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Virgin's Borghetti ticks the boxes

30 Oct 2012

Sydney Morning Herald

By Tony Webber

Virgin Australia's move to take a 60 per cent stake in Tiger Airways will have a huge impact on its ongoing battle with Qantas over the domestic corporate traveler market, writes Dr Tony Webber in the Sydney Morning Herald.

Virgin Australia appears never to do anything by halves, as evidenced by today's announcement of its purchase of a 60 per cent stake in Tiger Australia and its offer to buy all of SkyWest Airlines.

Both growth investments are presumably funded, at least in part, by money being poured into the airline by Singapore Airlines, which owns 10 per cent of Virgin Australia, as also announced today.

This follows Etihad Airways' purchase of 10 per cent in July and the 20 per cent share ownership of Air New Zealand.

Air travel demand can be split into three segments - corporate or business travel, leisure or holiday travel and fly-in, fly-out or regional travel. The purchase of Tiger shares and of SkyWest Airlines completes the demand strategy trifecta of Virgin Australia.

Its recent strategy has been to aggressively enter the corporate and business segment of the market, where Qantas once had a stranglehold, using Virgin Australia.
Fortunately, Virgin's corporate strategy had a leg-up as a result of the Qantas shutdown almost 12 months ago and hasn't looked back since.

Virgin needed to get yields up to pay for higher unit costs. The yields are higher at the front of the plane - and even higher at the back of the plane when there are more corporate than leisure passengers because the corporate traveller is more likely to pay a full economy fare.

Leisure traffic

Virgin's strategy now is to use Tiger as its leisure carrier to take on Jetstar.

In August Tiger operated about 7 per cent of available seat kilometres in the domestic market. Buying a 60 per cent stake of 7 per cent of domestic supply is a reasonably big gain in market share, particularly since Virgin already has about 30 per cent of the market.

The winner in the leisure segment is always the airline with the lowest unit cost, because this enables the airline to offer the lowest average price and lead-in fares.

The new Virgin brand cannot compete in this because it is adding cost to this segment of the airline, not taking costs away in pursuit of the business market.

It has literally bought into this by buying Tiger, the lowest cost player in the domestic leisure market.

The risk with Virgin's leisure strategy is that Tiger can't rebuild its name after the safety issues it has faced in recent years.

It usually takes longer to rebuild trust over safety issues than on-time performance, cancellation and customer service issues.

The last prong in its strategy is for SkyWest to take on QantasLink for the regional and fly-in-fly-out market.

SkyWest mainly flies within Western Australia in the regular passenger charter markets.

While charters account for less than half of SkyWest seats, it is the fastest-growing segment of its business. This is related to the mining boom and the fly-in, fly-out traffic this generates.

The slowdown in mining appears to have affected SkyWest's share price, which has fallen from 47c last December to 28c recently. The share price drop made SkyWest more attractive to Virgin Australia.

Last, but not least, we should applaud the decisions of Virgin boss John Borghetti. They are outstanding - not only the decisions but their timing. It would have been interesting to see how he would have changed Qantas if he had been given that gig.

First published in Sydney Morning Herald




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