Lessons from Virgin Australia

How Successful was Virgin Australia?

Word Count: 2586

How Successful was Virgin Australia?

Virgin Blue was established in the year 2000 as an airline that sought to bring low fares to a continent that was characterized by high fares. The airline first took the skies on August 31, 2000, and relied on the low fare promise as its key marketing concept (CF, 2020). The airline was established as a wholly-owned subsidiary of the Virgin Group. Since its inception, the airline remains committed to lessening the cost of airfares in Australia by half. Virgin Blue also had a strong commitment to become one of the leading low fare airlines in the country and across the globe. While the company experienced tremendous growth in the initial years of its establishment, it also experienced challenges that forced it to go into administration in 2020 because of the impact of the COVID-19 pandemic. This report discusses how successful Virgin Australia was during its life and what contributed to its going into administration due to the coronavirus pandemic. The analysis is based on Aviation Economics theories and principles and focuses on the airline’s operations in the domestic market. In addition, this report discusses the reason for the decision to transition from the Low-Cost Carrier model of Virgin Blue and the impact of Jetstar as part of the transition, and the role of Tiger Air.

Brief History of Virgin Australia

Virgin Blue started in August 2000 and succeeded as a Low-Cost Carrier until the Global Financial Crisis in 2009 where soon after it restructured to a full-service, or legacy, carrier model to be known as Virgin Australia (VA). The airline, which was founded by Brett Godfrey and Rob Sherrard, first took the skies on August 31, 2000, from Brisbane to Sidney. In 2001, Richard Branson rejected a buyout offer from the then Air New Zealand, which owned Ansett Australia. Virgin Blue then came into an agreement with Patrick Corporation to invest in the airline and promote its growth domestically to fill the void left by the collapse of Ansett Australia in 2002 (West, 2009). The airline was floated on the Australian Securities Exchange in 2003 as Virgin Group in efforts to sell down its holdings.

Virgin Blue’s expansion to the international market took place from 2004 when it launched Pacific Blue. The Pacific Blue was the airline’s New Zealand-based leisure-focused international airline. It offered flights between different countries including New Zealand, Australia, Fiji, the Cook Islands, and Vanuatu. Following a partnership with the Government of Samoa, Virgin Blue launched Polynesian Blue in 2005. Polynesian Blue was an innovative joint venture airline that offered affordable and essential air services between Australia, New Zealand, and Samoa.

Following the Global Financial Crisis in 2009, Virgin Blue experienced losses and a decline in market share, which implied that its future as a low-cost carrier was unsustainable. As a result, the airline sought a major revitalization to help maintain its profitability and market share. The revitalization entailed redefining the brand in Australia to become a genuine competitor to rivals in the domestic market such as Qantas (“From Virgin Blue to Virgin Australia”, 2012). Additionally, the revitalization efforts involved rebranding Virgin Blue to Virgin Australia as part of complete brand repositioning. Consequently, Virgin Blue restructured to a full-service, or legacy, carrier model to be known as Virgin Australia after the Global Financial Crisis in 2009.

The Success of Virgin Australia

Virgin Blue was largely a successful airline in the Australian domestic market due to its effective business model and strategy. According to West (2009), VA had a market share of between 30% and 40% and competed on all key domestic routes in Australia. The airline competed in all Qantas’ key domestic routes, which contributed to its evolution to become a major industry player. Ma et al. (2019) state that Virgin Blue became the second largest carrier in Australia after Qantas after seizing the opportunity to grow following the collapse of Ansett Airlines in 2001. Prior to its collapse, Ansett Airlines was Qantas’ long-standing rival. The growth of Virgin Blue to become the second-largest airline in Australia with a 30% to 40% market share was influenced by its ability to seize the opportunity brought by the collapse of Ansett Airlines. By 2009, Virgin Blue had a fleet of 91 aircraft, which reflected its growth and evolution as one of the major airlines in Australia.

The growth and success of VA can be attributable to its use of key principles and theories in Aviation Economics. One of the principles of Aviation Economics that are linked to the operations and success of VA is low-cost carrier (LCC) model. LCC business model is based on the idea of operating at the lowest possible cost and selling seats at low rates (Srisaeng, Baxter & Wild, 2014). By operating at the lowest possible cost and selling seats at low rates, an airline stimulates demand and realizes high load factors. Airlines that operate using this business model focus on reducing costs by implementing a price leadership strategy in their markets. In most cases, the operating costs of LCCs are minimized by operating a single-type aircraft fleet.

VA was established as a low-cost carrier that focused on lessening airfares in order to stimulate demand for air transport and achieve high load factors. While the airline did not operate a single-type aircraft fleet, it sought to reduce costs by implementing a price leadership strategy. Price leadership is a major contributing factor to the success and profitability of companies in the Australian domestic airline market because it is a duopoly market. As a duopoly marker, the Australian domestic airline is characterized by stiff competition, which implies that airlines need to expand their size to realize lower costs of operations (Ma et al., 2019). Qantas, which is the oldest airline worldwide, has a significant market share in the Australian domestic airline market. The company has experienced stiff competition from Ansett Airlines before its collapse in 2001. While the collapse of Ansett Airlines provided an opportunity for small airlines to enhance their market share, Qantas’ dominance was a major impediment.

VA capitalized on the growth opportunity provided by the collapse of Ansett Airlines by fostering its low-cost business model and strategy. This involved engaging in price wars with major competitors like Qantas in order to stimulate demand for air transport. VA utilized its low-cost business model to introduce price cuts, which in turn enhanced its market share. Since the low-cost business model and strategy enabled the airline to lower its operational costs, VA expanded to nearly all business segments. It was operating in all Qantas’ key domestic routes because of low-cost operations brought by this business model. By operating in these key domestic routes in Australia, VA enhanced its competitiveness and increased its market share to approximately 40%.

Using the LCC business model, VA has successfully competed with Qantas on different priority areas that have in turn contributed to its growth and profitability. VA has successfully competed with Qantas on key domestic routes, pricing, and expansion of a range of services. As previously indicated, VA utilized the low-cost business model to expand its operations and compete with Qantas on all key routes resulting in increased market share. This involved expanding its route network by linking capital cities across the country. In addition, Virgin Blue expanded its routes beyond the conventional tourist routes that are deemed as larger coastal tourist destinations (Srisaeng, Baxter & Wild, 2014). In this regard, Virgin Blue adopted a route network strategy that facilitated its growth and expansion in Australia’s domestic airline market. Virgin Blue’s route network strategy is supported by the principle of internal expansion. Internal expansion is a principle of Aviation Economics that entails enlarging operations by inventing new products, opening branches, or developing new businesses. For this airline, internal expansion efforts basically entailed the addition of new routes to enhance its competitiveness against Qantas. The airline used this network strategy to add routes that were previously only served by regional carriers like Melbourne to Mildura. The airline route network strategy was combined with the low-cost strategy to help ensure these routes remain economically viable. The economic viability of the new routes was also ensured through the acquisition of a fleet of Embraer E-170 and E-190 regional jets. These jets were also utilized to enhance flight frequencies on major business routes.

With regards to pricing, the airline utilized this business model to lower operational costs and promote low-cost airfares for customers. Vasigh, Fleming & Tacker (2013) note that lower operational costs and high labor productivity are some of the major characteristics of LCCs. As an LCC, VA sought to keep its labor costs under control to support low airfares and enhance its competitiveness against Qantas. With respect to expansion of a range of services, Virgin Blue not only focused on the domestic market, but also adopted strategies for the long-haul international markets (Srisaeng, Baxter & Wild, 2014). VA’s expansion of a range of services was combined with the route network strategy to cater to the growing needs of customers. As Qantas expanded operations in international markets, VA also expanded its international operations by introducing Pacific Blue and Polynesian Blue. Consequently, VA offered its customers connecting services, sustained significantly lower airfares than Qantas, and participated in code-sharing agreements with key airlines (Srisaeng, Baxter & Wild, 2014). In addition, VA consolidated all its random little airlines in 2010 into a single brand and introduced domestic-style First Class, and updated the long-haul fleet. During this period, the airline also introduced lounges and added A330s for domestic trunk routes in efforts to simplify operations and provide a wide range of services to customers (“From Virgin Blue to Virgin Australia”, 2012).

Restructuring of Virgin Blue’s Business Model

As part of measures to enhance its competitiveness in Australia’s domestic airline market and against Qantas, Virgin Blue restructured to a full-service, or legacy, carrier model and rebranded to Virgin Australia. The restructuring came at a time when the airline was losing money and market share and faced an unsustainable future due to the Global Financial Crisis in 2009 (CF, 2020)s. The restructuring was based on the “Game Change program”, which was geared towards a complete brand repositioning. Dynamic Capabilities Theory is at the core of Virgin Blue’s decision to restructure its business model and brand repositioning. Based on this theory in Aviation Economics, businesses seek to realize sustainable competitive advantage in rapidly changing environments by acquiring valuable, inimitable, and rare resources. Through this, businesses reconfigure, marshal or integrate their capabilities and resources to enhance their adaptation in rapidly changing environments (Bleedy, Ali & Ibrahim, 2018). According to Merkert & Morrell (2012), Dynamic Capabilities Theory is the foundational principle behind mergers and acquisitions in the aviation sector. In this case, consolidation and mergers/acquisitions are viewed as game-changers or key factors for survival and success in the aviation market.

Following the 2009 Global Financial Crisis, VA was facing a rapidly changing business environment and aviation market that necessitated the change in business strategy and operations. Prior to VA’s restructuring, Qantas had successfully launched and was operating Jetstar Airways. Jetstar Airways’ low-cost operations were fostered by the standardization of a fleet of 177 seat Airbus A320 aircraft (Srisaeng, Baxter & Wild, 2014). This fleet of aircraft was critical to the competitiveness of Jetstar as it generated significant fuel and technology efficiencies. Jetstar soon positioned itself to tap into the leisure travel market and expanded its services through adding routes. Consequently, Jetstar became one of the major airlines in Australia’s low-cost air travel market.

Tiger Airways, a Singapore-based airline, launched its operations in Australia’s low-cost air travel market in 2007. As a low-cost carrier, Tiger Airways had significant impacts on Australia’s domestic airline market as it forced operators like Jetstar to change long-standing operating strategies. Tiger Airways played a critical role in enhancing the operations and competitiveness of Jetstar by fueling the adoption of new business strategies. Following the impact of Tiger Airways on Australia’s domestic airline market, Jetstar introduced new services and routes to help enhance its market share.

The impact of Jetstar and Tiger Airways on Australia’s domestic airline market contributed to VA’s restructuring and brand repositioning. The impact represented a change in VA’s operating environment and necessitated the change of business strategy. The airline adopted a “Game Change program” that was geared toward improving its operations and profitability by promoting dynamic capabilities and resources. As a result, VA adopted a slightly different business model compared to previous LCCs. Some of the operations that characterized the new business model included code-sharing agreements with major airlines, connecting services, and acquisitions of other airlines. For example, VA acquired Tigerair’s Australian division in efforts to enhance its capabilities and operations in the rapidly changing environment.

VA Goes into Administration

Virgin Australia went into voluntary administration after the impact of the COVID-19 pandemic. The airline’s voluntary administration was influenced by various factors that relate to its business model and strategy. LCC business model is one of the major recent developments in the aviation sector. While this business model has enabled airlines to enjoy significant growth and success, it has also been the reason for the failure of some airlines (Vasigh, Fleming & Tacker, 2013). Despite being a good business model for VA, LCC is unsustainable during difficult financial periods. For instance, during the Global Financial Crisis in 2009, VA was forced to change its business strategy and model because of the impact of the crisis on its operations. The coronavirus pandemic has generated pressure on airlines because of the ban on air travel in several parts of the world in attempts to curb the spread of the virus. Airlines operating on low-cost business models such as VA have been faced numerous operational difficulties. The business model and cost structure of VA could not sustain its short-term, medium-term, and long-term operations amidst the impact of COVD-19 on the aviation sector. The widespread travel bans coupled with a volatile business environment due to coronavirus forced VA to go into administration. Due to these difficulties, the airline’s debt continued to accumulate and the failure to secure a bailout from the federal government forced it to go into administration (Butler & Davies, 2020). As the virus continues to spread, the airline has struggled to find a survival plan for continued operations and profitability (McMah, 2020).