Virgin Blue gets down to business

A profit in the airline industry these days is rare, but when you increase profit and every other significant parameter – against soaring fuel prices and a new robust competitor – that is certainly something to celebrate.

But Virgin Blue is not in a celebratory mood. Like its latest advertising campaign of ‘Getting into Business’, the airline’s management is getting on with business – attracting more traffic from the business end of town.

That push started in earnest 12 months ago and has delivered the airline a 12 per cent lift in net profit to $84.5 million for the nine months ending June 30.

Revenue was up 8.5 per cent to $1.39 billion, earnings per share up 12.5 per cent, available seat kilometres (ASK, the number of seats times the distance flown) up 3.9 per cent while costs per ASK excluding fuel were down 3.4 per cent.

CEO Brett Godfrey attributes some of the result to Virgin’s focus on the corporate market but suggests that the best is yet to come.

“It takes time for the full impact to be felt – so far it has been trickling through,” he told WA Business News.

But that trickle is gaining momentum, with yield up 2.6 per cent and load factor up 1.9 points to 77.9 per cent, resulting in an increase of revenue per seat kilometres of 3.4 per cent, to 8.02 cents.

Virgin Blue has essentially morphed into what Mr Godfrey likes to call a “new-world carrier”, since it was launched on August 3 2000 with two 737s offering seven return flights a day between Brisbane and Sydney.

The airline now has 51 737-800s dubbed NGs for “New Generation” operating over 300 flights a day to 22 destinations in Australia and the Pacific region under the Pacific Blue brand. In June, it ordered nine more 737-800s, exercising price rights placed in 2003, but these are to replace leased aircraft – not expansion.

The push into the business end of flying encompasses both adding product to match Qantas and innovative concepts – at least for Australia – to better the competitor.

In 2005, Virgin Blue introduced web check-in ahead of Qantas, which is yet to roll-out that capability, along with a frequent flyer program – Velocity – which matched Qantas but also upped the ante by offering members the opportunity of redeeming points on any flight.

“Any seat, every flight, every route, every day with no blackout period,” Mr Godfrey said.

The program was also launched with some clout, thanks to its partners NAB, American Express, Emirates, Virgin Atlantic and Europcar.

“Velocity has become one of Aust-ralia’s most popular customer loyalty programs with our ‘any seat redem-ption on Virgin Blue’ policy proving hugely appealing to Australian travellers,” Mr Godfrey said.

Also appealing has been a restructure of Virgin Blue’s timetable around frequency – particularly at peak business travel periods.

This year, Virgin Blue opened lounges at major airports and also introduced a casual user fee of $30. The take-up has been bullish, according to Mr Godfrey, with the “casual budget” for the year exceeded in just six weeks.

Virgin Blue has also introduced ‘corporate plus’ fares with easier booking restrictions. The fares give passengers complimentary access to the lounge, priority check-in and increased baggage allowance to 32 kilograms.

In August, the airline took delivery of its first aircraft equipped for live TV at every seat. After a 30-day shake-down trial, the airline will launch into a complete nose-to-tail refit, to be completed in 10 months.

Virgin Blue will be only the third airline – and the first in Australia – to introduce live television in connection with cable provider Foxtel.

Mr Godfrey said it would be the biggest thing since the airline intro-duced year-round low fares in 2000.

The live TV will replace DigEplayers, which are offered on longer haul flights and can be hired for $15 with unlimited access to 10 pre-loaded feature length movies, 10 sitcoms and short programs, up to 20 music videos and about 100 songs across several music categories.

Another plus for Virgin Blue, Mr Godfrey said, was its on-time performance.

But one corporate frill that will never find its way onto Virgin Blue flights is mobile phones, “except maybe in the loo down the back”.

Federal government travel contracts are also on Virgin Blue’s radar.

In Queensland, Virgin Blue’s home state, the airline gets 40 per cent of the travel, but for the rest of the country the figure is more like 1 per cent of the annual $250 million spend, according to Mr Godfrey.

So far, the results of the corporate push are certainly on the board – despite a 35 per cent hike in fuel costs of $70 million and $7 million in one-off costs associated with the set-up of Velocity.

Not as clear are the airline’s international plans, and Mr Godfrey is cautious in this regard.

“I am a bit of a contradiction,” he said. “I am a risk-averse entrepreneur – I am encouraged by what I have seen but there are challenges”.

The major challenge is access to the US market to build a viable business model and fleet plan. Virgin Blue has ‘requests for proposal (RFPs) with Boeing and Airbus for five 777-300ERs or A340-600s but may have to look at Asian destinations if US access is limited.

But that may alter the type of aircraft selected

“If we’re going to do it, we can do it within the two years we have indicated, with first services in 2008,” Mr Godfrey said.

Also on the expansion radar are domestic flights within New Zealand. The airline had aggressively launched flights to NZ in 2004 – under the Pacific Blue brand – but these have not built up at the rate anticipated due to intense competition across the Tasman. These flights were supposed to be the launch pad for NZ domestic flights.

Virgin Blue serves Auckland, Wellington and Christchurch from Brisbane with one flight a day, and only Christchurch from Sydney and Melbourne, again with one flight a day – not sufficient to drive into the domestic market.

The airline has had more success serving the Pacific Islands with flights to Vanuatu, Fiji, Tonga, Samoa and the Cook Islands.

Possibly Virgin Blue’s greatest success story is its staff, who belong to just three unions as opposed to the 16 unions at Qantas covering 45 enterprise bargaining agreements.

“The culture of the Virgin group is a worldwide phenomenon and our staff is just superb,” Mr Godfrey said.

In Australia, like the rest of the world, the Virgin brand is recognised for value for money, challenging the establishment and a fun work environment.

But Mr Godfrey explains that Virgin Blue is a very different airline to Virgin Express or Virgin Atlantic.

“You take some fundamental principles, such as being family and you build your local niche around that,” he said.

“Sir Richard [Branson] said that Virgin Blue was more Virgin than Virgin.”

And to get the right staff, flight attendants must go through a rigorous five-stage recruitment process.

Mr Godfrey said Virgin Blue spent more money on recruitment than any other company he had been associated with.

But the results are on the table with extremely low turnover.

He says Virgin Blue’s ace is its corporate culture. And while there is no doubt that Qantas will make inroads over the next decade in reducing its cost base, it will “never ever replicate our corporate culture,” he says.

“Our people believe they’re on a crusade and they feel responsible for the fact that our airfares are less than half the price they were when we started – despite inflation.”

Virgin Blue now operates four daily non-stops to Melbourne at 6am, 1.35pm, 5.40pm and 11.35pm, while Sydney has three non-stops at 12.25am, 12.45pm and 4.25pm. The airline also offers one daily non-stop to Adelaide with connections to Sydney and Melbourne and a daily Broome flight.