Blue sky mine

SIR Richard Branson is becoming Qantas’ worst nightmare. The British entrepreneur first took on the Aussie airline seven years ago when he launched Virgin Blue. Then a couple of months ago he announced plans to launch a new Trans Pacific airline called V Australia to snatch Qantas’ US market. Now he’s grabbing a piece of the burgeoning Asia Pacific airline market too.

Branson has snapped up a 20 per cent stake in the new Malaysian budget carrier, AirAsia X as part of his expanding airline repertoire. The news comes as a further blow to Qantas, which relies on its long-haul business to destinations like Asia, the UK and US. 

He claims he will spend “whatever is necessary” to make the no-frills carrier profitable. And if the ‘Flying Kangaroo’ isn’t worried, perhaps it should be. AirAsia X plans to launch flights from Malaysia to the Gold Coast from next month for as little as $26 return. The long-haul airline is also planning on covering the lucrative and underserviced Australia to London route, as well as China, India and even the US.

Branson, who owns a 25 per cent stake in Virgin Blue alongside majority owner Toll Holdings, is keen to expand the Virgin brand in Australian aviation. Virgin Blue chief executive Brett Godfrey tells Wealth Creator that the duo’s plans will once again challenge the Qantas stronghold. “In reality, the aviation sector in Australia changed dramatically for the first time seven years ago when Virgin Blue  first launched as the first low cost carrier to be seen in this part of the world,” he says. “Until then, it was a duopolistic environment with two legacy carriers operating side by side, charging the same fares, offering the same levels of service and flying on the same routes. 

“So it wasn’t surprising that the exorbitant air fares ostracised the majority of Aussies from travelling often, or in many cases, travelling at all. With the introduction of competition and diversity, the existing players also saw fit to review their own strategies and offer more palatable fares for the travelling public.”

And he says that they have five key strategies in the pipeline that will make Virgin in Australia a serious contender to pip Qantas from its number one airline spot. One of them is no doubt V Australia, which was unveiled in July and will take to the air next year.

“An exciting opportunity for us is the launch of long haul flights between Australia and the US, set to begin late in 2008,” Godfrey says. “This is an enormous investment for the Virgin Blue Group and one that has the potential to revolutionise the Trans Pacific market in the same way Virgin Blue has done domestically.’

Another is the possibility of launching a new no-frills budget carrier to take on the likes of Tiger Airways and some European carriers who are eyeing the virtually non-existent ultra low-cost market in Australia.

“It is one of about five concepts we are looking into,” Godfrey says. “We have yet to formulate a business plan or present to the board but it is something under consideration.”

Branson and Godfrey may also be planning an entry into the tourism market, having branched out into cruise holidays last month through a deal with an online travel company. Qantas currently has subsidiaries in the catering, freight, holidays and defence services markets - supplementing profits made strictly from air travel.

If Virgin manages to begin offering these fringe services and enter the booming trans Pacific and Asia Pacific markets, this could spell trouble for Qantas. Branson’s vision and backing, with Godfrey’s ambition and capability have so far proved a strong mix.

He is right when he says the introduction of Virgin gave the airline industry here an unprecedented and well-deserved shake. It forced Qantas to drop its fares and then promptly set up budget airline Jetstar. And now, it has also opened the way for even cheaper discount airlines to set up shop here.

“The cost of travel is half what it was seven years ago and we will not see the likes of that type of change again; tomorrow or in seven years time,” says Godfrey. “What happened was that competition did what it does best. As a result, what we have today is a very dynamic, very exciting aviation environment.”

For the native Victorian, though, it’s been a turbulent ride to the top. He is one of the few airline entrepreneurs in this country to still be operating. The 40-year-old came up with the idea to set up Virgin Blue while he was working in finance for the Virgin Group in London. He had drafted a business plan for an Aussie airline back in 1993 over a few (too many) beers with fellow Virgin founder and mate Robert Sherrard.

The pair were discussing the exorbitant prices and lack of competition in the local airline market and scribbled down, on the back of a bar coaster, some rough notes for how an airline would be set up. Godfrey did not manage to find anyone interested in backing the concept and so shelved the idea until he met with and worked for Branson - someone he admired for his innovative and creative business flare.

He built up the courage to present Branson with the business plan and after a 20 minute meeting, walked out with $10m and the green light to set up Virgin Blue. In the months and years that followed, Godfrey struggled to find airplanes, baggage handling space in airports and suitable airports to fly from. He also came up against stiff resistance from Qantas.

But seven years later, the gamble has certainly paid off. Virgin launched with two planes and 200 staff on August 31, 2000. Today it employs over 4200 staff and has over 54 aircraft carrying more than one million people a month to destinations throughout Australia, New Zealand and the South Pacific.

It has gone from not turning over a profit at start-up to posting a net profit after tax of $124.3m during the last six months of 2006 - up 80.9 per cent on the previous year. In 2003, two and a half years after launch, it had flown 10 million customers - up to around 15 million today. And having started with flights between Melbourne and Brisbane, it has now expanded across the whole of Australia and introduced Polynesian Blue - a low fare airline between Australia and Samoa - and Pacific Blue flying to Tonga. Godfrey has now managed to snap up around one third of the total market and has his sights set on 12 per cent across the Trans Pacific.

While Godfrey has achieved his goal of pushing down prices, he admits that Virgin has only gone half way in becoming a truly no-frills budget airline. This becomes clear when looking at the types of fares offered in Europe and North America, where flights can regularly be bought at base cost. Airlines such as Ryanair and EasyJet for example, often charge far less than Virgin on a comparative basis. So while he did go a long way in reducing fares, he never became what many would regard as a budget airline. Often Virgin’s flights have been only marginally cheaper than that offered by Qantas. For this reason, a raft of new low-cost carriers are flooding into Australia - particularly to service the booming Asia Pacific routes to places like Singapore, Kuala Lumpur and Japan.

If Godfrey seems worried about this, he’s certainly not letting on. When we speak, all he is focused on is growth, expansion and further success. “Within the next couple of years we will have completed the introduction of our brand new Embraer E-Jets into our fleet,” he says. “With that comes the expansion in to more regional ports across Australia as well as the introduction of our ‘right sizing’ strategy to allow us to maximise efficiency across all routes by directing the appropriate size aircraft to specific routes at various times.”

He has also given some thought to the idea of having a budget long-haul carrier, although he claims there would be some restrictions to this plan. After all, you couldn’t possibly not offer food or beverages to customers on a 25-hour flight to the UK. “We don’t believe the traditional genuine no-frills LCC model is compatible or palatable for travellers over six hours let alone the 14 we’ll be flying over the Pacific,” he explains.

“Offering a high quality product and service doesn’t have to mean a high cost base like legacy carriers, it’s about finding new and innovative ways to offer what people want. Our live2air seat back in-flight entertainment offering on Virgin Blue domestic flights is a great example of that. Starting with a ‘clean sheet’ internationally, is a huge opportunity.  It would be safe to assume there is more where that came from and there are exciting times ahead.”

Godfrey will no doubt be standing alongside Branson as these developments unfold. But he’s not so sure his competitors will still be there. “In terms of five years time, I think it’s fair to say the local aviation sector will be as fiercely contested as it is today,” he says. “There may or may not be the same players, but our own five year plan has some exciting developments for both domestic and international markets.”