Virgin Australia: Rise, Restructuring, and Administration

Introduction

Virgin Blue was established in 2000 as an airline that sought to bring low fares to a continent characterized by high airfares. The airline first took to the skies on August 31, 2000, and relied on its low-fare promise as its key marketing concept (CF, 2020). Established as a wholly owned subsidiary of the Virgin Group, the airline remained committed from its inception to reducing the cost of airfares in Australia by half. Virgin Blue also aspired to become one of the leading low-fare airlines both domestically and globally. While the company experienced tremendous growth in its early years, it also encountered challenges that eventually forced it into voluntary administration in 2020 as a result of the COVID-19 pandemic.

This report examines how successful Virgin Australia was during its operational life and what contributed to its entering administration due to the coronavirus pandemic. The analysis draws on Aviation Economics theories and principles and focuses primarily on the airline's domestic market operations. In addition, the report discusses the reasons behind the decision to transition away from the Low-Cost Carrier (LCC) model of Virgin Blue, the impact of Jetstar on that transition, and the role played by Tiger Air.

Brief History of Virgin Australia

Virgin Blue commenced operations in August 2000 and succeeded as a Low-Cost Carrier until the Global Financial Crisis in 2009, after which it restructured to a full-service, or legacy, carrier model and rebranded as Virgin Australia (VA). The airline, founded by Brett Godfrey and Rob Sherrard, first flew on August 31, 2000, on the Brisbane–Sydney route. In 2001, Richard Branson rejected a buyout offer from Air New Zealand, which at the time owned Ansett Australia. Virgin Blue subsequently reached an agreement with Patrick Corporation to invest in the airline and support its domestic growth, filling 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 sought to reduce its holdings.

Virgin Blue's expansion into international markets began in 2004 with the launch of Pacific Blue, a New Zealand-based, leisure-focused international airline offering flights between New Zealand, Australia, Fiji, the Cook Islands, and Vanuatu. In 2005, following a partnership with the Government of Samoa, Virgin Blue launched Polynesian Blue — an innovative joint venture offering affordable air services between Australia, New Zealand, and Samoa.

Following the Global Financial Crisis in 2009, Virgin Blue experienced losses and a declining market share, making its future as a low-cost carrier unsustainable. The airline consequently pursued a major revitalization to maintain profitability and market position. This revitalization involved redefining the brand in Australia to become a genuine competitor to domestic rivals such as Qantas ("From Virgin Blue to Virgin Australia", 2012), and rebranding to Virgin Australia as part of a comprehensive brand repositioning exercise.

The Success of Virgin Australia

Virgin Blue was largely a successful airline in the Australian domestic market, owing to its effective business model and strategy. According to West (2009), VA held a market share of between 30% and 40% and competed on all key domestic routes in Australia. Ma et al. (2019) note that Virgin Blue became the second-largest carrier in Australia after Qantas by seizing the growth opportunity created by the collapse of Ansett Airlines in 2001. Prior to its collapse, Ansett had been Qantas' long-standing rival. By 2009, Virgin Blue operated a fleet of 91 aircraft, reflecting its considerable growth and evolution into one of Australia's major airlines.

The growth and success of VA can be attributed to its application of key principles and theories from Aviation Economics. Central among these is the Low-Cost Carrier (LCC) business model, which is based on the idea of operating at the lowest possible cost and selling seats at low rates (Srisaeng, Baxter & Wild, 2014). By doing so, an airline stimulates demand and achieves high load factors. Airlines using this model focus on cost reduction through price leadership strategies, and in most cases minimize operating costs by maintaining a single-type aircraft fleet.

VA was established as a low-cost carrier that sought to stimulate demand for air transport and achieve high load factors through low fares. While the airline did not operate a single-type aircraft fleet, it pursued cost reduction through a price leadership strategy. Price leadership is a major contributing factor to success and profitability in the Australian domestic airline market, which operates as a duopoly. As a duopoly market, the Australian domestic airline sector is characterized by intense competition, meaning airlines must expand their scale to realize lower operating costs (Ma et al., 2019). Qantas, as the dominant incumbent, had previously faced stiff competition from Ansett Airlines; following Ansett's collapse in 2001, its market share became contestable, though Qantas' overall dominance remained a significant barrier.

VA capitalized on the growth opportunity created by Ansett's collapse by reinforcing its low-cost business model and engaging in price competition with Qantas to stimulate demand. The low-cost model enabled the airline to introduce price cuts that expanded its market share. Because low-cost operations kept costs down, VA was able to extend its presence to nearly all business segments and compete on all of Qantas' key domestic routes, ultimately growing its market share to approximately 40%.

Using the LCC model, VA successfully competed with Qantas across several priority areas: key domestic routes, pricing, and the breadth of services offered. With respect to route network, Virgin Blue adopted a strategy that went beyond conventional tourist routes and larger coastal destinations, adding routes previously served only by regional carriers — such as Melbourne to Mildura — and supporting their economic viability through a fleet of Embraer E-170 and E-190 regional jets (Srisaeng, Baxter & Wild, 2014). These jets also enhanced flight frequencies on major business routes. This route network strategy is consistent with the Aviation Economics principle of internal expansion, which entails enlarging operations through new products, new branches, or new business development.

On pricing, the airline used its low-cost model to keep labor costs under control and maintain affordable fares relative to Qantas. Vasigh, Fleming & Tacker (2013) identify lower operational costs and high labor productivity as hallmarks of LCCs. In terms of service range, Virgin Blue expanded beyond the domestic market, introducing Pacific Blue and Polynesian Blue to compete with Qantas in international markets. VA also offered connecting services, sustained significantly lower airfares than Qantas, and entered code-sharing agreements with key airlines (Srisaeng, Baxter & Wild, 2014). In 2010, the airline consolidated its subsidiary brands into a single entity, introduced a domestic-style First Class cabin, updated its long-haul fleet, added airport lounges, and deployed Airbus A330s on domestic trunk routes — all designed to simplify operations and broaden the customer offer ("From Virgin Blue to Virgin Australia", 2012).

Conclusion and Recommendations

Virgin Blue was founded in 2000 as a low-cost airline built around a low-cost business model. Since its inception, it experienced tremendous growth and profitability in Australia's air travel market. This success was attributable to sound business strategies and models, with the LCC approach playing a critical role in the airline's performance prior to its restructuring as a full-service carrier. As this report demonstrates, Virgin Blue's transition to a legacy carrier was driven primarily by external environmental factors — particularly the effects of the Global Financial Crisis in 2009 — and the adoption of a new business model did enhance profitability in the medium term. However, the transition also eroded the airline's market share in the low-cost segment, and the evolved business model ultimately proved insufficiently resilient to withstand the unprecedented disruption caused by COVID-19.

The experience of Virgin Australia offers important lessons for airlines and the broader aviation sector:

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