Virgin terrified of Jetstar/QF plans

[jakeseven7]

Just had a rather interesting chat with an snr mgr at Virgin Blue... over a couple of beers his tongue got a bit loose...!

Basically with all the QF announcements - massive new fleet orders, Jetstar to NZ, linking up with Jetstar Asia, a two class Jetstar international airline, all this allowing the main QF brand to concentrate on more business routes - combined with the ownership struggle @ Patrick really has VB exec team more than a little nervous...

He said no one, including Brett Godfrey expected such a large, 'coughbersome' company such as QF to be able to respond so strategically to VB. They all had Jetstar tagged as a total non threat to begin with and realise now they should have taken it more seriously now Jetstar has positioned itself as the real budget airline in Australia and eroding VB's once core target market. This has left VB uneasily trapped in the middle between a rapidly growing Jetstar and a solid Qantas.

The sales/marketing team are terrified that VB has lost its differentiation in the market as it creeps closer to Qantas in price without offering anywhere near the frequency or services and Jetstar is now widely known as the cheapest airfare so picks up the leisure travellers.

Interestingly the general feel at Virgin is that Velocity is being marketed badly and is a bit of a 'we had to have one so someone has slapped this together in a week or so' feel about it.

Hedging - don't even go there... Staff can't beleive that fuel was not hedged. It is a banned topic @ HQ! Pacific Blue isn't really talked about either, it started as a bit of a 'keep the air fair' idealistic thing but nobody at Virgin realised how tough the trans tasman / pacific was going to be - and as we know they haven't made a dime out of the extension (infact have lost money). Quote 'even bloody air pacific is sticking the boot in, via qantas of course!'

Having said all that Virgin are desperately trying to win back the media who have been busy picking apart their balance sheet over the last couple of years. They reckon if they get Branson back it will be a boost but realise that even Branson has some work to do after his latest stunt to promote Virgin Atlantic @ Bondi was largely ignored by the media. Virgin believe the one key thing they have left is their brand's attitude.

Thought this was all rather interesting coming from an insider!
If you are planning to have a go and accuse me of makingthis up, please don't bother but would love to hear others thoughts on it..

IS Virgin in real trouble? ;-) Or just a tough patch?!

Cheers /

 

[thadocta]

Wot he said.

Dave

 

[JohnK]

IS Virgin in real trouble? ;-) Or just a tough patch?!

Very interesting comments.

I think Virgin will survive especially if Branson is back again.

International 2 class flights reasonably priced will give them a small share of the market. I don't think they can compete with the Qantas monopoly but certainly can compete to a certain extent with Jetstar. Just need to choose their initial routes carefully. We have seen the problems, with O7, than can occur when trying to start up a new airline.

I think Velocity is a reasonable start for a new frequent flyer program. Adding decent partners to this program will make it more attractive to some people.

 

[JohnK]

IS Virgin in real trouble? ;-) Or just a tough patch?!

Very interesting comments from the senior manager at Virgin.

I think Virgin will survive especially if Branson is back again.

International 2 class flights reasonably priced will give them a small share of the market. I don't think they can compete with the Qantas monopoly but certainly can compete to a certain extent with Jetstar. Just need to choose their initial routes carefully. We have seen the problems, with O7, than can occur when trying to start up a new airline.

I think Velocity is a reasonable start for a new frequent flyer program. Adding decent partners to this program will make it more attractive to some people.

 

[QF WP]

Might have to follow up with Brett and another very senior manager I know about the truth or validity of some of this information...

Interesting, nonetheless...

 

[N860CR]

I think Virgin are going fine, they are still the better of the two LCC's in Australia and have substancially better public support. Jetstar Domestic is growing, yes, but more through force than choice. Virgin probably didn't expect them to still be around (same way I feel), however with Qantas dropping a number of routes, people have been forced to use Jetstar and hence ensured its sucess.

It's worth noting that JetstarAsia hasn't had anywhere near the sucess of Jetstar here. There is a lot of competition over there, where as in Australia people basically take whatever seat they can get (because there isn't always too many of them).

Pacific Blue is still developing and Jetstar's NZ routes will probably have the same issues. It's evidently harder to get costs down on some of these routes, FJ and DJ charge basically the same fares SYD-NAN, however DJ has undercut QF and NZ on the trans-tasman flights. It needs time to grow.

Should Branson take control again it will put Virgin in a better long term position, however for 2006 I'd say the airline will just work on strengthening its current strong market position.

 

[Yada Yada]

As someone who has flown more DJ than QF domestically this year, I'd say they are still doing OK. They have turned a decent profit despite not having hedged fuel pricing, and with JQ having eaten into their LCC market, and with SYD airport costs having gone through the roof.

Whenever I fly SYD-MEL or SYD-BNE, DJ planes are almost entirely full, so they certainly do not have the problem that O7 has. The peak hour scheduling on the routes I travel are the equal of QF. Although on a recent trip to ADL I flew QF because the schedule suited me better than DJ's.

I wonder if the comments you heard indicate not so much actual problems at DJ but are more perceived problems. Perhaps a recent loss of mindshare is affecting them? QF/JQ have been making all the news lately with aircraft purchases and launching new services and routes etc, which probably makes DJ feel that they are being left behind. DJ have been the ones making all this type of news for the past 5 years - regular new aircraft arrivals, new services domestically and OS etc. However they have now reached a stage where they are consolidating and therefore have fewer announcements. The corporate duelling going on between Patrick and Toll cannot be helping their attitude either. The sooner this is resolved the better.

I'm not so sure they should fear JQ. There are major differences between the two and I'm not sure DJ would want to mimic them. They'd be better off continuing to improve their business offerings while keeping costs contained. JQ does not even fly to MEL so IMO they are a side player in one of the biggest sectors in the country. And they are much smaller in fleet and pax numbers right now.

Getting Branson back would be good even just from the point of view of having a charismatic and cheeky figurehead back in place.

 

[NM]

Very interesting comments from an insider (no reason to believe you are making it all up). I can understand the thinking. Whether it is true or not is less of an issue, but perceptions are realities in many cases.

I think Qantas got a wakeup call when DJ went through its rapid expansion. They really under-estimated the threat from DJ. Now it appears the pendulum may have swung back the other way.

 

[markis10]

Cheap fares attract business travellers as well, I normally pay the difference between best available and a QF ticket but lately Jetstar have been half the price of everyone else on the FNQ sectors, at $200 a ticket the points are not worth it.

VB are also suffering from a lack of freight business which Jetstar still get with AAE, contributing to the bottom line, although having a fleet of 737's is a big disadvantage for freight ops in the first place.

Jetstar have their issues as well, after all Asia has not gone well, I suspect the real losers in all the changes are the QF staff, its clear the cost base is being driven down by the Jetstar expansion and many at QF will find themselves doing the same job with a lot less perks in the future.

 

[QF WP]

Members might be interested in a Centre for Aviation article (I can't post link as only open to subscribers), edition #98, dated 29 Nov 05, outlines why DJ are confident that they can take on both Qantas and Jetstar and succeed. Those who want it can PM or email me and I'll email (it's a PDF format, 2.45MB).

Also Bartholomew's article in The Age and SMH on 1 December 05 (can't find the link at the moment):

Virgin tells Qantas it's a New World

VIRGIN Blue has, for the first time, publicly articulated its revised strategy. While unlikely to set off any alarms at Qantas, it does provide an insight to how Virgin Blue plans to broaden the tussle for market share and yield, and its own view of its competitive advantages.

The strategy was presented to a conference of senior Virgin Blue managers yesterday, with the main points published in the Centre for Asia Pacific Aviation's weekly report on low-cost carriers (LCCs).

In it, Virgin Blue talks about the evolution of such carriers. When the LCC phenomenon was new, there were few carriers, little overlap between their markets and a focus on developing new routes or contesting routes with high-cost incumbents. They were highly differentiated from legacy carriers and were distinct propositions - in value and product.

More recently, as markets have become more crowded, LCCs have started to cross swords with each other and with LCCs like Qantas's Jetstar, established by legacy carriers.

"The problem with the 'baby LCC' strategy is that it does nothing to address the situation where LCCs directly take on legacy carriers in core trunk markets competing for higher-yielding business travellers, which will increasingly be the case," the airline said.

The paper said legacy carriers had relied on network strength and product differentiation to garner a yield premium to offset their cost disadvantage.

"But what happens when a new type of carrier begins to offer the same features that drive the yield premium, yet maintains a significant cost advantage?"

As Virgin Blue says, this isn't a hypothetical question because Virgin Blue itself is doing precisely that. It describes the new version of LCC as a "New World Carrier" and says it is probably the leading example of the new type of LCC.

What differentiates Virgin Blue from most LCCs is that, thanks to the demise of Ansett, it is a network rather than point-to-point carrier. It offers national coverage, multi-sector boarding passes, through-checked baggage, international and regional inter-line and codeshare arrangements plus the frills of airport lounges and now a frequent flyer program.

It is a low-cost version of a full-service airline which offers the frills that are paid for either separately or by trading off incremental increases in its costs for significant gains in yield.

Virgin Blue's big advantage over Qantas is the productivity of its assets and people - an advantage that Qantas can't attack because of legacy industrial relations, aircraft and systems. Provided Virgin Blue remains disciplined, it can trade off costs and yield at the margin and seek to expand its market share faster than its capacity growth - at Qantas's expense.

 

[jakeseven7]

Might have to follow up with Brett and another very senior manager I know about the truth or validity of some of this information...

Interesting, nonetheless...

None of this stuff was really new news to any of us - Virgins problems have been pretty well documented, and of course for PR they would never admit to this but I think it was more the whole low morale factor that suprised me, as someone else pointed out the whole Patrick/Toll thing is probably hurting them a bit.

 

[oz_mark]

I suspect that Virgin Blue is being somewhat distracted by the whole ownership thing. Watching the two airlines this year, I have the perception that it is Qantas that is the more nimble of the two airlines.

I'd say what Virgin Blue need to do is gain some focus on what it is they are really trying to achieve - how do they grow the business and so on. There may be only the two airlines, but I think they both need to make sure that don't underestimate their competition.

 

[AndersB]

Most flights domestically in Australia are short enough that any of the airlines' offerings could be endured. My buying decisions are heavily influenced by the features of the associated Frequent Flyer programs, hence my irritation with Qantas since May 05.

However, with the Velocity Program's limited options for overseas award flight redemptions, DJ will still be my last choice.

If DJ would be a Star Alliance member then I would direct 90% of my domestic travel to them.

So, why can't they become part of Star Alliance? Are the minimum requirements for membership that difficult to achieve?

 

[QF WP]

AndersB, I ws discussing that exact subject with a senior DJ manager on Friday. Can't post the details here, but PM me and I'll explain what I understand...

 

[Kiwi Flyer]

Most flights domestically in Australia are short enough that any of the airlines' offerings could be endured. My buying decisions are heavily influenced by the features of the associated Frequent Flyer programs, hence my irritation with Qantas since May 05.

However, with the Velocity Program's limited options for overseas award flight redemptions, DJ will still be my last choice.

If DJ would be a Star Alliance member then I would direct 90% of my domestic travel to them.

So, why can't they become part of Star Alliance? Are the minimum requirements for membership that difficult to achieve?

If DJ joined *A then I'd use them more as well.

There are 2 different categories of *A membership - full and regional IIRC.

Full membership would require a lot of IT (in particular) investment to enable partner earning and burning, and apply the *A rules (eg recognising elites). I dont know how much if any these can be waived, but I'd expect alliance airlines have limited wiggle room as these are minimum benefits the alliance is "selling".

There is also a large exit fee. IIRC when the QF-NZ tie-up was being considered a figure of $50m was bandied as *A exit fee. No idea how realistic this figure is but it certainly is significant enough that Air NZ publicly acknowledged exit fee to be an issue they had to take account of.

Regional membership has lower requirements. Maybe DJ could join *A as a regional member?

 

[Mal]

I would like to see DJ join the * alliance.

Then, they would be a real competition for Qantas in a lot more ways.

As an airline, I think they have had a few stumbles recently. However I also see them as working out good ways to compete with Qantas in the Business market. I think their re-launch of lounges will be great when it happens. I also would like to see a premium product launched.