Borghetti's transformation plan well under way, supported by record cash

Virgin Blue today reported a net profit before tax of A$34.3 million; while underlying earnings for the Group were $87.2 million before interest and tax and the underlying net profit before tax was $31.0 million, in line with the revised guidance of $20-40 million announced in May, shortly after new CEO John Borghetti took the helm.

Total revenue was up 13.1 per cent to $2.98 billion, with cash reserves of $815 million.

In a briefing that certainly met expectations of change, the airline also announced a formidable partnership with Etihad and a second phase of its fleet rationalisation program.

The Etihad partnership will see V Australia flying into Abu Dhabi thrice-weekly from February next year; but it's about a lot more than that (see below).

Borghetti provided some perspective on his first three months in the job, when he said that "there was no question that the company had an enormously promising platform to build from... there is enormous enthusiasm within the staff to take the airline to the next step... (and) the upside in this business... is far, far greater than I ever expected and I think we've got huge opportunities going forward."

He went on to define the new strategy as "a very simple one and a very logical one. We have to move away from reliance on the leisure market, that is clear. We've got a cost advantage that we can use to our advantage in the corporate market.

"We've exited some loss-making routes, but importantly we've also exited routes that weren't a strategic fit to the new strategy. 

"In the first hundred days we've kicked off a game-changing program and we have already announced two phases of our network review...

"We are not here to win market share at all costs, we are here to provide shareholders with a good return. For us the right market share is an economic argument; it's the level that is appropriate to get a return for our business and for our shareholders."

Other points of interest to emerge from the briefing were:

* the new international strategy is designed to feed the domestic business "in an appropriate way". It involves a small number of aircraft operating to two key hubs (Los Angeles and Abu Dhabi) and thus opening up hundreds of global destinations.

* the Embraer 170 jet was described as "not an economically viable aircraft for our use" and the airline will quit them.

* The B787 and the A350XWB are not on the airline's radar at this stage.

* Cabin product plans would be unveiled at a later date. JB sidestepped a question about any introduction of business class.

* Borghetti still wants to move to a single brand, but "how we progress that we'll just have to let time unfold".

* The A330s will be deployed East Coast to Perth, but in prefacing one answer with "if we use them out of Sydney" the CEO seemed to be saying that it would initially be Melbourne-Perth. And that would make sense as it's one of Qantas' most profitable routes.

The Etihad deal

What's the attraction in a close alliance with Abu Dhabi-based Etihad? Well both CEOs (Etihad's James Hogan joined JB on the podium) had a long list of reasons to be in bed together:

* Jetstar's announced intention to operate to the Middle East (and the absence of some other synergies) had started to sour Etihad's relationship with Qantas.

* Bringing an Australian carrier back to Abu Dhabi as a hub opens up Europe, the CIS and the Middle East itself to that carrier. Carriers that are strategically positioned globally are are able to hub and source markets and then disperse traffic.

* It provides both carriers with a opportunity to improve their corporate market penetration and fill premium cabins.

* John Borghetti described such bilateral alliances as "absolutely key" and said that he expected the Etihad deal to be followed by those others waiting in the wings with Air New Zealand and Delta. He said that such bilaterals were the key to unlocking value.

* There will also be a major boost to inbound traffic because of the efficiencies delivered, supported by joint marketing. And that will translate into domestic feed.

Second phase of network review

The airline will take delivery of two A330-200 aircraft in May next year and use them on trans-continental routes "to grow available capacity, especially at peak times, extending the airline's appeal to business travellers".

The A330s, which will be leased from Emirates, will operate in an EK two-class configuration. There is also talk of another five aircraft being leased from Emirates at a later date.

And from February next year the airline will consolidate international services to those two hubs already mentioned, withdrawing in the process from South Africa and Phuket. It has already withdrawn the over-sized B777 from Fiji and replaced it with the B737.

So...

The pace of change at Virgin Blue has accelerated now that John Borghetti has the team he wanted in place, but it's likely to accelerate more. We have noted that the Qantas Group is also manoeuvring for strategic dominance, so JB can not afford to slacken the pace. Alan Joyce has more pieces on the chess board right now, but he'll have to perform at his agile best to retain control of the game. We foresee many more dramatic moves as this one develops.