In Skywest deal, Virgin Blue continues corporate thirst

Virgin Blue E-190
Unspecified turboprops to be operated by Skywest in Virgin colours will supplement Virgin-operated E-190s. Photograph: AirSpace user Rear Loader

John Borghetti has made clear the purpose of his job as chief executive of Virgin Blue: to return to shareholders the greatest profit possible.

International routes from Australia can be a dogfight (see the trans-Pacific) and trunk routes a fight as well, but Australia–unlikeother domestic networks–does have a pot of gold at the end of a rainbow far away from major cities: regional flying and fly-in fly-out (FIFO) mining contracts.

Borghetti calls that FIFO sector “booming”. It was, after all, what largely kept Australia afloat while the rest of the world experienced a depression.

With regards to general regional flying, Borghetti tells The Age: ”WA is a very small part of the jigsaw. This is also about opportunities on the east coast of Australia.”

That regional and mining market has been Qantas’s turf (last month Qantas announced plans to purchase Network Aviation to increase its FIFO) but, as Borghetti continuously shows with Qantas’s key markets, not anymore.

Today Virgin Blue and Skywest signed a 10-year alliance to create a regional network in Australia. Skywest will operate up to 18 unspecified turboprop aircraft in Virgin’s (new) livery to existing and new destinations, including on Australia’s East Coast, where QantasLink has a sizable operation.The two will also code share with each other.

The first aircraft will arrive in mid-2011 and four will be operational by year’s end. Read more of the news here.

Borghetti is going after higher yields, which eventually get passed on to shareholders, and the Skywest alliance will give Virgin higher yields. For the corporate market, Virgin’s reckoning is that its lower cost basis can create a premium product at lower prices. It’s not clear in this deal of much of a cost advantage Virgin can have.

The big-picture plan for Virgin Blue is to strengthen it through strategic alliances rather than undergoing the lengthy and risky process of setting up new market, which would also involve, as Borghetti says, scores of aeroplanes that also take time and money.

This alliance should also be seen as Skywest defending itself against venerable Qantas. This scenario is increasingly becoming the case in Australia: Virgin partnering with whoever is not aligned with Qantas so Virgin and its partner can rival or surpass Qantas (such as Virgin and Air NZ will do with trans-Tasman capacity).

Borghetti’s transformation of Virgin Blue is much like building an aircraft. With alliances he has constructed the fuselage and rightfully received publicity for it but now needs to do the less headline-grabbing interior details that are as important as the structure. For Virgin that means a new product (corporate travelers want perks) and unified brand, which should, as the hints suggest, be unveiled next month. 

Then we will see how much of the corporate market and higher yields Virgin can quench and if Qantas will be left thirsty.


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