Agent of change

For Borghetti it was a major issue because without a new image and an altered reputation there was no way it could become a high class operator with global reach.

Has he succeeded? By any measure today’s Virgin Australia has undergone an astonishing transformation since the now 59- year old son of Italian immigrants took charge. No-one in the industry is aware of any other no-frills flyer going so upmarket. A few legacy airlines have gone the other way. But today, Virgin Australia is an airline with all the trimmings and a virtual global network that sees it punching well above its weight.

Not long after stepping into the Virgin hot seat Borghetti admitted that when he was at Qantas, where he spent 36 years embroiled in the complexities of the airline industry, he was well aware that fast-growinglocal upstart Virgin Blue was a serious threat to the big national flag carrier in a highly competitive marketplace.

“What makes Virgin Blue dangerous is they don’t know what’s not possible,” he once said. Having crossed the bridge he said that earlier comment was absolutely true.

“That’s what made them dangerous.

It used to scare the hell out of me.

Now it thrills me. ” It may have thrilled but for Borghetti, as he set out to dramatically change the airline, it was far from being an endless tale of strawberries and cream. Indeed, one of his first tasks as Virgin’s chief executive was to announce the carrier’s profit forecast for the year ended June 30 2010 was being slashed from a previous $80 million to between $20 million and $40 million because difficult domestic and international leisure markets were causing fare levels to plunge. It was an inauspicious start.

Without a new image and an altered reputation there was no way it could become a high class operator with global reach.

Then again, Borghetti was no stranger to the roller coaster ride that is the airline business. He had joined Qantas as a mail boy at the age of 17 and worked his way up to executive general manager of mainline operations, overseeing a $10 billion budget, 16,000 staff and about 200 aircraft. He was central in the overhaul of the Qantas product and customer service models, upgrading of its first and business offerings and the massive upgrading of its terminals, as well as the introduction of the Airbus A380 into the fleet. In the running to succeed Geoff Dixon as chief executive he was pipped at the post by current Qantas chief Alan Joyce, leading to his departure in 2008.

Borghetti hadn’t intended to get back into airlines but after two years out in the cold he was back in business following an approach by Virgin’s Richard Branson.

“Eventually the excitement of this position got the better of me,” he said at the time. “Because I thought: ‘wait a minute, this is exciting. It is really evolving the airline to the next step, building a new airline almost’. ” And that is exactly what he did.

There are three key achievements in the evolution of Virgin Blue into today’s airline.

Firstly, there was Borghetti’s success in quickly pinning down an agreement with Singapore Airlines which allowed the Virgin brand to be used offshore. It allowed him to dump the “Blue” tag, which permanently tied the airline to a perception it was no-frills, consolidate the various divisions and present the new Virgin Australia to markets at home and abroad.

Secondly, the rapid introduction of legacy airline service standards, including corporate lounges, as well as high quality brand advertising, quickly lifted the airline’s image.

Thirdly, he created his own virtual global alliance throughbilateral deals with major offshore partners Singapore Airlines, Etihad Airways in the Gulf, Delta Airlines in the US and Air New Zealand.

And cleverly, he created an unprecedented corporate structure that allowed some of these partners – SIA, Etihad and Air New Zealand – to become majority owners, giving Virgin powerful backers with deep pockets and access to a global network capable of matching Qantas internationally. He also produced a five-year business plan that convinced some of these partners to push investment cash into Virgin without even wanting to claim a seat on the board, although they all did take their place in the boardroom later.

While all of this has been groundbreaking it certainly can’t be said that the new Virgin has yet become a financial success. It did make a meagre $21. 3 million profit in the year ended June 30 2010 and $67. 8 million in 2011 but by 2012 it had slipped into the red with a loss of $98. 1 million, followed by losses of $211. 7 million in the 2013 year and $355. 6 million in the year endedJune 30 2014.

But those results were hardly different from the pain airlines were suffering around the world. The reasons have been well reported: In Virgin’s case, a crippling capacity war with Qantas coupled with high fuel costs and tough economic conditions. Indeed, the domestic capacity clash was one of the most contentious periods of recent years as Qantas took its “60 per cent marketshare line in the sand” stance.

For Borghetti, it was never about marketshare. As he told this writer: “Our position on marketshare has not changed. We don’t have any set target of marketshare. We never have and never will have. It is about earnings, it is about yield, it is about building a sustainable business that is active in every sector.

Marketshare doesn’t even come into the discussion. ”

Today, the end of that capacity war and a dramatic easing of fuel prices has changed the outlook. In February this year, Borghetti was able to announced a “significant improvement” in the group’s

Today, the end of that capacity war and a dramatic easing of fuel prices has changed the outlook.

financial performance following a half year (to December 31, 2014) underlying profit of $10. 2 million. That represented a $54. 5 million turnaround on the previous corresponding period. There was still an after tax loss for the six months of $47. 8 million but that was down from a $74. 3 million half year loss twelve months earlier.

Expectations are that there will be a profit for the current full year.

There may have been financial struggles but during his tenure to date Borghetti has repeatedly surprised the market with his gambits. Initially running an airline that was competing with both Qantas and its budget subsidiary Jetstar, as well as the transformation of Virgin Blue itself he has built a group of airlines to confront his rival on every front. He caught the media and the industry on the hop when he announced a 10 per cent stake was being sold to Singapore Airlines for $105 million and Virgin was paying $35 million for a 60 per cent share in part SIA-owned budget Tiger Airways Australia (now Tigerair Australia). Furtherit spent another $99 million on a 100 per cent takeover of major Australian regional Skywest to turn that into Virgin Regional. Last year he surprised again by becoming sole owner of Tigerair, paying just $1 for the final 40 per cent stake in the airline.

All of this meant Virgin was now competing head-to-head with Qantas on the full-service front domestically and internationally, the budget sector and the regional arena, including entry into what was seen as the lucrative fly-in/flyout business ferrying workers to Australia’s mining centres.

There is no doubt that the two sectors presenting a challenge to Borghetti have been the Tigerair operation and long-haul international flying. The LCC, centre of a dramatic grounding of its fleet for safety reasons in 2011 prior to Virgin taking control, continued to lose money, although there have been signs of recent improvement.

Tigerair managed to make an underlying profit of $500,000 in the quarter ended December 31 2014, a return to the right side of theledger for the first time since 2010, although over the full half year, it did make a net loss of almost $25 million.

Borghetti himself says he is “very happy” with the progress being made at Tiger and that its chief executive Rob Sharp has improved its efficiencies, its service proposition and has started to build scale again. Virgin has brought forward its estimates for Tigerair’s profitability several times and is currently saying the end of fiscal 2016.

Virgin’s international losses during the same period worsened to almost $50 million from $31. 9 million in the prior corresponding period, the result of increased competitive pressure, particularly in the South-East Asian and Europe/United Kingdom markets, constraining yield recovery.

Operationally, Borghetti has certainly seen fleet growth. When he arrived the carrier had 79 aircraft.

It now has 106, or some 140 if Tigerair and Skywest (now Virgin Australia Regional Airlines) are included. Currently operating Boeing 737‑800s (and two -700s), 19 Embraer E190s, six Airbus A330-200s and five Boeing 777-300ERs, with VARA operating ATR 72 turboprops on domestic regional servies, Virgin has ordered 23 of Boeing’s new 737 MAXs for single-aisle expansion with deliveries from 2018. While no decision has been made the potential for an order of either 787 Dreamliners or the Airbus A350 is currently being evaluated. Borghetti has made it clear he won’t be taking on any more 777s and that he’d prefer to be operating a single widebody type.

His network strategy internationally is also well defined. Flying to Europe is not on the radar. The strategy is really Australia, regional, Asia Pacific and the US, with growth in medium-haul rather than longer-haul. Offering its customers a wider global network will be done through its alliances with its major shareholders and partners. Creating a virtual global alliance through bilaterals was the plan from day one.

“I knew we couldn’t join one of the existing ones (alliances) for the simple reason that firstly, we couldn’t afford to and secondly, no matter who we joined we were always going to be the tail on the dog,” he explained. “Can you imagine joining Star or Skyteam or whoever and you sit there next to a guy who’s got over a thousand aeroplanes and a huge staff and you are just a small carrier. Every time you put your hand up they are going to say ‘sorry, who are you again?’ “The other issue is that you couldn’t possibly get anti-trust immunity with all the carriers that mattered – we are tailoring our bilateral alliances to precisely what is best for us and we are fortunate we have four of the best airlines in the world in their respective regions so I think we are very lucky there. ”The ultimate aim for Borghetti is to make Virgin Australia a stable, value-creating, non-cyclical exposed business. Traditionally, many airlines make money in one half of the year and lose cash in the other half. His challenge has always been to grow earnings but do it in a smooth way so the volatility is removed from the equation. He hasn’t achieved that yet but he does appear to be well on the road. Virgin has come a long way since he took charge and he himself believes the airline is ahead of schedule on all fronts. The carrier had wanted 20 per cent of its revenue to come from corporate and government passengers by the end of fiscal 2014. That was achieved by the end offiscal 2013. Today, the number is above 25 per cent and the target is to reach 30 per cent by the end of 2017. Borghetti says Virgin is actually ahead of schedule in every key performance indicator it set back at the launch, whether it be Velocity frequent flyer members, revenue mix, route networks or anything else.

And while he has been reported as suggesting that somewhere between four and seven years is the maximum corporate shelf life of a top executive there is no sign the thought of departure has even crossed his mind.

“The time will come when I’ll have to be gone (from Virgin), but I’ve still got so much to do,” he said in a recent interview. “There’s still so many things I need to do. ” He also makes the point there is no completion date on change.

As he puts it: “The thing about this business is the moment you think you’ve just nailed it, that’s the time you’ve got to retire because you haven’t nailed it. It’s just the beginning, not the end. If you look at the airlines that find themselves in trouble today around the world they are typically the airlines that stood still for a while and the moment you stand still in any way, whether it’s in a competitive sense or a product sense or aircraft order sense you don’t actually stand still, you go backwards. You will never see us standing still. You will always have the next big step coming. ” What that will be remains to be seen, but the Virgin Australia report card makes pretty good reading. It’s not straight ‘As’, but given the mammoth task Borghetti was faced with when he began the adventure in 2010 the place the carrier has reached today would have been almost impossible to imagine five years ago.