Floods to wash away Virgin doubts

If John Borghetti had any doubts about the complex shift in Virgin Australia's positioning and strategy that he has been pursuing almost from the moment he became chief executive nearly three years ago, the latest floods in Queensland would have dispelled them.

While the insurers and Bowen Basin coal miners are the most obvious sectors adversely impacted by floods in Queensland, the disastrous 2011 floods, and the devastating Cyclone Yasi that followed them, also severely buffeted the domestic airlines.

Qantas calculated the cost of those Queensland events to its earnings at $90 million and Virgin Blue, as it then was, at $50 million. Virgin Blue was pushed into loss by the impact of natural disasters that financial year.

At the time, while Virgin was trying to push into more of a mid-market offering, it was still predominantly a discount carrier reliant on leisure routes. More than half its core domestic flights were into or out of Queensland.

The 2011 experience confirmed to Borghetti that he had to reduce that reliance on high-volume, low-margin routes and diversify Virgin's exposures away from Queensland, which led to the re-branding and re-positioning of the airline and its shift into an ongoing assault on Qantas' dominance of full-fare, business-related travellers.

That is, however, a work-in-progress and one that has triggered something of a price and capacity war between the two carriers that is placing significant pressure on yields. The other domestic player, Tiger Airways Australia, which is very focused on leisure routes, last week revealed it had lost $32 million in the nine months to end-December. The floods aren't going to help Tiger to reduce those losses.

Virgin Australia is, of course, in the process of acquiring a 60 per cent interest in Tiger's Australian operations, if the Australian Competition and Consumer Commission allows it. It is also in the process of acquiring the Skywest regional aviation group.

The latest floods underscore both the merit of the strategy Borghetti has been pursuing and the importance of gaining that ACCC tick for the Tiger deal. The ACCC has made it clear that it has some reservations about reducing the number of domestic competitors from three to two.

That would allow Borghetti to reduce the exposure of his core business to leisure routes and Queensland in particular, using the low-cost Tiger brand to compete with Qantas' Jetstar in that segment of the domestic market and sharing the exposure to the ongoing vulnerability of Queensland and northern New South Wales to natural disasters with Tiger's Singaporean-based shareholders.

Adding control of Tiger and Skywest to the Virgin Australia business and building his group's exposures to international routes through the series of alliances with international carriers that he has struck won't quarantine Virgin entirely from future floods or cyclones but it would create greater scale and diversity with which to absorb the impacts of those kinds of events.