When Virgin Blue first started up in Australia in 2000, it did so in a market shared by two dominating airlines. The two big ones, Qantas and Ansett enjoyed a duopoly without any real competition. Ticket prices were high and innovations rare.

This suddenly changed when Brett Godfrey, then working at Virgin Atlantic, came up with the idea to launch a low-cost carrier to shake up the domestic market. They secured about US$10 million of equity funding from the Virgin Group and adopted a low-cost business model, similar to that by some successful American and European operators. The airline started on August 31st, 2000 with a fleet two Boeing 737s and seven daily flights between Brisbane and Sydney. Since then, the Australian market has drastically changed.

Already before Virgin arrived in the land down under, Ansett, then owned by Air New Zealand, was a troubled airline. Inefficiency and problems with the fleet were just two of the bigger problems which Reginald Ansett's carrier faced at that time.

Qantas and Virgin Blue, the big players in the market. (Photo: Michael Meier)

The whole Ansett story came to an end in September 2001, when the whole Air New Zealand Group collapsed. Air New Zealand was bailed out by its government while Ansett was eventually forced to liquidate after the last rescue attempt failed in March 2002.

Virgin Blue took advantage of the vacuum in the domestic market and built up capacity to win a part of the former Ansett market share. To cope with the new situation, Virgin Blue altered its original approach. The company moved away from the point-to-point concept and became a network carrier, offering connections trough its hubs.

Qantas was after the Ansett passengers too and Virgin Blue had to act quickly in order to gain a big piece. Until then, the airline already had a market share of 17%. But now, the conditions drastically changed and Virgin Blue suddenly found itself as the second heavyweight in the market. The demise of its competitor also allowed Virgin to take control of a part of former Ansett terminals and lounges in Sydney and other airports all over the country.

 

Virgin Territory

As the name suggests, Virgin Blue has been set up by the U.K. based Virgin Group. Started by entrepreneur Richard Branson in the early Seventies, the group now holds interests in a number of airlines all over the globe. Beside Virgin Atlantic Airways, Belgium-based Virgin Express and Virgin Nigeria are also part of the group. Virgin America, a new start-up based in California will soon join the Virgin airline club.

Beside the aviation business, the Virgin Group is lending its name to a wide number of other businesses such as a U.K. train operator, mobile phone providers, the famous Virgin Mega Stores and many other more. In Australia, the Virgin Group is prominently represented through Virgin Blue, but the group also offers holidays, credit cards and home loans beside a number of other services.

Richard Branson is the person behind all the Virgin Companies - and their most valuable marketing asset - but he's no longer directly involved in the day-to-day business. Virgin Blue is lead by Brett Godfrey, who has been Chief Executive Officer since the company's inception. He previously held management posts at Virgin Atlantic Airways and at Virgin Express. In 2000, he left Europe and moved back to his home country to become a co-founder of Virgin Blue.

Richard Branson is christening the first aircraft in Brisbane. (Photo: Virgin Blue)

When the company was launched, it was completely owned by the Virgin Group. In March 2002 Chris Corrigan's Patrick Cooperation was brought in as a new shareholder. Patrick took a 50% stake in the company. This resulted in new funds for Virgin Blue, needed to finance the huge expansion. Another change in the ownership structure came in late 2003 when Virgin Blue was floated on the Sydney Stock Exchange. This further reduced the Virgin Group's stake.

The ownership structure has since changed again - twice. First, the Patrick Corporation launched a hostile takeover bid in early 2005 to gain control of the airline. By the closure of the offer, Patrick held 62% of the company; the Virgin Group retained a 25% share.

Later the same year, the Patrick Corporation itself became a takeover target when its competitor, Toll Holdings made a hostile offer to buy Patrick. This battle went on over months and even led to some court cases. Virgin Blue was an important part of the discussions, as the Virgin Group teamed-up with Toll to use the takeover attempt to win back control of Virgin Blue. As part of Toll's first offer, the Virgin Group would have increased its ownership in Virgin Blue after the takeover, from 25.6% to 40.6%. But during the process, Toll adjusted its offer and the Virgin Blue deal was no longer part of the transaction.

After months of battling, the offer was finally accepted by the Patrick board members and Toll took control of its competitor. The Toll Group does now control 63% of the airline and has no intention to sell this stake in the short term, as Toll's Chief Financial Officer Neil Chatfield was quoted in January. At the moment, Toll would have to sell its stake at a loss, since stock markets have plunged in recent months. Once market conditions change, Toll might decide to offload Virgin Blue Holdings again, freeing up money for its Asian expansion.

In its young history, Virgin Blue already went through two hostile takeovers. And the issue is still not solved. One could think that this would cause discussions and uncertainty within the company. It sure leads to some talks, and the new owner's ideas might impact the long-term strategy. But in general, the management points out that the issue does not have any direct impact into the daily business.

Business as Usual

Despite the ongoing ownership controversy, the airline has an impressing track record. Virgin Blue employs more than 4000 people today. In just seven years, the fleet has grown to more than sixty planes, all of them modern Boeing 737-700s and 737-800s, as well as some Embraer jets, which the airline started to add in late 2007.

The Embraer 170s and 190s were added to spread the network to new places which couldn't justify a Boeing 737 service. Places such as Alice Springs for instance, where the airline originally flew but pulled out as the place couldn't fill the +150 seats of a 737.

The airline placed orders for 11 Embraer 190s, three Embraer 170s and also holds six additional options. Adding the Embraers is a step away from the simple one-type fleet, but it will enable the company to reach many more places and increase frequencies between cities.

Brett Godfrey, Virgin Blue's CEO. (Photo: Virgin Blue)

Overseas Opportunities

Still, the domestic market doesn't offer too much potential anymore. Chief Executive Brett Godfrey and his team had to look elsewhere for new opportunities. In 2003, Pacific Blue was established in New Zealand. A fully owned subsidiary, it allowed Virgin Blue to enter the Trans-Tasman market between Australia and New Zealand.

The Tasman routes, previously a traditional duopoly market controlled by Qantas and Air New Zealand, have since become a hard-fought terrain. Today, a number of airlines, including Qantas, JetStar and Emirates are fighting for these customers. After Virgin Blue brought affordable air travel to the domestic market in Australia, it also did on the Tasman.

And the quest went on. From New Zealand, Pacific Blue spread its wings to Pacific Islands and is currently flying to Fiji, Vanuatu, Toga, Cook Islands and Samoa. In Samoa, Virgin Blue even established another new subsidiary, Polynesian Blue, after winning a submission by the island's government for airline services.

These days, Virgin Blue is looking even further to the west. A team is working on the project to start transpacific flights to destinations such as Los Angeles. These routes are the cash-cows for Qantas and its American competitors. More than once, Singapore Airlines has tried to establish itself in these markets too, by offering a direct service from Sydney to Los Angeles. So far, these attempts have always been blocked by the Australian government. Virgin Blue seems to be really close to crack into that market now.

Preparations are already quite advanced. The Boeing 777-300ER was selected as the plane of choice for the new long-haul flights. The Brisbane-based company has ordered six 777 jetliners, with options for six more. The 777-300ER nominally carries 365 passengers up to 7,880 nautical miles (14,594 kilometers).

In July 2007, Virgin Blue also announced the airline's new name: "V Australia." Due to the fact that Singapore Airlines holds a major stake in Virgin Atlantic limites the group to use the Vrigin name internationally in the airline business. That's also the reason why Virgin Blue's NZ offspring is called Pacific Blue.

V Australia's Boeing 777-300ER will sport a silver fuselage with a red tail featuring the stars of the Southern Cross and elements of the Australian flag.

The company has also gained formal confirmation from Australia's International Air Services Commission (IASC) that it has approval to operate return non-stop services between Australia and the United States commencing late 2008.

V Australia's livery on the Boeing 777-300ER. (Photo: Virgin Blue / V Australia)

Virgin Blue is not the only domestic low-cost carrier aiming for foreign destinations. Qantas-owned JetStar has already international operations with Airbus A330 aircraft sourced from Qantas. JetStar was launched in 2004 by Qantas to attack Virgin Blue's predominant position as Australia's leading low-fair airline.

While JetStar now offers an extensive regional network, its arrival hasn't harmed Virgin Blue too much. Virgin's market share remained unchanged, as Heather Jeffery, General Manager of Public Affairs, points out. Apparently, JetStar was more like a tool for Qantas to shift a part of its low-yielding economy traffic to the new entity with a lower cost base.

Frequent Flyers

But Virgin Blue is also innovating in other areas of the business, by adding services. By doing so, the airline moves itself more and more away from what we know as the traditional low-cost model.

In its core, the airline has been set up in a similar approach as other well-known no-frills carriers in Europe and the United States. It offers all-economy class seating and food is only available on purchase. But then again, the airline is offering services you wouldn't expect from a low-cost operator, such as assigned seats or network connections with checked-through.

Another initiative to drive more people to the red planes was the introduction of a frequent flyer programme. Velocity, as it is called, has been introduced in late 2005.

It has long been criticized that Virgin Blue didn't have a loyalty programme whereas travellers at Qantas could collect miles. Virgin invested about $A 17 million (USD 12.7 million) into the set-up of Velocity, which has already won a Freddy Award for "Best Award Redemption" in the Asia Pacific region. But this doesn't really come as a surprise, members are allowed to redeem their points on any flight, any seat without blackout periods known from almost all the other programmes.

Furthermore, Virgin Blue took a unique and clever way in assigning points. Instead of giving them out according to the number of miles flown, customers get a certain number of points determined by the total ticket price. And its passengers seem to like the programme. In June 2007, Velocity was signing up its millionth member.

One of many 737s docked in Brisbane. (Photo: Michael Meier)

 

Definition of a Concept

With the introduction of lounges, Virgin Blue again moved further away from the rock-bottom segment. The airline opened lounges at its main gateways. Initially, the lounges were called Blue Rooms. Just recently, they were redesigned with a multi-million investment. The new lounges, opened by the end of May, are now called "The Lounges". Access to these lounges can be gained through a yearly membership or by paying a single entrance fee.

Another pay-on-demand service arrived in the form of live television. The company is constantly equiping its fleet with seatback screens and satellite receivers. The service is based on technology originally developed by JetBlue. Virgin Blue hopes to attract more customers and earn extra revenue with this innovation.

These are just some very visible changes in Virgin Blue's product and approach. The airline's strategy has clearly emerged from a traditional low-cost model. It transformed itself to a full network carrier. So, are costs much higher now? Not at all, Virgin Blue is a perfect example of the fact that the so-called low-cost airline doesn't really exist. Every single carrier wants to label itself as a low-cost airline nowadays. Fair enough, with ongoing restructuring and deep cuts in labour costs, all airlines try to trim their costs down to the level of their so-called low-cost competitors.

A better term to describe Virgin Blue would be "New World Carrier"; a forward-driven airline with a different approach and strict focus on a low cost base.

Virgin Blue has always been proud to be the airline that brought lower air fares to Australia. And despite all product enhancements, Virgin Blue is still committed to its original credo: To offer constantly affordable fares.

All service enhancements have to justify themselves. As Brett Godfrey once pointed out, "Virgin Blue is investing pennies to earn Pounds".

Early morning arrival in Sydney. (Photo: Michael Meier)

 

Financials

And the concept seems to work. Virgin Blue is a strong and profitable company. In August 2007, the airlines' last major financial announcement, Virgin Blue reported a net profit after tax of $216 million, a 92.9% improvement on the previous year.

Net profit before a series of one-off expenses was $232 million. During the period under review Virgin Blue incurred $23 million of non-recurring pre-tax costs associated with preparations for items including its long haul international airline V Australia, the 20 Embraer E-Jet domestic growth project and the write-off related to cancellation of the reservations project.

Uncertain fuel costs continue to be a challenge for Virgin Blue - as they are for every single airline. The company has continued to implement its hedging policy and for FY08 has in place currency hedging covering 77% of requirements and fuel hedging covering 49% of fuel requirements. Also, the company counteracts this problem by keeping all other costs as low as possible.

Beside fuel, labour related expenses account for the second biggest cost factor in Virgin Blue's balance sheet. No plane would fly without kerosene, but neither would it without the right people on board and in the background. And investing in people usually pays out, also for Virgin Blue. It's does not come as a surprise that the airline has also approved a profit share programme, distributing AU$ 7.1 million to it's 4000 staff members.

PacificBlue is flying to New Zealand and into the Pacific. (Photo: Michael Meier)

Good People

The Virgin Group and all of its companies around the globe have always been focused on their people and their motivation. This doesn't stop in Australia. Virgin Blue's employees share a really professional altitude. But it seems as having fun is somehow part of the work at this company. This Virgin spirit can be seen all the way through the departments. From Check-in staff and flight attendants to upper management.

Each year, the company organizes a huge party for its staff. As a highlight, the management including Chief Executive Brett Godfrey is always good for a surprise with a crazy performance on stage.

These parties go in line with the company's celebration of newsworthy events. Be it the inaugural of a new route or the launch of a new service. Virgin Blue understands how to use these happenings for some good publicity. It has become a tradition that staff on first flights into new destinations arrives in fancy costumes, management included.

That's Virgin Blue - what you get when you mix the Virgin spirit with the Aussie lifestyle. Can't be wrong!

Michael Meier