Borghetti plots a Qantas coup
Virgin is seeking a larger chunk of Australia's lucrative, Qantas-dominated business traveller market. But the airline's strategy is more likely to be a gradual one rather than an all-out capacity war.
In the past few days, coinciding with imminent delivery of Virgin’s two new Airbus A330s, Borghetti has been talking up his plans to increase capacity and frequencies on the core triangle of routes between Melbourne, Sydney and Brisbane as he introduces more business class product on those routes.
Qantas’ Alan Joyce has responded by saying he, too, will increase capacity in response and do whatever it takes to defend the 65 per cent Qantas/Jetstar domestic market share – its ‘’line in the sand’’ – that Qantas has long believed optimises its economics. Qantas has demonstrated in the past that it will dump capacity onto the key domestic routes rather than allow any threat to its dominant share.
Borghetti, who was involved in defending Qantas’ position against a number of attempts by low-cost-carriers to enter the domestic market, would be only too aware that Qantas will match, and probably raise, any attempt by Virgin to significantly increase its share and that Qantas does have the ability to deploy both its domestic brands to defend its position.
It could be that he was simply drumming up some visibility for the expansion of its A330 fleet. Virgin will have five of the planes, featuring lie-flat business class seating, by the end of the year. The two new planes will be in service by the middle of next month. There are industry-based reports, however, that support the view that Virgin’s planned ramp-up in its capacity is very real.
Capacity and price-led competition between airlines can be quite destructive, with the potential for both load factors and yields to be trashed. Borghetti is too experienced an airline executive, and too familiar with Qantas’ approach to dealing with upstarts, however, to simply ignite a clash that creates mutual destruction of value.
Thus far the Virgin ambition has been to avoid a full-scale confrontation with Qantas while trying to grab a slice of its business passenger market and the yield premium that proffers. It has been able to under-cut Qantas on price in the knowledge that Qantas won’t damage its entire yield structure by over-reacting to what has been a relatively modest Virgin business class capacity.
So far the strategy has been quite successful. While its load factors have slipped since it has added capacity at a rate ahead of the growth in passenger volumes, the premium yields it has gained on those routes where it has introduced a business class have more than offset that. Its revenues from travel management companies and governments have been rising rapidly.
Once it has more premium capacity available – as it will have from next month – Virgin will be able to broaden and deepen its push into business class travel. Relative to Qantas, however, it will still have only limited premium capacity in the market.
That is consistent with Borghetti’s ambition of gradually edging Virgin’s share of the corporate and government market up to 15 to 20 per cent rather than with a full-scale price and capacity war that Virgin doesn’t currently have the profitability to win.
While Borghetti has been quoted as saying that no-one has a God-given right to any particular level of market share – a response to the Qantas line-in-the-sand – he’s far more focused on improving Virgin’s profitability than he is on simple market share goals.
If he can pick up a slice of the business and government market by adding premium capacity, the yield improvement should offset the dilution of load factors. Additional capacity, therefore, is designed to allow the increased flight frequencies essential to attracting business travellers rather than by market share ambitions.
If Qantas’ response is to also add capacity, and discount its business class seats and weaken its own profitability, that would be a bonus – provided he doesn’t inadvertently spark an all-out capacity and price war that the far bigger and more diversified Qantas is better-equipped to survive.
InvestSMART FORUM: Come and meet the team
We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free