Where Did Virgin Australia Go Wrong?

In the washup following Virgin Australia going into voluntary administration, the armchair surgeons will be busy prepping for the inevitable post mortems. So let’s sharpen the scalpel and get in early by looking at where Virgin Australia went wrong.

The problems for Virgin Australia started about 10 years ago. Photo: Brisbane Airport Corporation.

A new CEO initiated a shift in strategic direction

About ten years ago, Virgin Australia transformed from a lean, low-cost operator into a full-service airline. That change coincided with a new CEO at Virgin Australia. John Borghetti had lost out in the race for the top job at Qantas to Alan Joyce. Shortly after that, Mr Borghetti jumped terminals to Virgin Australia.

There’s a train of thought that Mr Borghetti wanted to wreak havoc on Mr Joyce and that the best way to do that was to match the Qantas product. We’d never suggest something so petty as a reason for the change in strategic direction at Virgin Australia. But, Virgin Australia’s move up-market coincided with the arrival of the new CEO.

Former CEO John Borghetti took Virgin Australia upmarket and increased expenses. Photo: Virgin Australia.

Also coinciding with Mr Borgetti’s arrival at Virgin Australia was a brief period of profitability for the airline. Virgin Australia made about USD$15 million in both 2010 and 2012. Since then, Virgin Australia hasn’t turned a profit.

Expenses increased as losses mounted

A fundamental problem arises when expenses increase in the face of continuing losses. You have to borrow to keep going. Virgin Australia’s aircraft got a makeover, business class was introduced, and lounges were introduced. It was all very nice, but it costs money.

Previously, Virgin Australia (known as Virgin Blue) had operated just one type of aircraft. Now, it picked up A330s, Boeing 777s, Embraers, ATRs, and A320s. It was all to facilitate new routes and projected growth. The problem is that diverse fleets are so much more expensive to operate than a single fleet airline.

Virgin Australia diversified its fleet, at great expense. Photo: Virgin Australia.

Shall we speak of Virgin Australia’s overseas adventures and ill-fated forays to Johannesburg, Phuket, Hong Kong, and elsewhere? When the airline could have stuck to its knitting – a robust domestic network, it chased shiny vanity international routes that bled cash.

And Tigerair Australia? Who thought a dozen A320s could compete against the might of Jetstar? Virgin Australia assumed 100% ownership of Tigerair in 2014 when they bought the remaining 40% stake off Tigerair Holdings for one dollar. Somehow the asking price failed to raise any red flags.

So here we have an airline spending a lot of money and also continuing to lose money. Subsequently, it has to start borrowing money. It is a recipe for disaster, or at least voluntary administration.

Corporate market a hard nut to crack

John Borghetti is copping a bit of flack for his leadership at Virgin Australia (he finished up early in 2019). But when you look at the nature of flying in Australia, you can see what he was trying to do. It wasn’t so much about cracking Alan Joyce; it was about breaking into a concentrated market.

With 26 million people, Australia is a small aviation market. But its cities are spread out, so Australia is also a busy and profitable aviation market. And like most countries, a small percentage of flyers are the airline’s core customers, the Pareto principle at play.

The competition for the top 20% of flyers is fierce. Qantas has a market share of about 60% in Australia. It looks after its best customers – nice lounges, good frequencies, connections, and so forth.

Virgin Australia laid on a good product to crack the corporate market but struggled to get there. Photo: Virgin Australia.

Mr Borghetti had a red hot go at breaking into this lucrative market. It was, of course, hugely expensive. But after operating for 20 years, Virgin Australia still only has about 30% of the market. Qantas chases the corporate market share hard. Big time executives who might be persuaded to switch accounts to Virgin Australia are given keys to the fabled Chairman’s Lounge and kept loyal to Qantas. It might all seem a bit silly, but things like this have been significant hurdles for Virgin Australia to overcome.

Corona widened the cracks in the pillar supporting Virgin Australia

If there is a concrete pillar holding up Virgin Australia, factors like increasing expenses in the face of continuing losses and difficulties cracking the lucrative corporate market are the cracks in the pillar. And these are not little hairline cracks.

Virgin Australia went into 2020 weakened. When the corona-crisis shut down the aviation industry, Virgin Australia, which was already bleeding money, was suddenly starved of revenue. What funds it had it was spending fast. No-one really knows how long this will last for, but there is no immediate relief in sight. The cracks were widening in that pillar as the pressure mounted.

The administrators of Virgin Australia are optimistic the airline will keep flying. Photo: Virgin Australia.

Voluntary administration was almost inevitable – almost a relief.

What’s my last take from the collapse of  Virgin Australia? As in life, ultimately, the only person you can rely on is yourself. Virgin Australia went to the government, banks, and parent companies for financial help. All rebuffed the airline. Like a human being fast running out of money, with mortgage payments due, and none of your nearest and dearest willing or able to assist you, the buck and ultimate responsibility lie with you. Virgin Australia found this out the hard way.