Few airlines focus as much on passenger experience as Virgin Australia. But unfortunately for investors, that approach has not produced recent profits.
Future of Passenger Experience
To better understand the challenges facing airlines in an age of fluctuating oil prices, rapid growth, and changing passenger expectations, our Future of Passenger Experience series will allow leaders in the industry to explain their best practices and insights.
Virgin Australia CEO John Borghetti is a survivor.
Earlier this year, Air New Zealand, then one of Virgin Australia’s key shareholders, tried to remove Borghetti. Air New Zealand CEO Christopher Luxon argued Virgin Australia should bring in another leader to stem the carrier’s losses, according to local media reports.
But the board sided with Borghetti, allowing him to stay. Borghetti then helped find a new buyer for most of Air New Zealand’s stake, with Chinese conglomerate Nanshan Group buying roughly 20 percent of Virgin Australia. Nanshan is the second large Chinese investor to buy a stake in Virgin Australia this year, joining HNA Group, owner of Hainan Airlines, which in May said it would buy 13 percent. The two Chinese firms join Etihad Aviation Group and Singapore Airlines as major investors in Virgin Australia.
The capital infusion means Borghetti should have more time to turn around Virgin Australia, which lost $169 million (U.S.) in the 12 months ending June 30. Borghetti, who took over in 2010, after a long career at Qantas, has tried to overhaul the ailrine, moving to cut costs while also improving the passenger experience.
Skift spoke with Borghetti in July, while he visited Los Angeles to promote the airline’s new business class cabin. We spoke about the airline’s new cabins, its Chinese investors, and future plans.
Note: This interview has been edited for length and clarity.
Skift: You have two new major Chinese investors — HNA Group, owner of Hainan Airlines and Nanshan Group, a major firm that invests in the mining, construction, tourism and real estate industries, among others. Will this change how you operate?
Borghetti: No. We have a majority independent board and it will continue to operate independently. Obviously, what it does is create some relationships.
Skift: What about routes? Could this change where you fly?
Borghetti: We’ve already said publicly that we’re looking at China. We’re working very closely with HNA in particular and the opportunity for us to fly to China and for that matter potentially Hong Kong. We’re looking at a couple of destinations. We are pretty confident we will be there by the end of next June. That’s a massive growth of opportunity for us. China is the biggest inbound travel market in Australia and growing at around 20 percent plus. I think there were 1.2 million Chinese tourists coming to Australia last year. It’s overtaking America and it just keeps going.
Skift: In other industries, companies sometimes tweak their product to appeal to Chinese customers. Will you do the same?
Borghetti: We will. You have to keep your core product. I’d say 90 percent of it needs to be fundamentally your DNA, but you always have to appropriately package the last 10 percent, whether it’s food or whether it’s cabin crew. But that’s no different to anywhere else really that we fly.
Skift: You have a new business class suite for long haul routes. Every seat has aisle access, an improvement from your last configuration, which had two seats by the windows and three in the middle. Do you wonder if airlines will reach a point where they can no longer markedly improve on the last generation of seats?
Borghetti: I thought that about 15 years ago. Then about 14 years ago. Then 13 years ago and I’m thinking that today, but I know I’ll be wrong. Because there’ll always be something to improve. What will that be? Well, technology will change for a start. Things like WiFi. The second thing is materials will change. They’ll become lighter, stronger, more workable, more flexible. They’ll be improved more. The cabin structure will change as you go into concept fiber aircraft. The fuselage shapes [of newer aircraft] are different. You look at the [Airbus] A350. You board the 350 and it’s almost got vertical walls. I think it will just keep evolving. All that then leads to product change.
Skift: How long does a business class seat last today? Is it a five-year window?
Borghetti: Life cycles are somewhere in between five to seven years in my view. It does vary from route to route. [You want to add new seats] before you get to a point where someone has come out with something better and you’ve got to start discounting to keep your customers.
Skift: Was the cycle longer when you started in this industry?
Borghetti: Oh, yeah. Product life cycles are getting shorter and shorter. If you go back to the first class product life cycle in the 70s and the 80s, [seats lasted] about 20 years. It was just two seats that reclined. End of story. So, yeah. It’s getting more and more competitive.
Skift: You only have five Boeing 777-300ERs flying longer routes. But you have also installed new flat business class seats on A330s flying regional routes. Why?
Borghetti: Our passengers are demanding a better product. I’ve got a very simple theory. There’s a direct correlation between comfort in the air versus comfort on the ground, depending on the duration of flight. If you’re looking at a Melbourne-Sydney flight, about an hour and a half, then people value more the lounge facilities and ground experience because it’s such a short flight. But as that flight gets longer, the importance of the in-flight experience grows.
When you’re talking about transcontinental flying between Sydney and Perth, [it’s almost like] you’re talking international flying. It’s [nearly] a six-hour hour flight. You want a decent product. Typically, as we do have overnight flights, people want to get a few hours sleep before they arrive at their destination. We put the same configuration on that aircraft — same seat. There are some minor differences, but very minor. In fact, you wouldn’t even pick them. It’s researched very well.
Skift: You’ve also updated your premium economy product on long-haul aircraft. Why?
Borghetti: Business has kept evolving and it’s gotten so much ahead of economy that there’s a market niche gap that had been missing. The extremes have been so high that it makes sense to put a product in the middle. It’s working very well. It was working very well in its previous iteration, too.
Skift: What about regular coach? How can you keep customers comfortable and still ensure your seating is dense enough so you can make money?
Borghetti: Particularly on long-haul aircraft, your biggest enemy is time. The two things that hit you when you are in any one place for a long time are comfort and how do you make the time go. Hence, you’ve got entertainment systems. WiFi will be coming in the middle of next year.
Comfort comes at a price. There’s a balancing act between how much more comfortable you can make the passenger but still maintain the price because you have to make money in the end.
That’s where the differentiation comes in. [You reach a point when you realize] ‘we can’t actually do much more here with this price.’ So there’s definitely a market for premium. We said, ‘Let’s make a premium economy cabin so you can have a little bit more comfort.’ You don’t have to pay the full business class price for it.
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Photo credit: Under CEO John Borghetti (center), Virgin Australia expects to expand into China. Virgin Australia