MARKETS SPECTATOR: Virgin's two minds

Virgin Australia's plans for discount carrier Tiger Airways is a risky strategy for an airline in the midst of trying to rebrand itself as a full service alternative to Qantas.

In 2000 a new airline was launched in Australia. Its name was Virgin Blue and was launched with typical flamboyance by Sir Richard Branson. Virgin promised cheaper yet better service to Australians long held in the grip of a Qantas air travel hug.

Now Virgin Blue is Virgin Australia and its chief executive Massimo (John) Borghetti wants to make it the airline of choice for the jet setting executive in Australia, offering more than credit card payment for beverages. Business class seats have been installed, terminals upgraded and meals are offered with a selection of wine.  

In two years Virgin says it has doubled the revenue it gets from corporate and public servant travellers to 20 per cent of sales in 2012 from 10 per cent of revenue in 2010. In 2012 Virgin’s total revenue was $3.9 billion. Borghetti has formed alliances with airlines such as Singapore and the United Arab Emirates’ Etihad. Virgin has acquired regional airline Skywest. Now it wants to return to its budget roots and expects to close its acquisition of Tiger Airways Australia in July.    

Qantas’ budget airline Jetstar is hardly a pushover for Virgin. Qantas won’t provide any statistics as to its market share of budget travel in Australia but Virgin acknowledges that Jetstar is in a “strong” position.

Tiger has just 11 aircraft. By 2018 it hopes to have 35. The fares, routes and packages for Tiger have yet to be announced.

Virgin’s efforts to make the grind of air travel less of a grind with cheery ground staff and flight crews have made an impression on the Australian market. But Qantas’ market share of the business traveller market is 84 per cent, according to its chief executive, Alan Joyce. The real battle for business travellers happens not in business class, which makes up less than 5 per cent of spending by companies in the domestic airline market, but in economy, according to corporate travel consultant TMS Australia.

Budget airlines could begin to eat the sales destined for their full service parents in today’s cost-conscious corporate and retail environment. For Borghetti, Virgin’s gamble with Tiger may determine whether he is hailed as a visionary or as someone who has misjudged the consumer and the airline market terribly.

At 1350 AEST Virgin shares were flat 43.5 cents. The stock has risen 3 per cent this year and in the last 12 months. Qantas shares had fallen 1.92 per cent to $1.53. The shares have gained 1 per cent in the last 12 months and 3 per cent in the year to date.

The benchmark S&P/ASX200 Index was up 5.543, or 0.21 per cent, to 4965.40.

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