financial analysis

Mar 21, 2016

Virgin Australia’s pursuit of excellence gets another top-up

This is an awkward moment for Virgin Australia in that today's announcement of a

Ben Sandilands — Editor of Plane Talking

Ben Sandilands

Editor of Plane Talking

Is a single person entering an apparently deserted premium lounge a snapshot of Virgin's problems?
Is a single person entering an apparently deserted premium lounge a snapshot of Virgin’s problems?

This is an awkward moment for Virgin Australia in that today’s announcement of a $425 million unsecured loan from its rich and powerful airline backers buys it more time to fix its finances.

That’s a high price for no guarantee of an acceptable outcome as well as a confirmation of a persistent problem.

It is almost six years since the company under former Qantas senior executive John Borghetti took it to big red with an ambition to become a higher quality Big Red.

That’s a bit too long to make sense, yet the progress it had made toward what could be just a mirage on the highway to the future cannot be discounted.

For all of those wins, well described in this AFR column by Jamie Freed, the entrenched incumbency of the dominant Qantas brand is dragging Virgin back to earth from the heights it has been climbing toward.

Consider what Virgin achieved in the last year, including the first half of this financial year. It made much more money that it had so far as the Virgin Australia brand, often charging more for its product than Qantas and despite carrying fewer passengers than previously, because it was successfully establishing itself as a preferred service for a core of regular flyers who thought the premium was well worth it.

But has it paid too much to win what looks like a shrinking part of the overall market, where corporate account managers tend to channel Mr Scrooge more than before, and growth may well belong more to ordinary people deciding they can afford to fly much more than before?

That’s a set of issues that also affect Qantas, but it seems from the financial results, less so than is the case for Virgin. Neither Virgin nor Qantas run their loyalty ‘schemes’ as being rewarding anymore, but as rule ridden points confiscating data base marketing programs that quite possibly annoy people more than they recruit them. The hostile reduction in benefits available through bank issued credit cards hasn’t helped them either.

The market is getting harder nosed, although the notable differences in the quality and customer experience offered (on a good day) by their respective low cost brands of Jetstar and Tigerair may not quite be working out the way either Qantas or Virgin intended.

Tiger has undergone an exceptional turnaround in viability, but unless Virgin decides to greatly expand its low fare brand’s fleet and reach, it won’t deliver the sort of proportionate support to its owners that Jetstar does to Qantas investors.

Disaffection with low cost travel, and in general terms, more competitive fares from Qantas, may be adding to Virgin’s struggle to win and keep good paying customers.  Presumably, Qantas and Virgin are investing a lot of time and effort into trying to understand these market dynamics, but the question for Virgin is why the competitor with a shade less premium in its premium lounges, and business and full fare economy offers, is nevertheless on top and in charge.

The painful question for Virgin Australia is whether it needs to reconsider its product strategy and redefine its concepts of where growth, relevance and sustained profitability reside. Its critics also need to recognise that they don’t have any easy answers to offer either.

Air travel is entering a period of renewed disruption. Stripping amenity and quality off existing full service economy products might only result in people reconsidering the declining passenger experience in general, and deciding they don’t need to be frequent flyers after all.

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