Issue 305: On a Roll

The 58 year-old has led a stunning transformation of Virgin Blue into Virgin Australia over his three years as chief executive of the country’s second major airline – indeed, airline group. With so much achieved, and so much still on his ‘to do’ list, it is clear the self-confessed speed freak and workaholic doesn’t spend much time indulging in thinking about past successes.

The Virgin Australia transformation has been well documented, but is worth reviewing to put in perspective what has been the biggest, quickest makeover in Australian aviation history: a new executive team, a new name and brand repositioning, new staff uniforms, new widebody A330s, a comprehensive cabin reconfiguration including business class, new airport lounges and terminal refurbishments, entering the regional market with turboprop ATR 72 aircraft, a virtual international airline with partners (and key shareholders) Air New Zealand, Etihad and Singapore Airlines, a relaunched frequent flyer program, new computer reservation system, the acquisition of Skywest and, soon, a controlling stake in Tiger Australia.

“I’m impatient, you know,” Borghetti admits. “I know where we want to get to and I want to get there tomorrow.”

In Borghetti’s relatively modest corner office in Virgin’s Sydney corporate HQ is a coffee table with three display models on it, one a 737 in Virgin Australia colours, and two cars, one a classic Mercedes-Benz SL and the other a Porsche 911, indicative of his famous passion for fast cars.

“I like cars, as you’ve probably guessed, and I’ve had plenty of people say, ‘which was your favourite?’ And I say, well, my next one. And it’s the same thing here; what drives you? Well, our next step is what drives me. The moment I’ve got it I want the next one.”

“Our next step is what drives me. The moment I’ve got it I want the next one.”

So it’s not surprising that Borghetti nominates time, and more precisely the lack of it, as the biggest challenge he faces as CEO.

“Time is my biggest enemy. Why? Number of fronts. One is, I’m an impatient sort of guy and you can ask anyone who works for me. They’ll tell you, he wants everything yesterday. But there’s a reason for that and the reason is that unless we move fast, others will move faster and this is a race. It’s like a treadmill. You’ve seen those little mice in those little treadmills and once they start running and the wheel turns faster they’ve got to run faster and if they stop the wheel will tip them over?

“That is what aviation is. If you don’t stay ahead of the pack and keep running fast, keep innovating, keep changing, then you’ll be passed over. So time is the biggest issue.”

That hints a little at what motivates Borghetti, and what has driven him to achieve the great changes that he has at Virgin. As a veteran of three decades at now arch-rival Qantas, the Virgin boss knows exactly the flying kangaroos strengths, weaknesses, and, perhaps most importantly, its potential, even though it has been almost five years since he left the flying kangaroo.

Certainly there are clear hints in Borghetti’s final years at Qantas as to the direction he would have taken it in, had he been made CEO – witness the Hans Hulsbosch livery refresh (Hulsbosch subsequently worked with Borghetti on the Virgin Australia rebranding), the Marc Newson designed A380 interiors, the Centre for Customer Service Excellence crew customer service training facility in Mascot, and Sydney Airport first class lounge.

Borghetti never speaks poorly of Qantas, nor of the man selected ahead of him for the top job at Qantas in Alan Joyce, but it is clear there is a competitive fire that drives him, and he wasted no time in putting the Virgin Australia Airlines Group into a competitive position against the Qantas Group.

“If you speak to my kids they’ll say, ‘Dad never stops’ … I’m a very competitive person but I like fair competition, I don’t like cheating and if you want to win, you want to win of your own accord.”

Expands Borghetti, “I suppose that goes back to my background. We came to Australia [from Italy] 50 years ago in April. We effectively didn’t have any money and so Mum and Dad worked really hard to earn a dollar and so I grew up in a family of hard, honest work and if you achieved you achieved because of your sweat, not because of cutting corners. And I suppose that’s stuck with me in everything I do, whether it’s on the personal side or on the business side; I want to win but I want to win fairly and squarely, I don’t want any free kicks.”

Alluding to Qantas’s industrial and other troubles of recent years, Borghetti continues, “And, given some of the things that have happened in the last couple of years, I think we have been given some free kicks … and I’ll take them, but I want to win in my own right.”

Certainly Borghetti’s strategy for Virgin Australia is his own in his own right. Three years in, how does how Virgin Australia look today differ to what in his strategy he outlined to the then Virgin Blue board when pitching for the CEO role?

“It’s almost to the…” he pauses.  “How would I describe it? It’s absolutely on strategy but it is beyond where we thought we’d be. It’s the strategy right on song, on steroids, is probably the best description.”

So how was the original strategy been boosted?

“Fundamentally it came from the bloody hard work of everybody in this company – it sounds corny but it’s true. If the staff had not come on board with this I wouldn’t be sitting here right now, or not having this story [to tell], so fundamentally that. Secondly, I think in life timing is everything and I think the time was right, by any measure.

“I think that we are the right management group for the right time in this evolution of Virgin. At some point in the future it’ll require a different management team, a different CEO and one of the things that I’ve always been fearful of, and I’ve said this many times to my friends, I don’t want to overstay my welcome. There is a job to be done but history’s littered with businesspeople, politicians that did a fantastic job but wind up overstaying their time. And I certainly don’t want to fall into that trap.”

But Borghetti’s time at Virgin would appear to have some way still to run?

“I hope so but let’s see. Never say never.”

Clearly, then, time is of the essence, and the competitive fires run deep, but it is not just a vision for Virgin Australia but a belief in its potential that seems to be driving Borghetti on.

“I could come up with a vision for a particular business and it could be the perfect vision and I could give it to you and say, there’s the vision, now go and implement it. But if your belief isn’t in it and you don’t feel it’s yours, your ability to push it through isn’t as strong,” Borghetti expands.

“So the moment you’ve got that belief in the vision and you then drive that belief or that hope, as I keep calling it, to people that need to make the changes, it becomes easy. And belief, or the vision, is not about standing up with people and giving them a set of numbers that says, look, we’re doing this because here are the numbers. You will never effect change quickly and effectively if you base it on what I’d call binary kind of approach.

“It has to be done by driving emotion and driving passion.”

So where did Borghetti’s own belief and passion come from?

“Fundamentally I suppose it came from two things; one would be experience, the 36 years I had in the airline business when I started here, having a view of the aviation landscape in this country helped me. The second thing was the fundamental belief and something that I’ve always been very open about is, no matter where I’ve been, what airline I’ve been, that competition is good in aviation in Australia and having one predominantly dominant carrier is not good.

“Even when I was in that space, I always felt that competition was good … You see, in running a business everyone jokes about, yes, I’d like to run a monopoly, but frankly, that is a very bad approach to business, simply because I believe running a business is more than just maximising profit and screwing every bit of revenue or cost out of it.

“There is also a moral obligation to ensure that you are contributing to the greater good of the country and the greater good of the economy, the greater good of the population. And unless there is a competitive environment you’re not doing that.”

“It has to be done by driving emotion and driving passion.”

Says Borghetti, Virgin Australia’s competitiveness has stemmed from “a belief that this airline could one day be successful and significant player in every sector of the market in this country, domestically and internationally. From that belief then came, okay, ‘how do you create a vision and how do you then create the strategy?’ Once you’ve done that then you say, ‘now I’ve got to go and sell it to the staff’. Forget the market, forget the analysts and all that; if you can’t sell it to your staff, you can’t do it. And the only way you can do that is by selling the passion. Sell the passion and then the rest flows through.

“Now, luckily for me, in our case there was a lot of pent-up demand almost of passion in the business. The staff were fantastic; the ground crew, the aircrew, the pilots; they were all busting to progress to the next level so by the time I came along and said, ‘listen, I’ve got this idea, I reckon this is sensational, let’s do it’, they’d all said, ‘yes, fine, well, we’ve been saying this now for a while. So fantastic; where do we start?’

“You’ll always find detractors along the way and typically, it’s interesting in business; the higher you go up the organisation almost, the more the detractors come out of the cupboard because they are people that were previously driving a different vision or different strategy. So it’s only natural that it takes time for them to adjust but I actually found that the staff adjustment was actually not an issue.”

But clearly bringing the staff onboard with the strategy was more about presenting a vision and implementing from above, command and control style, from head office.

“The other issue with change is that people think that in a business you change strategy and all you’ve got to do is send emails or do presentations to staff. And that’s the worst thing that you can do because no-one’ll read it and even if they read it no-one’ll take notice of it. It gets back to, they want to see the whites of your eyes, they want to see that you actually believe what it is that you’re saying and that’s where personal contact is important. I’d like to think that that played a major part in it.”

Borghetti also offers a fascinating perspective on implementing change where there is a younger, more receptive workforce, such as at Virgin Blue, compared to at an older company with a more established corporate culture.

“You can have an organisation that is ready for change, as you say, so emotionally and mentally might be ready for change, assuming you get them in that space. But the depth of experience and the depth of system, capability, process is not there so you have to build that. On the other hand, an established business that has the depth of systems and processes and sophistication of operational techniques and all the rest of it but doesn’t have the former – so there’s two halves to it.

“Which is easier? I don’t think there is one that is easier than the other, I think they’re both difficult. I generally believe that changing people is easier than changing systems, which is, I’m sure, a bit contrary to what most people would say to you. But fundamentally, changing people is … giving them hope, but also honesty and transparency and treating them like individuals. If you do that to anybody, generally speaking, they’ll come along, whether you’re talking about your family or your business. And it doesn’t cost you much, it’s just your time, your effort and your ability to sell, so to speak.

“Systems, processes take time, take costs, so I would argue that the people part is actually the easiest part but I didn’t have that as an issue … I think often companies forget the importance that leadership plays in transforming a company on the people side rather than the systems side.”

Clearly, then, Borghetti is a CEO invested in the intangibles of a business, as much as the measurable.

“I want to know what’s going on a day-to-day basis, I want to know if our customers are happy, I want to know if our staff are happy and the only way you can do that is to actually go to the airport and have a look. Now, luckily for me, I fly just about every day so I get that almost by default.”

But seeing the operation up close, how does Borghetti avoid getting bogged down in the day-today nitty gritty to the detriment of the bigger picture?

“It is hard, I must admit, sometimes to stop yourself from getting too involved in the day-to-day operation and every time I get off a plane I fire off an email to my execs, poor old Sean [Donohue – chief operating officer] and Mark [Hassell – chief customer officer] get the brunt of it; I was on the plane and this was cold or, I checked in and there was a long queue.

“And I’m sure that in the early days they thought, ‘my goodness, we’ve got a weirdo here’. But that’s how I want my executives to act, I want my direct reports when they’re flying to come back and go to their colleagues and say, ‘look, that cup of tea was cold’, or whatever it was, because it’s the only way we can work together in getting it right. So it’s hard to pull yourself away from that and I never will.”

Continues Borghetti, “Many CEOs hide in their office and look at the numbers, quite rightly, and all the rest of it and they do a great job. But you also need to care about the little bits because it’s the little bits that go on every day in a customer service business that make those numbers that you look at on a desk different.

“So it’s really hard to ignore [the day-to-day nitty gritty], you can’t. I grew up in doing the jobs that my staff do, most of them I’ve done. Sure, time’s moved on and maybe they’re done differently but fundamentally they’re the same so you can’t help but get drawn into it.”

Borghetti’s point about CEOs hiding in their office gives a great glimpse into the kind of CEO he works to be.

“Absolutely, the numbers are [critical] but they are a consequence of action. Depending on what actions you take, whether it’s buying assets, customer service or whatever, the consequences of that are the numbers that they are so you’ve got to have numbers as targets and it’s almost a circle. You say, ‘this is what we want to make, now let’s go and do all these things and check that all these things are being done’, so the numbers that come back are what we expect.

“It’s the old story of expecting what you expect. If you’re expecting that kind of return then you’d better go out there and expect that they’re doing all the things that they need to do in order to get that return. So it’s not one or the other, it’s actually both.”

Does that mean there is room for investment decisions to be made on intangible factors that might not stack up in a traditional business case?

“Yes. I do it every day,” Borghetti says emphatically. For example, “sometimes marketing is viewed as that. You come out with a tactical pricing campaign and you can do the sums behind it and say, right, we’re going to put a price out at X dollars, we’re going to do advertising at Y dollars, that should get us X number of sales, advertising costs us Y so, yes, we’re in front. That’s easy.

“But then there’s the intangible of a brand campaign; I’m going to go out and spend $2 million or whatever the figure is on a brand campaign. Right, now tell me, how much money are you going to get for that? You can’t pick it, no-one, I defy anyone to do this. Now, there’s all sorts of marketers that’ll come back and tell you, oh, here’s a formula, X equals Y, blah, blah, blah and it’s going to give you a return of X; well, that’s rubbish, you don’t know.

“You invest in that intangible because it plays a role in the greater good of the positioning of your business but you can’t technically do a business case that is black and white and you just have to accept that. So there are some decisions that you have to make that are – I won’t call them gut feel but that are not completely based on a business case. It’s easy if you’re buying a business to do it as a business case and you should, but there are some intangible things in customer service that you can’t put a number on.”

That’s an approach that had its skeptics in Borghetti’s early days at Virgin at least.

“It was harder to sell [some of the more intangible aspects] to management than to anyone else. The staff no issues, the board’s no issue, it’s middle management … And that’s understandable because if some of those items that you’re talking about, they haven’t experienced or that isn’t their background then of course, they don’t understand it so you have to take time to explain it.”

Borghetti cites Virgin’s lounge upgrade program as an example.

“I remember when we refurbished our first lounge which was Brisbane. The old lounge was very tired and needed refreshing and we were going to refresh it for $X. And I said, no, look, rather than refreshing it by $X, refresh it by X plus Y and put a particular feel to it with the branding and all the rest of it and we will at least grow our membership, visitors by – I won’t give you the exact figure but I’ll say 40 per cent.

“And of course, there was great disbelief in this some who would say, ‘oh, we’re spending all that money, we’ll never get it back’. Now, go back and have a look at the visitations we were getting in the club then and what we’re getting now. In fact, it’s an embarrassing problem to have but a good problem to have; the club’s already too small, we’re expanding it. And the mixture within that club now; there are people in business attire that are predominantly taking up the seats.

“So the club has cost you more to refurbish and run but the halo effect of the revenue mix that you’ve brought on stream and the penetration that it’s helped you achieve in the corporate market pays for it ten times over. So that kind of experience was foreign, because it was very much a cost-focused business rather than a cost-focused and revenue line-focused business.”

One number Borhetti says he is not focused on is marketshare.

“The game today is all about yield, it’s not about share. I keep saying this, I don’t care whether we’ve got 30 per cent or 35 per cent, I couldn’t care less, what I care about is our yield. Now, interestingly, the March figures for us started to show a turnaround in yield for the first time in six months, which I see we’re ahead of the competitors on in terms of the turnaround. And that’s all because we’ve just been through the war that we had to have, we had to establish our right to exist.”

That “war we had to have” was the recent capacity wars in the Australian domestic market.

“I’ve got this fundamental view that in any monopoly situation – and let’s face it, Australian aviation at the top end of the market had been a monopoly since Ansett had stopped flying. In any situation like that the monopolist or the major player, when they’re threatened by a new entrant, usually goes through three phases. The first phase is denial, so a new entrant comes in, as we did and said, we’re going to get 20 per cent of the market, corporate market. And of course, the denial factor came in; they’ll never do it, they don’t have the brand, they don’t have experience, we’re strong, we’re powerful, we have 99 per cent of it or whatever it is; so the denial phase.

“Until they start seeing that you’re chipping away and you’re actually making traction then they enter the second phase, which is realisation. The second phase they’ll say, right, we realise now these guys are going to start cutting our lunch, quick, throw nuclear bombs at them, push back hard, so competition increases, as it did in the last 12 months, capacity grew, pricing went down – the war that we had to have.

“But ultimately, you get to the third phase, which is acceptance. The monopolist says, you know what, there’s nothing now we can do to stop this business. So there are two principal things in situations like this… One is that when this situation starts you always know what the end is. The end is that the monopolist will wind up having less of whatever they had and the new entrant will have more of whatever they didn’t have. The only thing you don’t know is how much, where does that line up, but it’s inevitable. There’s not an industry in the world where that hasn’t happened and we’re no different; that’s the first thing.

“And the second thing is that without shadow of doubt, none whatsoever, those three phases occur in every situation and history keeps repeating itself all the time. And so we knew it was coming, we knew the war was coming and we knew we had to fight it.

“We had to say, look, we have a right to exist here, we have a right to provide this product. And we knew that, in the end, we would have more than what we had and they would have less than what they had and that’s exactly how it’s played out.”

So with the capacity ways abating and with Virgin, Tiger and Virgin Australia Regional/Skywest linng up against Qantas, Jetstar and QantasLink, are we now seeing a new normal in aviation?

“No, I think what we’re entering is a different form of competition, I think that what we’re entering into is a period now of still very intense competition but it isn’t just on price, it will – of course, it will be on price but it is also on product. You see, because in this period what we have done is we have forced a competitor to improve their product.

“For the first time ever in this country since the day that Ansett stopped flying you have a carrier that had a superior product than the opposition, than Qantas. Previously in the last 10 years you only saw price competition, that’s all it was. Now you’re going to see price and product competition, so I think it’s good for the market, it’s good for the customers.”

“We have a right to exist here, we have a right to provide this product”

The plan is that that will be good for Virgin’s shareholders too.

“Financially, year [2012-]13 has been a hard year because of the war… I’m focusing on [2013-]14 right now because 14 is the year that we’re expecting the result of all our hard work in the first three years…

“So we’re very focused on FY14 at the moment and we’re seeing good potential there. Our corporate penetration has increased at a very good rate ahead of where I thought, and continues to gain momentum.”

The acquisitions of Skywest and especially Tiger are also key to that building momentum.

“What it’s enabled us to do is compete in every space, and the reason that’s important is because, apart from the public benefit, is that the moment you’ve got a monopoly at one end of the market – doesn’t matter whether it’s the top or the bottom – they can maximise profits and if they’re part of a bigger group they can re-channel those profits at coming at you, right?

“So, competition on all levels is very good.”

So what new competitive fronts will Virgin Australia open up?

“What’s next is more of what we’ve started to do and what we have started to do in the last six months or so is branch out into areas that we haven’t been previously active, or very active, or active at all. And to date, of course, it’s been Skywest in terms of the regional space and Tiger,” Borghetti says.

“You’ll see us going into other spaces over the next couple of years that will involve us branching out into different areas that we’re not involved in currently.”

Clearly John Borghetti’s competitive drive is still spurring him on to continue running ahead of the pack. The race is not yet won.