How fast the tables turn

It wasn’t that long ago that Virgin Blue could do no wrong in the eyes of the mainstream media while Qantas was being hounded over any little maintenance issue and its rapidly falling loads. How times change.

In the past few weeks we’ve had reports from Virgin Blue that they’re “only” going to make $20 to $40 million this financial year instead of the $80 million they’d been saying only a few weeks earlier. The reduction was blamed on reduced consumer sentiment, a fall in leisure travel and an expectation that domestic airfares would drop by 10%. Given the fragile nature of the Australian psyche at the moment and the notice arriving after a week of sell-offs in the stock market, naturally the share price took a beating and dropped over 25%.

The drop flowed on briefly to Qantas as you’d expect them to be hit with the same domestic drop, however they released news that they were still on track for a good profit and in fact had seen passenger numbers increase. Further rubbing salt into the wounds, they’re talking about increased service as their next two A380s come on line and Bruce Buchanan (CEO of Jetstar) was stating that the Qantas group is well positioned to thrive as the premium market is recovering and Jetstar is an international operation so it’s not completely exposed to domestic down turns.

As if all that wasn’t enough, at the same time Virgin is reassessing their routes and contemplating a single brand strategy, Qantas also release news that Jetstar will be trialling the iPad for inflight entertainment (though Apple may not be entirely supporting it). They also announced they are linking up with Air France/KLM to provide better access to Europe from Paris & Amsterdam as Jetstar starts pushing into Europe.

Whew, a flurrry of good news stories from Qantas while Virgin Blue is being realistic and suddenly it’s Virgin Blue struggling on the floor while Qantas is lifted into the shining light. Wow!

During all this, there was no real mention of the ongoing Jetstarisation of Qantas. Sure, premium may actually have given signs it’s not entirely dead and the next couple of A380s will let Qantas move some 744s onto route expansion, but all the big news is happening in Jetstar.

it’s interesting to note that the iPad wasn’t being trialed on Qantas flights, even though the flying kangaroo is found on domestic routes and the iPad’s 10 hour battery life would be fine for shorter international routes. You’d think that they’d be trying to link up the cool, funky iPad with the strong, powerful, premium Qantas brand, not the discount, cut-price, penny pinching Jetstar.

As to Air France/KLM, well, what about Qantas’ flights into Europe and their linkages with British Airways? Are these routes going to fall away with only the “Kangaroo Route” from Australia to the UK remaining as Jetstar takes over all the rest?

Face it: If it’s new, big or the future, it’s going to be Jetstar. Qantas will remain and may increase here & there, but it’s only going to be where a high-end product can be comfortably sustained. But even if the high-end market does increase, it won’t outshine the solid income from the economy (& premium economy) end of the market, especially as Qantas has stiff competition from Emirates & Singapore when it comes to luxury.

Meanwhile, as all this is unfolding, there are a few references to the dramatic drop in Virgin Blue’s expected profit being due to John Borghetti starting work as the new CEO with a “clean desk.” I believe that this is exactly what’s happening as Borghetti has been brought in to take Virgin Blue to a new level, re-purposing it towards the “New World Airline” concept which is exactly what he’s doing (reassessing route structure & fleet composition, targeting the business market and rationalising the brand).

Naturally this sort of change is going to take effort away from “business as usual” operations and will have a material impact on Virgin Blue’s earnings potential. By announcing a dramatic reduction to expected profits, Borghetti has cleared the decks, allowing him to make the sweeping changes he wants without having to be constrained or distracted by the original high earnings target.

This is also very much like the way Qantas would inform the stock market in the past. They would announce expectations of a tidy profit and good results during the year, then typically would end the year exceeding expectations and returning better than predicted results. By understating their public expectations but striving internally for more, they frequently achieved better than the market expected.

John Borghetti spent 36 years with Qantas so he “grew up” with this kind of ‘announce low but aim high’ approach. Is it any surprise that he may be introducing the same concept at Virgin Blue now that he’s in charge?

Actually, the surprise for me is that the mainstream media hasn’t made this connection. Maybe they’re caught up in the short term memory loss of the “now!” approach to reporting?

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