When a discount airline like Australia's Virgin Blue suddenly becomes the country's number two carrier, it must decide how to adjust to its new role

The final collapse in February of Ansett Airlines elevated Virgin Blue to the position of Australia's number two airline overnight. Thrust into this role, the discount carrier is fast learning that being the second player brings a whole new set of challenges.

"We're no longer the niche player," says Brett Godfrey, Virgin Blue's chief executive. "We now face huge pressure due to the expectations that come with being number two."

Substitute the rise of WestJet after the collapse of Canada 3000, or the boost that TAM and Gol gained from Transbrasil's collapse, and other versions of this same story are playing out around the world in the wake of 11 September.

Since its launch two years ago, Virgin Blue's success has come from the same segmented market approach that works so well for discount carriers everywhere: point-to-point, short-haul flights, high trunk route frequencies, enhanced equipment utilisation, one aircraft type, emphasis on Internet sales and limited inflight service. The results are low costs and fares 25-50% below those of the majors. Godfrey says: "I know the [unit costs] of the US and European carriers and we have the lowest of any carrier in the world." And keeping them low is the best defence against Qantas Airways.

Like Air Canada in its domestic market, Qantas capitalised on the collapse of its major rival and commands about 80% of domestic traffic. Also like Air Canada, Qantas now covets more of the low-fare end of the market. Being number two when there is effectively no-one else means being the sole obstacle between the dominant carrier and total monopoly. Almost everyone wishes you well, but that does not necessarily translate into a friendly competitive environment.

Virgin Blue's costs are 25-30% below those of Qantas. This gives it a cushion against the threat of a fare war, which it needs as Australia lacks the regulatory regime that offers some solace to Canada's WestJet.

The Australian Competition and Consumer Commission (ACCC) only prohibits conduct which it deems intentionally anti-competitive. During last year's effort to revive Ansett, Canberra rebuffed requests to expand this law so that it would also prohibit conduct with an anti-competitive effect.

With the law limited to intentional conduct, "you need a smoking gun memo", Godfrey complains. "You need someone from the inner sanctum to dob [blow the whistle] on them. In reality, that's not going to happen."

Moreover, while Canada debates whether to expand its Competition Bureau's cease-and-desist authority, the ACCC has no such powers.

Godfrey laments: "The ability, as in Europe and the USA, to issue cease-and-desist orders when conduct is likely to have an effect on competition is a powerful weapon lacking in this country."


Godfrey lists a several pending complaints against Qantas for predatory pricing and dumping (all of which the giant carrier denies). And while Godfrey predicts the ACCC will eventually rule for Virgin Blue on at least some of the complaints, he says the damage is already done. Here he cites instances where his airline was forced to retreat because of Qantas counterattacks.

"I like to poke a stick at Qantas," Godfrey says, "but you have to take it to them in a way that they can't bite back." He reserves his strongest criticism, however, for the government.

In the lead up to last year's election, transport minister John Anderson said that Qantas "cannot be allowed to dominate the market and 60 to 65% of the market in, say, 12 months' time is about all they should reasonably be allowed to have." Anderson also warned that Qantas would be "regulated to within an inch of its life if people thought it had a monopoly".

But Godfrey says that instead of bringing Qantas under control or supporting tougher laws, Canberra simply invited the bigger carrier to submit a voluntary code of conduct. That code has never been made public, and Godfrey believes it may not even exist. "It's just a concept, a promise by Qantas that 'We will play fair. Trust us'" he says, adding: "I'm sorry, but I don't trust them. I expect to fight for every inch of market share that I get. I don't have a problem with that. But Canberra doesn't protect a level playing field."

Expansion pressures

Yet, competition issues are not Godfrey's biggest concern. With the expansion pressures that Virgin Blue now faces, his immediate worry is what the startup airline might do to itself.

"We never want to replicate Ansett," Godfrey says, yet moving into Ansett's "palatial" airport terminals seems likely, just as regional communities beg for new services, and the Star Alliance looks for a new Australian presence.

"If we become all things to all people, we're going to pay for it," Godfrey warns. "My big concern is to keep the reins on the expectations of Australia."

How to do that remains the big challenge. On the subject of terminals, Godfrey talks of "corporatising" them, moving airline offices into excess space and making lounges common-user.

"Providing a lounge for business or first-class ticket buyers would cost me a million dollars a year," Godfrey estimates. "I'm not going to give that much away to anybody. But charging 10 bucks a head to 10,000 people a year, maybe as an optional add-on to the ticket, might work."

This follows Virgin Blue's philosophy of charging for such extras as seat assignments and inflight meals.

Godfrey is equally stoical about pleas from regional cities. A 30-40 aircraft order either for more Boeing 737NGs or a switch to Airbus A320s is imminent. New jets of either type could accelerate expansion into secondary cities, but Godfrey insists he will not create a mixed fleet by introducing smaller aircraft to serve towns with short runways or with fewer than 50,000 people.

"I don't like the idea of separate reserve crews dedicated to different aircraft, separate parts and stores and paying maintenance engineers an allowance for different types of aircraft. I'm sticking to one type of aircraft."

For now he will seek codeshares with such regional carriers as former Ansett partner Hazelton Airlines. In the longer term, Godfrey foresees a separately managed subsidiary with a fleet of small aircraft, called something like "Virgin Outback".

Not all the pressure comes from Australia. Star Alliance member carriers are anxious to fill the Ansett vacuum. Virgin Blue expected to sign an agreement with United Airlines by late May. Godfrey foresees that other Star members will then follow, but he insists this will not change the Virgin Blue model. "The deal doesn't change our methodology," says Godfrey. "They are responsible for getting the passengers to us and from us; we just provide the on-carriage. So it's not like we're interlining. We will not be their preferred carrier for business class."

Bigger vision

Virgin Blue's biggest risks may stem from its own market share aspirations. Godfrey believes he can expand that share from its current 15% to 25% simply by "putting more red jets in the sky". But owners Sir Richard Branson and transport conglomerate Patrick Corporation seem to have a bigger vision. They talk of Virgin Blue taking 50% of the domestic market and launching international routes to meet Virgin Atlantic in Asia.

Virgin Blue's senior managers repeat the mantra that the carrier will not deviate from its low-cost model, but they also speak of "exploring the boundaries of the [low-fare] niche" and "providing a real alternative to Qantas".

Inevitably, this means less focus on segmented markets and more on wooing passengers away from Qantas. Indeed, Virgin Blue is already doing this. "People say we're only a leisure airline," Godfrey boasts, "but there are a hell of a lot of people getting off the aircraft at 7am in Sydney, and they're all wearing suits."

This is due to smart scheduling, the appeal of low fares to small businesses, an expanded route network and good marketing. As Godfrey explains: "We target chief financial officers, not chief executives, because chief financial officers understand travel budgets."

"Assuming we get into the Ansett terminals", he says, "with valet parking and lounges on a cost-plus basis, we're targeting the whole market." But he also knows the risks: "If we branch out too quickly, I believe we will dilute what has been a very successful model."

His dilemma is in how to widen Virgin Blue's appeal in order to grow without sacrificing its market position. "If we try to replicate Qantas, a Ryanair, Freedom Air, or someone is going to come in, undercut us, and take our place at the bottom end," Godfrey warns. "I don't believe you can be in the middle. You can either be one or the other in this market."

Source: Airline Business