Virgin Blue Poised to Introduce Business Class for Better Margins; Borghetti Refutes ‘Desk Clearing’ Profit Downgrade

DJ 738.jpgVirgin Blue’s short-haul fleet is poised to see the introduction of business class under the carrier’s “New Blue” strategy. (Photo: Will Horton)

Virgin Blue’s long-term “New Blue” strategy for the group aims to capture more of the corporate market with a business class while vowing its leisure product will be “attacking all three of our competitors at the back of the plane”, Virgin Blue Group CEO John Borghetti said today in Melbourne at a speech at the Annual Stockbrokers Conference.

But Borghetti said nil of what stockbrokers–or indeed anyone–are most concerned about: Virgin’s slashing in May of its annual profit from $80-100m to $20-40m, an announcement that saw the airline’s stock value drop by 39%.

He did however refute claims suggesting the downgrade was a desk clearing exercise “to make my life easier as CEO”, he said. “That is not the case. It is not about writing down assets to the bottom line.”

Bankers and analysts have been seeking answers about the sudden downturn and have so far felt “underwhelmed” with Virgin’s reply. Virgin blamed the profit downgrade on “rapid deterioration and increased volatility in the operating environment, particularly in respect of the leisure segment both domestically and internationally” coupled with increased capacity.

Borghetti’s only explanation was repeating the earlier claim about weaker demand and higher capacity without elaborating why it was not taking more capacity out of the market. Although V Australia’s fifth B777 will add 2900 additional seats per week when it enters service later year, in April V Australia converted its remaining two of seven B777-300ERs on order to options; they were due for delivery in 2011.

Borghetti all but asked the industry to look past the downgrade and instead focus on the future that he expects will bring greater financial stability by shifting from being a leisure-focused carrier to a corporate airline.

That shift began some years ago with the introduction of premium economy on its short-haul fleet, domestic lounges, and a frequent flyer program. But Borghetti is poised to set the business throttles to full.

“Business Class will no longer be the exclusive province of Qantas”, Borghetti said, confirming expectations Virgin will offer a dedicated business class. Presently the only Virgin Blue group airline with business class is long-haul subsidiary V Australia.

“Our push into the corporate market is aimed at providing us with more resilient higher margin business travellers,” Borghetti said. He vowed the carrier will “bring true competition” to the leisure market, but noted “we must reduce our reliance on this segment if we are to reduce the earnings volatility that goes with it.”

With product upgrades have come concerns of increased cost to Virgin, which started as a low-cost carrier before revamping itself to a middle-market carrier. Borghtetti did not deny costs could rise, saying only he would not “take our focus off our cost base”.

Control over costs will be crucial. Borghetti re-iterated the carrier’s pledge to preserve its leisure market share in the next two years. While predecessor Brett Godfrey remarked last year low-cost carriers like Jetstar and Tiger were in a “race to the bottom”, Borghetti said Virgin will challenge “all three of our competitors”.

He did not divulge how Virgin would match the range from full-frills Qantas to no-frills Tiger, but cautioned “It is not about pushing a standardised solution, [but] rather one that is derived from a deeper understanding of customer needs.” It’s a hint that could be seen as Virgin moving towards an Air New Zealand-like fare structure, the first attempt of a structured product un-bundling since Air Canada’s short-lived LCC spin-off Tango from last decade.

On the topic of alliances, Borghetti said Virgin will continue to remain independent and form individual strategic alliances where it sees fit, such as the pending joint ventures with SkyTeam’s Delta for trans-Pacific flights (for which it expects approval by August) and Star Alliance’s Air New Zealand for trans-Tasman flights. Borghetti qualified his statement, saying “our mind is not closed to other options.”

Borghetti said the “New Blue” plan is being finalised with results expected to be implemented in the next 12-18 months. In April when Virgin Blue confirmed its order for upwards of 105 B737s, it said it expected the first aircraft of that lot to be the first in its fleet to incorporate the hard product changes of its new strategy. Borghetti disclosed the carrier will soon start a pitch process to select an advertising agency to help promote its strategy.

Borghetti said the next 12 months would be “tough”, but allayed financial fears by saying the group had an $800m cash balance with no refinancing options while all debt against aircraft were secured.

Borghetti did not comment on the prospects of the group uniting its brands under one name or new aircraft orders.

If you, like many others, remain unimpressed with Virgin’s profit downgrade and lacklustre reasons, at least take confidence in the fact Borghetti had the wit to drop the “Airline of the Future” moniker for the more simple “New Blue”, which should make the carrier stronger, provided Borghetti delivers on what he promises–and with greater explanation.

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One Response to Virgin Blue Poised to Introduce Business Class for Better Margins; Borghetti Refutes ‘Desk Clearing’ Profit Downgrade

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