Virgin veers into a Qantas dogfight

John Borghetti has declared the first phase of his repositioning of Virgin Australia virtually over. Now, he says, it is "game on" in his attempt to crack Qantas' dominant position in the domestic market.

The Virgin Australia result today supports the view that Borghetti has, in a remarkably brief time and with a whirlwind of activity, fundamentally remade the airline.

Not only is it now profitable, with an underlying pre-tax profit of $82.5 million for the year to June, but revenue grew 19.8 per cent, yields were 12.2 per cent higher, its international business was solidly profitable and, Virgin says, it achieved its target of 20 per cent of domestic revenue from corporate and government accounts a year ahead of schedule.

It is that last achievement that would concern Qantas, although it says that it hasn't lost any significant accounts.

Borghetti's entire strategy of re-branding, taking his rebuilt fleet and his product upmarket, adding a business class, refurbishing lounges, re-launching his frequent flyer program, adding capacity and striking alliances with a string of international airlines is focused on attacking Qantas' dominant high-yield customer base.

Borghetti said today that Virgin had experienced a 113 per cent increase in high-yield fares.

What isn't yet clear is how much of the Virgin turnaround is due to the industrial problems Qantas experienced last year, which severely disrupted its operations and ultimately led to the controversial grounding of its entire fleet.

That produced an inevitable windfall for Virgin but it will take more time to determine whether the gains are lasting, with Qantas restating its determination to defend its 65 per cent market share and its hold on business travellers.

Certainly Borghetti doesn't plan to rest on his laurels. Last year Virgin added 9.6 per cent to its capacity and this year it plans to grow capacity another 8 or 9 per cent in the first half of this year.

With Qantas flagging capacity growth of 9 to 11 per cent competition in the domestic market could be quite brutal and costly, although Borghetti says he has no capacity share target but is focused on yield and margin improvement.

Borghetti is prepared for a fight, with cash of $802.6 million, $480 million of it unrestricted.

He's also moving onto the next phase of the game plan, which is built on a $400 million and three-year business efficiency program and a plan to aggressively expand the Velocity loyalty program to counter a key to Qantas' hold on business travellers, its own frequent flyer scheme.

The Velocity membership grew from 2.5 million members to 3.2 million last year and Borghetti is targeting more than five million members by the end of the 2015 financial year. His allies – Emirates, Air New Zealand, Delta, Singapore Airlines and Virgin Atlantic and Virgin America – are key assets in the attempt to drive into Qantas' stronghold.

They are also important to Virgin's international business, with generated earnings before interest and tax of $35.4 million.

Borghetti's creation of a virtual and capital-light international network was partly a response to the losses Virgin had experienced in its international business before he was appointed but was also an extension of his ambitions to shift Virgin's domestic business upmarket because the alliances boosted passenger flows into and out of the Virgin domestic network. Interline and code-share revenue, he said, grew 158 per cent last year.

Having largely realised his vision for a repositioned airline, one less reliant on low-margin tourist volumes and less exposed to the Queensland market in particular, the emphasis is now on growing Virgin's earnings and creating a sustainable platform for future growth.

Despite the distractions within Qantas as it continues to try to radically remake its own haemorrhaging international business, Borghetti, a Qantas veteran before joining Virgin, would know that is more easily said than done.

Qantas, with its twin brand strategy, will do whatever it has to defend its domestic market share and its business travel franchise and, knowing that Borghetti understands its operations and vulnerabilities intimately, won't underestimate him or his ambitions, or cede sky to him without a fierce contest.