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CEO Interview - Friends in High Places

John Borghetti, CEO of Virgin Australia John Borghetti, CEO of Virgin Australia, talks partnerships and profitability

You’ve been in the job for more than a year now. Is it what you were expecting?

It isn’t what I was expecting at all. It’s a lot more exciting and there are many more opportunities than I thought. That has made it possible to get ahead of plan. And that’s a big statement considering the past year we’ve had, with everything from rising oil prices to a volcanic eruption.

What are the opportunities you have mentioned?

We’ve been able to capitalize on the brand far more than expected. We now have one name and one consistent message. The power of the Virgin brand is enormous. We pay a fee for the Virgin license, which is the normal arrangement, and naturally there are certain expectations in terms of performance. We need to deliver, and we have been. We’ve also managed to appeal to both ends of the market. In Australia, Virgin was more associated with the leisure market but we’ve made a big impact on the business sector as well.

How do your various shareholders and partners affect your strategy?

We are involved with four big airlines—Air New Zealand, Etihad Airways, Delta Air Lines, and, subject to regulatory approval, Singapore Airlines. They are all strong brands and they all have an excellent reputation in customer service. Even so, our partners were chosen carefully. We have the Virgin brand to consider as well as the airline’s needs, so it was essential to work with carriers that were aligned to the same high service standards.

All of our partners will affect our strategy for the better. Virgin Australia needed an international network to rival its competitors and complement the strong domestic service. The only way that this could be properly achieved was through partnerships. We certainly didn’t have the money or the time for hundreds of new aircraft to be delivered, so it had to be done through working with others.

Is working together the only way for airlines to make money?

In my view, partnership is the only way to survive. But I don’t think aviation is unique in that respect. It is impossible for any company to be a global player and provide a global service without partners.
It’s interesting to note that aviation started at roughly the same time as the car manufacturing industry. How many airlines exist now compared with the number of car manufacturers? There is emotion and national pride tied up in airlines. That is not necessarily a bad thing but it must be turned to our advantage and not consistently used as a stumbling block to full cooperation.

How do you plan to exploit the potential in the Asia‑Pacific region?

We expect to make the deal with Singapore Airlines official in the near future. They have an unparalleled network in the region so we’re hoping to be able to tie in with that.
Singapore is ideally positioned to connect Australia with Asian nations, China in particular. You can reach every big city in these countries from Singapore, so it is the perfect hub for the region. It makes good business sense to work through a single gateway, too. You’ll never be able to connect every major city in China with Australia directly.

Is the region providing the responsibility and leadership that comes with being the largest aviation market?

Absolutely. It is taking the leadership question seriously and I think that was evident at the latest IATA Annual General Meeting, where so many airline leaders from the Asia-Pacific region were present.
Having said that, what is really important for the industry is that every region contributes. Given the messages we’re sending about this being a global industry, it is not good to have a single regional view dictating the global agenda. IATA does a great job in ensuring we speak with a single voice and that has to continue.

The industry is unified regarding the environment. But you had some disagreements with other airlines over the Chilean volcano, which affected Australian and New Zealand flights earlier in the year. What were the issues? The volcanic eruption forced us to stop flying some routes for a short while, predominantly to New Zealand. We resumed our services faster than other carriers but we would never fly if we weren’t 100% convinced it was safe to do so.

We must use the recent ash cloud crises as a learning experience. As an airline we certainly learned a lot about volcanoes, operations, and customer service. We have a good relationship with the Civil Aviation Safety Authority in Australia and we demonstrated to them a clear commitment to safety management. We must show the authorities around the world that airlines are best placed to make decisions about whether or not to fly.

In general, can airlines get governments to understand the needs of the industry?

The Australian Government has a pragmatic view about aviation and I have no objection to that. But there are specific areas of aviation that need to be addressed. Air traffic management and infrastructure could be improved. This would help us reduce our carbon emissions and ease environmental concerns.
The topic has taken on an even higher profile in Australia recently because the government has announced it is going to introduce a carbon tax from next year. There will be a fixed price to pay until 2015, when a market-based scheme will be introduced. Ultimately it is yet another cost being imposed. That has to be factored in to ticket prices, so it is the customer who will be affected.

Will airlines always be seen as big polluters?

I don’t like airlines being called big polluters. For a start, aviation is crucial to trade and tourism, particularly in Australia. And Australia is a big country, so flying is often the only way to travel in a realistic timeframe.

Besides this, the industry is constantly reducing emissions. Fuel efficiency has improved 24% in the past decade alone. That’s been achieved because it was plain common sense to be more efficient. Less fuel burned equals less fuel bought. So we’ll always be striving to become more fuel efficient; we don’t need taxes or carbon schemes to remind us. Airlines and the airframe and engine original equipment manufacturers have been involved in emission reduction since the foundation of the industry.

With less than a 1% profit margin since its inception, can the industry achieve sustainable profitability?
It’s difficult to say. Different airlines have different objectives and there’s nothing wrong with that. We have to be more prudent with capacity growth: there is a difference between growing the market and causing long-term damage. Competition is vital and I’m a great believer in it but the truth is there is a disconnect between revenue and capacity.

I think we should talk more about customer service, brand and marketing, and the effect these can have on revenue. Every airline flies aircraft and runs roughly similar operations, and we can work in these areas to reduce costs. But we also have to talk about the flipside of that, which is improving revenue. It’s too often forgotten about.

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