Virgin Australia: Cyrus is talking ‘mid-market’ airline

The next round of the Virgin Australia voluntary administration/sale saga is set for 22 June, when final binding bids for the airline are due from the two finalists – Cyrus Capital and Bain Capital.

The public lobbying has begun

Over the weekend Cyrus Capital senior adviser Jonathan Peachey, gave a briefing to Australian media from New York on what they have planned for Virgin Australia should they be the winning bidder.

Peachey’s experience

Preachey has some good credentials, he became the chief executive of Richard Branson’s Virgin Group in North America, having joined the the brand 10 years earlier in London.

He’s been a Branson stable member, working in a range of the businesses, including the Virgin Atlantic airline, on the board of Virgin Galactic, and on the Virgin America board, which was sold in December 2016 for US$2.6 billion to Alaska Airlines. So he should know the brands DNA well.

The briefing

There was some sooky stuff about how he proposed to his wife on a trip to Australia – doesn’t that make you warm and fuzzy. But there were also some firm proposals about the airline.

• Simplify – Virgin Australia has become too big and complex. Need to simplify by streamlining the network and fleet, and pushing the Tiger brand over a cliff
• Virgin DNA – need to bring this back to the airline – a bit of cheekiness. Peachey will draw from his experience at Virgin America
• Current management to stay – Paul Scurrah et al must be sighing with relief. It also means broadly adopting the current management designed forward plan
• Revenue Management – this is the info-science of considering capacity and pricing to make the most profit on every flight
• Mid-Market positioning – sitting between Qantas and Jetstar – with some overlap at the lower end. That means offering something that business flyers like, but also considers the price sensitivity of the leisure traveller
• Keep the staff happy – Preachey wants that 9,000 strong creditor, and their representative unions on-side, so he is appealing to their ‘focus on people’ culture and inviting them to use their initiative.
• No government support – that’s what the federal representative Nicholas Moore (former Macquarie Bank CEO) will be wanting to hear. Does this mean they will turn down money from the Queensland government to keep them based In that state?

What this means in practice

In some ways, this is no great change in course. More ‘business as usual’, but taking the pandemic into consideration. I predict the following actual changes:

The Club – goodbye

Goodbye to the elite VIP perks, not to mention the physical space of ‘The Club’ at Australian airports. This competitor to Qantas’s Chairman’s Lounge is elite stuff, and expensive to run. If Preachey is true to his word, this is top tier competition, something that won’t fit with his ‘mid-market’ view of the airline.

Staffing

Expect redundancies – but minimal, probably argued to be pandemic related, with a slow return to current staffing levels dependent on the recovery in demand. This bidder is reported to be making sweet noises to staff unions, and the practical effect of this will be keeping as many staff employed as possible.

Fleet

Simplification. Get rid of the A330’s (leases too expensive) and the 777’s (old less efficient planes). Use 737’s as the workhorse, with 787’s to be acquired for international. There might also be some rationalisation of planes used on regional flights. I will leave the question of the new 737 Max order to one side but presuming they do get approved for flying again, expect this order to go ahead. In the short term, Virgin Australia can swap around its current domestic fleet to cover the reduced flying needs of the airline post pandemic.

Service and Pricing

Expect the segmentation of each flight, with options that can be tailored for each passenger. I’m thinking like LATAM plus, or American Airlines ‘Main Cabin Plus’ where if you pay more, or have higher status, you get actual and perceived benefits. Actual benefits might be free snacks, perceived benefits might be seating more forward in the plane, or priority boarding, or the right to store your cabin luggage in de-marked overhead bins. The trick will be to introduce these without making things more ‘complex’.

Tiger Airlines, what Tiger Airlines?

Make it all simpler – one brand, one lot of systems, one network instead of two. The proposal becomes – why run two airlines, when you can accommodate the range and price sensitivities of the same groups of passengers on one plane, within one airline, by carefully segmenting the offering?

2PAXfly Takeout

This is another timely reminder to wear your seatbelt when seated. Holding you close to your seat will protect you from the sort of injuries sustained on this flight, when unsecured passengers flew to the ceiling of the aircraft, and then came crashing down once the ‘drop’ ceased.

The hope will be that this is an anomaly – a ‘freak accident’ in casual parlance. If it is a systemic error either mechanical or electronic, then this is a larger concern for the airlines that fly Boeing Dreamliner 787 aircraft. Let’s hope it isn’t. If it is, it will pile on the woes to Boeing’s existing stack.

This is some solid thinking based on Peachey’s experience in this part of the airline sector.

There are no particular surprises here, but I appreciate the realisation, that in many senses it is the people serving passengers that make for the experience that retains faithful customers.

What will be more interesting is to see what the other bidder Bain, has to offer, and how different it is from this proposal.

I have taken what I think are the most interesting aspects of reporting on this briefing from a range of online sources, and combined it with my thinking. If you have access, then I would suggest you read the Australian Financial Review‘s article by James Thomson. It’s the best and most comprehensive.

Can’t wait until 22 June, when we will know the next chapter in this saga.