Diversifying your business to become less reliant on low-margin commodity customers is the key to growth, and relationships are what makes it possible execute the shift, according to Virgin Australia CEO John Borghetti.
CEO, Virgin Australia
Speaking at an Australia/Israel Chamber of Commerce lunch in Sydney yesterday Borgehtti explained how, when he arrived at Virgin Australia more 90% of revenue came from leisure travellers who shopped on price. Those customers, while welcome, are not particularly loyal and are also fickle.
“52% of all domestic flights go in and out of Queensland or within Queensland,” he told the lunch. When floods and other natural disasters hit that State in early 2011, “there goes your business.”
The company also had to confront competitors such as Tiger and Jetstar who could undercut it on price.
“It became harder to compete in our traditional low-cost carrier space,” Borghetti told the lunch. “We had to ask how to compete with companies with a lower cost base and compete for what had become a commodity item.”
“What this game is really about is margin. You will always have someone coming in on lower cost base. The question is how to improve your margin.”
Borgehtti felt the best way to improve margin was to develop a strategy that meant Virgin Australia was not putting all its eggs in the leisure travel basket.
Doing so meant taking on Qantas in the business travel sector, but Borghetti said he did not fear the confrontation because consumers want competition.
“In any industry you need a second strong alternative,” he said. “Australia had a strong competitor one in the leisure travel market but not in the corporate market.”
Virgin Australia has responded with a raft of new business-friendly products, including dedicated Business Class seats for eastern seaboard flights as of January 18 2012.
To create a product that appeals to different kinds of passenger, the carrier has also had to change the way it reacts with customers.
“Our service is becoming more and more tailored. If we see you in a suit we’ll call you Mr or Mrs. We’ll call a 16 year old John.”
The ability to be responsive and flexible is, Borghetti said, a reflection of the strong relationship the company has with its staff. Those relationships came to the fore when the airline responded to Qantas’ grounding of its fleet by ramping up its own operations.
“We had to mobilise quickly. I am immensely proud of my executive team because what they did in two hours was absolutely amazing. And the staff too – we literally hand hundreds of staff volunteering. People who had come off roster.”
The airline quickly contacted its Pilots union, which agreed to help. Borghetti said he spoke to the Federal government, which relaxed regulations about international pilots flying domestic routes and Sydney airport’s curfew to help Virgin Australia fly more planes.
None of those responses, and the shift in product mix, would have been possible without good relationships.
“Our staff are fantastic – they really are out there to prove they are the best.”
“In the end what matters is the relationship with staff. There is not a CEO … that does not have a challenge of winning over the staff.”
Cashing in on Qantas
Borghetti also touched on what the Qantas grounding meant for Virgin Australia, which scrambled to get more flights in the air.
“You are stretching the organisation,” he said. “There was not a lot of short-term profit. It was an opportunity to show your product and service to people who had not flow with you and therefore had an old perception, or people who had flown with you and only had an old experience and now realise that this has changed.”
“Does it mean you will keep all of these people forever? Of course not. But you may keep some of them,” which makes the extra effort worthwhile.