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Who's Who in Low Cost Aviation

Carrier: Virgin Blue
Headquarters: Australia
Founded: 2000
Destinations: 30
Bases: Brisbane
Owners: Toll Holdings (62%), Virgin Group (25%), Public (13%)
Listed: Yes
Online Booking: Yes
Website: http://www.virginblue.com.au
Fleet B737-800 26
B737-700 22

Overview - Virgin Blue

Virgin Blue – evolution and reaction in the Australian market

Virgin Blue is the Virgin Group’s second – and by far most successful – attempt at breaking into the LCC arena. The carrier was launched in August 2000 and has been the beneficiary of both good timing and excellent management, progressing from its original two-aircraft operation on the Sydney-Brisbane route to become Australia’s second largest carrier.

Virgin Blue has expanded and evolved from a classic, low complexity LCC into a highly integrated air services provider, operating a comprehensive domestic network and two international subsidiary/joint ventures, Pacific Blue and Polynesian Blue. The impending arrival of a fleet of regional jets will reinforce this network further and plans are in motion for the launch of a transpacific carrier, V Australia, and possibly an ultra-low cost domestic subsidiary.

Filling the gaps – Virgin tastes early success

The Australian aviation market Virgin Blue carrier entered was vastly different from the current situation. Two major competitors, Qantas and Ansett, dominated the market in a comfortable duopoly, while another LCC, Impulse, had commenced operations just four months before its own launch.

Virgin Blue benefited enormously both from the Qantas takeover of Impulse in May 2001 and the collapse of Ansett in September of the same year. With essentially only Qantas to compete with in the early years of the millennium, Virgin Blue grew rapidly, expanding its route network to fill gaps left by the departure of Ansett.

However, Qantas’ 2004 decision to start its own LCC subsidiary, Jetstar, as a defence against Virgin Blue’s encroachment into its market share prompted a new response, one which has helped shape the development of LCCs internationally.

The ‘New World Carrier’

Spurred by the rapid raise of Jetstar, Virgin Blue deviated from the classic LCC formula it followed in its early years of operation. In 2006 the carrier developed and implemented its now famous ‘New World Carrier’ (NWC) strategy, focusing on the twin goals of maintaining its cost leadership while attracting the fare levels enjoyed by the legacy carriers – in particular, Qantas, whose average domestic yields exceeded Virgin Blue’s by around 15%. The tradeoff though is increased complexity and costs into its formerly super-simplistic, lean operation.

The carrier has introduced a self-funding series of enhancements to help it win high-value customers. User-pay lounge facilities and in-flight entertainment systems, as well as a sophisticated frequent traveller programme, flexible corporate fares and travel solutions. These provide added options that, when combined with competitive frequency share in key business markets, not only bring in higher-paying passengers, but represent profit centres for Virgin.

A key market which Virgin Blue is targeting is domestic on-carriage for all non-oneworld airlines. Between 15% and 20% of all domestic traffic connects to or from international services, and the majority of these are non-oneworld. Gaining access to this traffic also greatly enhances Virgin Blue’s opportunities for eg. developing a loyalty programme which could become competitive with Qantas’.

As part of its ‘NWC’ evolution, Virgin has also ordered 20 Embraer regional jets (E-170s with 78 seats and E-190s with 104 seats) to enhance its network, offering greater frequencies to a wider domestic market, including regional routes. Three aircraft being delivered in 2007, with 11 more to come in 2008.

The increasing hybridisation towards the more complex, higher yielding NWC model has considerable benefits. But it also leaves Virgin Blue exposed to carriers with a lower cost base, such as the impending entry of Tiger Australia into the Australian domestic market.

In response, Virgin Blue announced in May-07 that it was considering launching a “super low cost” subsidiary. The carrier would operate B737s and offer “extremely” cheap fares on domestic operations. At the time of the announcement the carrier stated that the new subsidiary could be in could be in place within three months – which means an announcement is probably due very soon. This would be the world’s first low cost subsidiary of a low cost airline.

Virgin Blue long haul: “V Australia”

At the other end of the scale, Virgin Blue revealed its new long haul international brand, V Australia, on 25-Jul-07, after receiving final approval from Australia's International Air Services Commission to operate Australia-US services. The airline plans to commence operations in Nov-08 and is currently awaiting US approval to operate up to ten weekly services.

According to CEO, Brett Godfrey, the carrier is “not looking to come in and stampede the market”, instead concentrating on minimising losses in the first 18 months while it builds up its initially limited capacity. Costs will be “exacerbated once the airline is up and running” and the closing months of 2008 are forecast to be “fairly heavy”. The carrier has six B777-300ERs on order from Boeing and another B777-300ER will be leased from ILFC.

V Australia is currently developing its launch route network, product and fare structure. The new airline is expected to be profitable within its second year of operations, after an initial outlay that it expected to run to USD62 million, over and above lines of credit that are needed to secure its fleet.

The ten weekly services allocated to the carrier would take a market share of approximately 12% on the Australia-US route, currently dominated by Qantas Airways (with 68% market share). United Airlines is reportedly urging US authorities to use V Australia’s entry to pressure the Australian Government to sign an “open skies” agreement. The current agreement, negotiated when four US airlines were operating the route, contains capacity limits that were included at Australia’s insistence.

The future: new markets and new opportunities

Virgin Blue is now in a position few other LCCs have paralleled, with a domestic market share of approximately 30%, growing international narrowbody operations and at least one – if not two – further subsidiaries to launch in the next few years.

The carrier’s ‘New World Carrier’ strategy appears to be paying off. The strongly positive recent financial results – with a record profit of AUD124.3 million for 2H06 – have matched its ambitious plans. With its position within the Australian market secure, Virgin looks ready to stretch its New World Carrier strategy into new markets as it enters a new phase of international operations.

It does however face an array of challenges. 2008 may bring many things, but for Virgin Blue it will be anything but dull. If Virgin Blue’s overall strategy is successful it could become competitive with Qantas on a number of levels, both local and international.



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Other Virgin Blue News

Virgin Blue flights to Uluru commence

Virgin Blue Holdings: Resignation of director

Virgin Blue first Australian Airline to offer a new way to check-in via your mobile

Virgin Blue signs major aircraft deal - up to 105 new boeing 737's for future growth

Virgin Blue announces John Borghetti new CEO

Update on outlook for the year ending 30-Jun-2010

Innovative repair procedure for CFM56 engines of Virgin Blue

Virgin Blue new lounge open for business in WA

Virgin Blue to launch flights to Christmas and Cococ Islands

V Australia and Delta ink frequent-flyer, lounge and codeshare agreements

 

Peanuts! Feature Airline - Virgin Blue