New Zealand and Delta Air Lines, are almost a done-deal.

In December the ACCC approved the Etihad deal and reversed an early rejection of the tie-up with Air New Zealand.

The alliances are a cornerstone of Borghetti’s plans to tap into the corporate market, offering new access to Europe through Etihad, the US via Delta and New Zealand with another born again airline Air New Zealand.

All alliances, although the Delta connection still needs US approval, offer reciprocal frequent flyer and lounge rights as well as co-ordination of pricing, schedules, capacity and routes.

Turbulence

But it hasn’t been all smooth sailing for Borghetti with analysts taking a dim view of the airline latest six month profit forecast of just $23 million to be announced in February due to a variety of factors, largely out of the airline’s control.

Borghetti announced in late January that while the underlying pre-tax profit would be about $75 million net profit would fall by about 63% because of the impact of September’s Navitaire reservation system outage and a $17 million charge for future ineffective fuel hedges.

For the full year the airline will also have to absorb makeover costs while traffic has slumped because of the impact of the Queensland floods.

The airline derives over half is business from Queensland.

Analysts such as Macquarie Equities, expect Virgin to trim capacity growth to 5.2%, from the original guidance of 8% while trimming costs to offset the new product investment.

And turbulence of a very different kind struck Virgin in November after the Australian Football League dumped Qantas for Virgin as its carrier for AFL teams.

The AFL’s decision drew heated criticism from some club officials, including Hawthorn president Jeff Kennett, who accused the AFL of putting money before players’ welfare by selecting an airline with more cramped seating.

Kennett, yet to be briefed on the airline’s business class plans raised health concerns for players on flights after matches.

“If those players in the course of their work get hurt or injured, you have a responsibility that when you’re transporting them around the country, you do so with their health interests at a very high priority. It’s going to make it very, very difficult and you’re going to find clubs having to stay overnight when they otherwise and previously didn’t,” Kennett told radio station 3AW.

Virgin countered saying that initially its 737 aircraft have 12 premium economy seats with a 34-inch pitch and 8 exit-row seats with 39 inch pitch for the taller players.

Typically Qantas has been placing AFL players in business class where possible, particularly on long flights to and from Perth.

Investment strategy

On a more positive note and perhaps a signal of things to come Air New Zealand snapped up 14.99% of Virgin Blue in late January in a move that is a smart long term investment and a strategic play to ensure the airline’s sphere of influence is secure.

The stock market is yet to factor in the upside of Virgin stock as it is only early days in its dramatic makeover.

After the announcement Air New Zealand CEO Rob Fyfe explained that the investment is part of Air New Zealand’s strategy to develop scale and reach in this region.

“The Tasman alliance with Virgin Blue was the first step in this strategy. This investment cements the emerging relationship between our two airlines,” Fyfe said.

Comparisons with Air New Zealand’s foray into Ansett are meaningless as not one element of the deal bears any resemblance.

The deal also flags some wider tantalizing scenarios.

Etihad, Virgin Blue’s new alliance is linked to a buy into Virgin Atlantic while Air New Zealand has just concluded a code-share with the same airline.
According to the London Sunday Times Etihad has expressed “top level interest” in Virgin Atlantic after the British Airlines appointed Deutsche Bank to conduct a full review of operations to assess the market.

The Sunday Times said Etihad CEO James Hogan had communicated with Deutsche Bank to express interest.

“We have no comment other than that we talk regularly and frequently to many airlines and a range of other businesses from all over the world about business issues and opportunities,” an Etihad spokeswoman told Reuters.

At the same time New Zealand Prime Minister John Key announced that his government wants to sell down some of its stake in the kiwi carrier.
However, importantly Key assured New Zealanders that the government would retain majority control, which is essential to protect what is a critical piece of the country’s infrastructure.

Qantas fleet problems

And the presentation and delivery of Qantas’s business class – and for that matter its economy – product is not helped by the late delivery of the 787 and A380.

The well documented delays, particularly of the 787, have created enormous problems for management, maintenance and operations not to mention marketing that plans a big splash with the 787.

And as the delays have been rolling it has been virtually impossible to make investment upgrade plans for the ageing 767 fleet to mitigate the problems.

Qantas has 12 767-338/-336s that are 20 years or older including the seven leased from British Airways (-336) and 15 Rolls Royce powered 747-438s that are 19 years and older.

Last November’s A380 incident notwithstanding it isn’t surprising that these 747s are the ones giving Qantas the most grief from a maintenance and publicity perspective.

Of course the 747s are rarely used on domestic flights the public wouldn’t know the difference.

In all Qantas has an active fleet of 26 767s and while seven will be retired by A330s after Jetstar takes delivery of its first tranche of 787s from late next year, the majority will not leave the fleet till the latter half of this decade unless Qantas orders or leases more A330s.

And while Qantas has its fleet issues Virgin Blue’s aircraft plans are not a bed of roses and will take some time to implement.

Upgrading the fleet of 737s to the new business product offering may take up to three years, while the A330s are only coming through initially at the rate of two a year.

And this where Qantas holds the high ground.

The airline’s domestic product is clearly the world’ bests, with its international offering amongst the best, while the Qantas lounges are outstanding.
Qantas’s frequent flyer program is an extremely powerful weapon – even after some privileges – have been removed, and one that it will use strategically as the battle for the hearts and wallets plays out.

While Qantas has its fleet issues Virgin Blue’s aircraft plans are not a bed of roses either.