What is the future of Virgin Australia?

By CityRail | Jul 30, 2018, 05:37 PM
Hi all,


As John is leaving Virgin also its alliance with AirNZ is ending on 28th October 2018, I think it would be important for us to think about the future of this airline and what should be done to make this airline survive in the increasing competing market.


Domestic Operation


It seems that domestic operation of Virgin is doing pretty well, as patronage and profitability has been rationalised after price war with Qantas. However I wonder if the domestic network is sufficient in the long term from being sustainable.


Virgin made a few attempts to improve its regional coverage, such as VARA with ATR72s, however it failed in Queensland (3 routes gone to Alliance Airlines) and still does not achieve an extensive network.


With Domestic Network, I wonder if Virgin Australia should consider entering into alliance with Regional Express, or even to acquire or merge with Regional Express. It seems regionally Rex's enemy is Qantas, especially in New South Wales and South Australia, and such alliance can achieve a significant competitive advantage to Qantas. It can also allow Rex to have access to more capital from Virgin and allow the company to purchase larger planes for key routes (such as Sydney - Wagga Wagga, Adelaide to Kingscote, Townsville - Cairns etc) to compete against Qantas.


It can also allow Virgin to have greater access from regional Australia for its NZ, Pacific Islands and Hong Kong/LAX routes.


East-West Routes


East-West Routes is another problem. As 2 A332s are taken away for Hong Kong, it seems that they are losing competitiveness on this key route to Qantas on relatively inferior products, especially lack of flat bed Business Class on Red Eye Perth-East Coast flights.


As B737 Max is coming in 2019, I think they should consider if those aircraft should be upgraded to 8 x Business Flat Beds similar to Mint on JetBlue.


International Operation


I think Virgin is getting into an embattled position after it lost its Air NZ alliance later this year. I really wonder how they can survive with increased frequency with planes that does not have adequate feed from both sides of Tasman. Moreover, I don't think their B737 business class is anywhere but attractive to business travelers.


Quite urgently, I think Virgin should consider launching Virgin New Zealand on key NZ domestic routes to capture Tasman traffic. Moreover B737 Max with upgraded Business Class should be deployed to Trans-Tasman as soon as possible to maintain enough feed for this sector.


International alliances are also a very weak for Virgin. I think John knows he can't survive as a CEO in Virgin when he lost such an important international alliance with Air NZ, and in particular losing that to Qantas makes it really ugly. However I believe there are opportunities abroad, in particular Asia, that I don't know why Virgin is not pursuing.


Instantly I would have been thinking about Japan, Thailand, Korea and Taiwan being the first 4 opportunistic partnerships that Virgin should pursue further. I am not trying to say they should get A330 to those places but at least Virgin would have space to get into alliances with Thai, ANA, EVA and either Korean Air or Asiana Airlines. Thailand is a major tourist destination for westerners, as well as a major international hub and it is quite strange to see there are only 3 daily flights from Sydney to Bangkok, 2 being dominated by Qantas and Emirates. Couldn't Virgin see opportunity there at all?


So as Taiwan, CI is in partnership with Qantas, but EVA Air only have less than daily service to Brisbane. Would that be another opportunity for a partnership that allows BR to launch SYD and MEL?


Similar situation for Korea and Japan. Japan-Australia has been dominated by OneWorld carriers but there are a huge member base from ANA in Japan. Couldn't Virgin see opportunity for an alliance with ANA to strengthen its position in Australia-Japan traffic?


Further west, I think it is really ridiculous to see SIA has holdings with Virgin yet there's no partnership with SIA's subsidiary - Vistara in India. I am sure Vistara need more partners and wouldn't this be another opportunity for Velocity members to earn points and enjoy status in India?


I think there are a lot of improvements with Virgin that they need to be made to be sustainable, what other ideas would you have for a better future of Virgin?


Discussions welcomed.

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By GBRGB | Jul 30, 2018, 06:10 PM
Focus solely on domestic and capitals with VA brand, intergrated with alliance partners to international services, lift options to regional centres with Tiger and possible short haul international from regional centres also TSV, MCY, DRW, OOL etc.
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By Traveller14 | Jul 30, 2018, 06:24 PM
So far its forays using own metal have been a mixed bag to put it politely.

I've only been on it to LAX: acceptable load factor the day I travelled, but to HKG the two routes (SYD newer than MEL) must be losing heaps with the three way nonstop competition (CX and QF).

None of us are its CEO so we don't know its costs but for sure it's suffering (or will when hedging lowers/runs out) from increased oil prices. Maybe as GBRGB says focus only on domestic flights and improve relations and partnerships with international airlines.

What happened on TransTasman must have been a huge shock. I'm surprised JB didn't have to immediately resign.
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By Andrew Barkery | Jul 30, 2018, 07:00 PM
I see VA going into too deep internationally.
AN was good in that what it did domestically, I loved it, but first, it also had trouble with NZ, and SQ wanted more, but wasn't able to buy more.
Look at VA now, owned by so many other airlines, its Aust small shareholders kicked out through unmarketable share holdings...
John B did a lot for VA, some of us didn't like his ideas, but he kept it going, against QF.
Under new management, of course we can't say with a certainty, BUT, scary how similar the VA and AN cases are.
Hopefully VA does not go belly up, is all I can summize.
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By brinkers | Jul 30, 2018, 08:39 PM
I suspect where VA goes next will be largely determined who the board choose as JBs replacement, and what vision they sell to the board.
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By tommygun | Jul 31, 2018, 08:59 AM
VA trans-Tasman competing with NZ would suggest VA needs an equivalent of NZ "works deluxe" on its 738's. Middle seat not occupied, extra legroom, bags and full cabin service are all included in the NZ version on its 320's. Business lite if you like, similar to intra-Europe J. On NZ you get it for roughly half the J fare (NZ has no J on 320 of course, it's roughly half the VA ask for J).
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By MRYJDrake | Jul 31, 2018, 09:27 AM
IIRC, Virgin operated domestically in NZ in the past, when they were Virgin Blue.

That flopped, as did QF domestically in NZ, so they rolled back to JQ because nobody needed premium on a flight that was no longer than 1:20 (AKL-CHC), realistically. JQ have only just moved in on the Regional routes, and other competitors in the regional domestic space have flopped as well, from Ansett, and Qantas NZ,

I think someone pitching for CEO, pitching Domestic in NZ will guarantee their future not being behind that desk.

But I could be wrong.
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By SteveCF | Jul 31, 2018, 09:52 AM
I’ve just flipped back to virgin due to job change after a few years with Qantas, the one thing I’ve noticed is a lot more empty seats than Qantas, and the inflight product hasn’t improved and isn’t full service.

Virgin in my opinion made great strides but has lost its direction and completed the task of being a full service airline.

I hate being an armchair ceo but I think the following applies to all businesses.... get focused and execute well.

Virgin in my opinion needs to finish the job and be an end to end full service airline domestically, there not there yet.
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Globetrotter

By Madhatter49 | Jul 31, 2018, 10:18 AM
Primary start would be signing up for Skyteam alliance. I'm sure SIA won't complain. QF have many alliances with non OW partners, but an alliance is a really simple growth option to give more required international coverage.

I suspect QF recently tied up with AF partly to make a Skyteam alliance more difficult too though.


Working out something for velocity lifetime status will help too.

Last edited by David at Jul 31, 2018, 10.43 AM.
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By Martin Haynes | Jul 31, 2018, 10:48 AM
So many variables here, so much also depends on the new CEO and also the shareholding of HNA plus SQ and EY. I think that VA needs to go 'private' and take itself off the ASX and into 100 percent private ownership, which would not be hard to to because the free float is tiny and the share price is a pittance. This reduces some costs and eliminates the exposure of reporting and all the related coverage. In a perfect world I would like to see SQ take over VA, with VA wound back to being a domestic airline apart from LAX flights, and VA joining Star Alliance.
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By Martin Haynes | Jul 31, 2018, 10:49 AM
I hate being an armchair ceo but I think the following applies to all businesses.... get focused and execute well.

Very well said!
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By JBL | Jul 31, 2018, 11:18 AM
My best guess, as I've said before, is the following

Trans Tasman/NZ

Following the NZ breakup, once the 737 MAXs start coming VA will put TT on the lower yield trans-tasman routes and potentially domestic with the old VA 737s. They will likely also develop a relationship similar to JQ/QF with lounge access, at least across the Tasman. There are gaps for VA/TT to exploit. For example, WEL has no intl budget flights except to the Gold Coast.

I could also see VA cooperating with partners to fill the widebody gap. They already have SQ flying MEL-WEL. Perhaps EY could be convinced to fly a fifth freedom to AKL with the planes they have on the ground all day on the east coast.

East-West

VA are going to pull more A330s off. I know from that the flatbed 737 seats are in the works, but have been delayed. I'm imagining they will come with the 737 MAXs. I could also see these flatbed MAXs go trans-tasman also, as a long-haul narrow body subfleet.

Hong Kong/China

There have been suggestions by CAPA that with HX entering the London market it will be likely that an agreement will be formed between HX/VS and possibly even VA. I could see a Virgin Kangaroo Route developing, with a comprehensive schedule between Australia, Hong Kong and Europe. HU would potentially also be incorporated into the agreement. VA will commence BNE-HKG and possibly PER-HKG. HX will possibly serve secondary Australian destinations. There's talk of them flying to CBR atm.

Considering VA intend to fly to (most likely) Beijing, this would provide a two hub model where passengers connect through HKG for the primary destinations that HU can't get into, and through PEK for secondary European destinations. The only problem I see with this is SQ and EY will likely object, but they do not form a majority shareholding.

Were this to happen, VA could potentially be pulled into closer cooperation with Skyteam and the massive agreement between VS/DL/AF/KL which would be pretty big for intra European connections. But this point is much more speculative than the rest.
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By Morgan27 | Jul 31, 2018, 12:19 PM
They also need to put seatback entertainment on their 737's like Qantas already has
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By DanV | Jul 31, 2018, 12:37 PM
So many variables here, so much also depends on the new CEO and also the shareholding of HNA plus SQ and EY. I think that VA needs to go 'private' and take itself off the ASX and into 100 percent private ownership, which would not be hard to to because the free float is tiny and the share price is a pittance. This reduces some costs and eliminates the exposure of reporting and all the related coverage. In a perfect world I would like to see SQ take over VA, with VA wound back to being a domestic airline apart from LAX flights, and VA joining Star Alliance.

Problem is that VA has since made enemies of NZ and UA in Star.

NZ and UA would use their veto to block VA's application into the Star Alliance. SkyTeam is Virgin Australia's only Alliance option available to them. SQ is going to have to live with it should they chose not to exit VA, as SQ and UA aren't exactly best buddies either.


Also there's the DL elephant in the room and they haven't ruled out buying a stake in the future (and basically turn VA into a feeder for DL & SkyTeam with the only Int'l being USA and NZ).


VA and DL have been BFFs since the late Virgin Blue days.


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By aklrunway | Jul 31, 2018, 12:53 PM
My best guess, as I've said before, is the following

Trans Tasman/NZ

Following the NZ breakup, once the 737 MAXs start coming VA will put TT on the lower yield trans-tasman routes and potentially domestic with the old VA 737s. They will likely also develop a relationship similar to JQ/QF with lounge access, at least across the Tasman. There are gaps for VA/TT to exploit. For example, WEL has no intl budget flights except to the Gold Coast.

I could also see VA cooperating with partners to fill the widebody gap. They already have SQ flying MEL-WEL. Perhaps EY could be convinced to fly a fifth freedom to AKL with the planes they have on the ground all day on the east coast.

East-West

VA are going to pull more A330s off. I know from that the flatbed 737 seats are in the works, but have been delayed. I'm imagining they will come with the 737 MAXs. I could also see these flatbed MAXs go trans-tasman also, as a long-haul narrow body subfleet.

Hong Kong/China

There have been suggestions by CAPA that with HX entering the London market it will be likely that an agreement will be formed between HX/VS and possibly even VA. I could see a Virgin Kangaroo Route developing, with a comprehensive schedule between Australia, Hong Kong and Europe. HU would potentially also be incorporated into the agreement. VA will commence BNE-HKG and possibly PER-HKG. HX will possibly serve secondary Australian destinations. There's talk of them flying to CBR atm.

Considering VA intend to fly to (most likely) Beijing, this would provide a two hub model where passengers connect through HKG for the primary destinations that HU can't get into, and through PEK for secondary European destinations. The only problem I see with this is SQ and EY will likely object, but they do not form a majority shareholding.

Were this to happen, VA could potentially be pulled into closer cooperation with Skyteam and the massive agreement between VS/DL/AF/KL which would be pretty big for intra European connections. But this point is much more speculative than the rest.

*WLG

And there is no way Etihad will start fifth freedom flights to Auckland. Emirates have pulled off the highly competitive Tasman, bar SYD/CHC and Etihad are stripping back routes overall.
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By DownSouth | Jul 31, 2018, 01:25 PM
Nice piece CityRail.
Some points
1) No new service (HKG) will make money from day 1, especially when the big guys react as they have time and time again, new entrant = dump capacity.
QF = 330-380, CP 330-777. Not the only factor driving decision but no doubt it’s part of the intent.
70% LF from startup is extremely good ESP considering the VA 332 has close to the 333 seat count of northern airlines. Similar pax loads then.

2) Its not all about pax loads, freight contracts could be extensive (and they prob are with HNA investors)who knows..

3) transcon they may go 737-10 and have 10-14business sleeper beds to replace 330, the varient has don’t been disclosed.

4) Skyteam and ANA tie up ideal.

5) domestic onboard catering in Y VA have stated is there focus to improve.

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