Virgin boss derides 'tired' Qantas line
Virgin Australia chief executive John Borghetti has refused to back away from a showdown with Qantas in the domestic market, saying "no one had a God-given right" to any market share.
Qantas is preparing to flood key routes with more frequent flights and larger aircraft to defend former chief executive Geoff Dixon's "line in the sand" of 65 perent of market share.
This is in response to Virgin's decision to introduce more luxurious wide-body aircraft on domestic routes and tackle the regional market in Australia with new turbo-prop services. However, Borghetti questioned the logic of the response.
Analysts have raised concerns that a rush to add capacity in a confined market such as Australia will lead to a discounting war and hurt the industry's profitablity.
"No one has a God-given right to any market share. No one," the Virgin chief said in an interview in Toulouse, France.
"He [Qantas chief executive Alan Joyce] needs to be getting a new line. It's a Geoff Dixon line, it's 10 years old and I'm a bit tired of hearing it."
"If they want to do it they can do it, it's their company. But I'm running this company, not them, and I know this strategy is right. And it must be right; otherwise they wouldn't be so concerned and doing some of the things they're saying they will."
Virgin has also upped frequencies on key business routes including the "golden triangle" of Melbourne-Sydney-Brisbane, leading to capacity growth ahead of what the company had flagged to investors at its first-half results. A recent research note from RBS pointed to year-on-year capacity increases of 21 per cent in the wider domestic market by September, led by Virgin's aggressive expansion.
It is a situation the broker forecast would trash profitability as the two largest players were forced to discount fares to fill the extra seats.
Borghetti said the capacity additions at Virgin were the natural result of the arrival of larger aircraft such as the fourth Airbus A330 the company took delivery of in Toulouse. Virgin is also swapping one Boeing 737 a month for a stretched version with 32 more seats.
Larger aircraft and greater frequencies are key to the Virgin chief's bid to win a larger share of the Australian corporate travel market, where yields are higher and demand less volatile than in the leisure market that still makes up more than 80 per cent of Virgin's revenue mix.
While Virgin's yields, or average ticket prices, have risen by a double-digit percentage, its passenger loads have fallen since the new aircraft and higher frequencies were added.
In response, Mr Joyce has said he will add as much capacity as is needed on the mainline carrier and Jetstar to retain a 65 per cent market share.
The line in the sand strategy dates to Mr Dixon's days, and is believed by the company to represent the optimum level at which a share of capacity equates to a maximum share of passenger traffic.
Mr Borghetti has a differing view on the relationship between capacity and profitability. "It depends on market forces and the state of the market. As supply and demand moves, that line moves and mathematicians should know that," he said, in an apparent reference to Mr Joyce's tertiary studies.
"That's why I don't have a line in the sand, because from a profitability point of view market share will Âdeviate."
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