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Published 21 February 2013 07:27, Updated 21 February 2013 11:21
Virgin’s ‘Game Change’ program is designed make it more relevant to frequent business travellers, says chief executive of Virgin’s Velocity Frequent Flyer program, Neil Thompson, says. Photo: Angus Mordant
It’s back to the late ’90s for business travel. For the first time since the dotcom crash of 2000, two airlines are slugging it out for the business class dollar. And while airline passengers may no longer be worrying about Y2K, humming Lou Bega’s Mambo No.5 or preparing to vote in the referendum on a republic, they will notice something familiar taking place.
Ansett is long gone but for the first time since its demise, incumbent Qantas is fighting another major battle. Virgin Australia, which began life as Virgin Blue in 2000, is putting the finishing touches on its own transformation from low-cost carrier to premium-service operator. The battle for Australia’s estimated $4 billion business air travel market is under way.
“The big change is [Virgin chief executive John] Borghetti’s big bet,” says corporate travel consultant TMS Australia chief executive Tony O’Connor. “They’re spending a lot on reinventing the airline with new planes, new cabins, new everything.”
The premium rebirth of Virgin has been necessary as it was being pushed out of the low-cost market by Qantas’s Jetstar. Borghetti, who took charge at Virgin in 2010 after 36 years at Qantas, has responded by increasing the network and service levels in an overhaul that in November had already helped the airline make 20 per cent of its revenue from corporate and government business.
The challenge facing the newcomer was underscored on Thursday when Qantas said it maintained its 84 per cent share of the business market - estimated to be between $3 billion and $4 billion - in the half year to December.
“Qantas Domestic has remained the airline of choice for business travellers,” chief executive Alan Joyce said, while reporting a near-tripling increase in after-tax profit to $111 million. “During the first half we renewed 40 (large) accounts and won 39 new (large) accounts, including four won back from the competition.”
Under Borghetti’s “Game Change” program, Virgin has expanded commuter routes and muscled into the fly-in, fly-out game with the purchase of WA-based operator Skywest. It has introduced business class to commuter flights, opened and refurbished lounges in airports across the country and is trialling an inflight wi-fi system to stream audio and video content to users’ own devices, which it intends to roll out in April. At Sydney domestic airport, gold and platinum members of the airline’s Velocity frequent flier program can bypass the departures hall and go through a dedicated entrance to check-in and security before progressing straight into the lounge.
“The objective was to really start to reposition the airline, make it more relevant to the frequent traveller and to the business traveller,” the chief executive of Virgin’s Velocity Frequent Flyer program, Neil Thompson, says.
Now comes the hardest part – convincing more customers to switch.
“From Virgin’s perspective, they’ve put all the major pieces in play,” CIMB Securities Australia analyst Mark Williams says. “From here it’s a marketing campaign to try to get more corporates on board. But having said that, Qantas’s corporate product is formidable, particularly the frequent fliers’ program. They’re not going to want to lose customers too quickly.”
Qantas is quick to point out the difference in size between the two schemes. It has 9 million members, all of them active (non-active members get knocked off the scheme). Virgin does not remove inactive members.
Thompson, who says Velocity has almost 3.5 million members and is on track to hit 5 million by 2015, says size isn’t everything. “One of the risks of these programs is if they get too big, you’ve got too many people chasing a limited number of seats,” he says.
Memberships don’t run out but these programs can be as much about other activities as flying, Thompson says.
“Our objective is to engage all the members,” he says. “We have members whose activity is mostly around flying, we have members whose activity is mostly around shopping. It’s about being able to serve the needs of all your different [membership] segments.”
Velocity also allows customers who take parental leave to put their membership on hold for up to six months so they don’t lose the status they have accumulated from work trips, Thompson says. “When they come back, we restart the clock and they’re not penalised,” he says. “People really appreciate it.”
He declines to identify the size of the business class market share Virgin wants. The airline has a 30 per cent share of the total domestic market and analysts expect it to work towards a similar figure in the higher-yielding business travel market.
“It’s about the mix,” he says. “That reflects your overall yield. As the mix on our own flights increases, that will be reflected in the total market.”
Qantas domestic chief executive Lyell Strambi says Virgin still has a long way to go before it has an equivalent offering.
“There is a perception that Virgin has moved a lot further than they have,” Strambi says. “We have a massively extensive lounge network compared to theirs – 34 lounges compared to nine. Our frequent flier program is enormous. We still offer meals and baggage free for every flight, whereas our competitor doesn’t. We’ve got the lion’s share of capacity on Perth.”
Announcing results on Thursday, Joyce said Qantas would upgrade 20 A330-200s for its wide-body domestic fleet, meaning trans-continental flights would offer lie-flat beds in business class.
“We know that fleet renewal is vital to customer satisfaction and we are confident that these steps will help us remain the airline of choice for domestic business travellers,” he said.
Thompson says the biggest step Virgin has made over the past 18 months is to build up a network of alliance partners including Singapore Airlines, Air New Zealand, Delta, Etihad, Virgin Atlantic and Virgin America. At home, he says, the biggest difference is service.
“Customers are voting with their feet,” he says. “I am struck every day by the number of Qantas frequent flier bag tags I see on luggage in our lounge. These are platinum and gold tags.”
Strambi says Qantas has increased its service levels and has put 11,000 staff through service training.
The fight comes at a tough time for the airlines. Better corporate procurement practices and adherence of staff to travel policies has seen the unit cost of corporate travel fall 12 per cent since 2006, O’Connor says. The real battle for business travel happens not in business class, which makes up less than 5 per cent of domestic air travel spending by companies but in economy class.
The currency of business travel economy is flexibility and this is where companies have saved money by buying cheaper tickets with less flexibility.
Bureau of Infrastructure, Transport and Regional Economics figures show that while the average real price of a restricted fare fell almost 28 per cent between September 2007 and January this year, the average price of a flexible full economy fare rose 8 per cent.
Having been caught in a pincer movement by a full-service Qantas on one hand a low-cost carrier Jetstar on the other, Virgin in October said it would take a 60 per cent stake in Singapore Airlines’ budget operation Tiger Australia.
This would allow it to pit Tiger – whose fleet it intends to expand to 35 aircraft from 11 by 2018 – against Jetstar and concentrate the Virgin brand in the premium market. The competition regulator has raised concerns the acquisition might restrict competition. A final decision is due next month.
But the scenario of two airlines battling it out is different this time around. Neither Virgin nor Qantas are interested in starting an in-house travel management company to compete with the likes of CWT and Amex and steer corporate bookings their own way. Qantas, like Ansett, started one in the 1990s but the QBT agency is now in effect independent.
And unlike in the last millennium – assuming Virgin’s purchase of Tiger goes ahead – the focus is on full-price fares. “With the backpackers taken out, the battle of the major carriers is now more about business travellers than it ever has been,” O’Connor says.
It’s game on. Corporate procurement officers should party like it’s 1999.