The gospel according to John Borghetti, Virgin CEO
Monday, January 14, 2013/
“A chief executive’s real job is to provide vision, inspire and create hope for company employees. My job is to provide the tools our staff need to deliver on that vision. An important element is face-to-face communication. I’m on a plane at least once a day. You have to talk to people – they know more about things than you do.”
That’s the view of Virgin Australia chief executive John Borghetti, who likes to think of himself as a “people man”. He works in a people industry, a focal point, he says, that’s too often lost on other airline chief executives around the globe.
“Talk to CEOs in aviation around the world and what most want to discuss is cutting costs,” Borghetti says. “Of course, that’s normal business. But very few of them talk about how to improve their airline’s revenue streams, their service, or how to engage more with their customers or staff.
“Aviation can be complicated, but fundamentally it’s pretty basic. It’s firstly a people business, not a numbers business. Every airline in the world flies the same aluminium tube through the air. The paint-jobs and seats might be different. But what separates airlines are the people they employ. Run the business right and the consequence will be good numbers.”
After becoming chief executive in May 2010, Borghetti’s strategy included repositioning an airline that had lost its way.
He says before joining the airline – Virgin Blue, as it was known then – it had deviated from its initial model as a low-cost carrier to a mid-tier one by introducing loyalty schemes, a limited range of lounges and premium economy. This led to higher costs, and competitors took advantage by offering cheaper fares.
Also, Virgin Blue was almost totally dependent on the leisure market, exposing the company to big losses from natural disasters. Borghetti says Virgin lost more than $100 million in six months due to the Christchurch earthquakes, Queensland floods and volcanic ash clouds.
“We had to diversify our revenue base from our dominant leisure market,” Borghetti says.
His aptly-named “game change” strategy included competing against Qantas in the more lucrative business segment. Qantas dominated the business travel segment before Virgin entered the space in January 2011.
“In any business, when you enter an almost monopolistic market, there’s only two things that are guaranteed,” Borghetti says. “The monopolist will wind up losing market share and the new entrant will win some. The only question is how much? When you see a monopoly, you think, I could take a crack at that.”
To entice business travellers, Virgin started a price war, undercutting Qantas business fares by 27%, which Borghetti says is sustainable over the longer term. “We’re gaining on Qantas,” he says. “We now have about 30% of capacity in the market while Qantas has about 65%. Take out Jetstar, and Qantas has about 45%. I don’t call it a price war – I call it competition. We haven’t cut fares for the short term.”
A new vision
Borghetti, a former Qantas senior executive and employee for more than 35 years, had a vision for Virgin just before he was appointed. He told the board: “If I’m going to take this role, here’s the strategy, so if you buy the strategy, then I’ll take the job.”
He says the company had too many brands – Virgin Blue, Pacific Blue, Polynesian Blue – and their different offerings confused customers. So he changed the company name to Virgin Australia last year to provide a new identity and a single customer proposition.
Aircraft interiors were modified for business class, new lounges were built, existing lounges were renovated and terminals upgraded. “On the service side, we had to create a network that gave us global coverage,” he says. “We elected to do it through strategic alliance partners, so we could co-operate on pricing, scheduling, co-ordination and reciprocity in terms of frequent flyer programs.
“So now we have a global network that can fly you into more than 400 destinations around the globe, to destinations on other people’s airlines with our code and passengers can still earn frequent flyer points. That was the other important thing – we needed a frequent flyer program that covered the globe and was competitive. When I joined, we had 1.8 million frequent flyers and I was told the program was pretty well matured. Today, we have way over three million and it’s growing by about 1600 members a day. We needed that critical mass.”
Borghetti changed the composition of the aircraft flown on different routes to extract the most value. Long-range planes were taken off relatively short routes and wide-bodied aircraft, providing more room and comfort, were introduced between Australia’s east and west coasts.
More fuel-efficient planes, the ATR 72s, were introduced on new regional routes from capital cities; the routes Borghetti considered to be monopolised, such as Emerald, Gladstone and Port Macquarie. Borghetti also increased the number of flights between Melbourne and Sydney from the low 20s to 31 a day. He considers the three growth routes in Australia to be from the east coast to Western Australia, regional markets within a state and between Melbourne, Sydney and Brisbane.
But, as he says, having a strategy is one thing, and executing it is quite another. Borghetti is almost two years into a three-year plan that he continues to roadshow at least twice a year to his 7000 staff, sharemarket analysts and journalists.
Why it works
“To make a strategy work, it’s all about communication,” he says. “You have to be able to convince the staff that what you’re doing is the right way forward and is going to benefit the business. It’s easier to convince people if you believe in it. Everyone likes clarity – you can’t execute a plan if it’s confusing. And stick to the strategy; it might need tweaking here and there, but it has to be consistent. Don’t drastically change it every two or three months – that’s a certain highway to failure.
“A chief executive’s real job is to provide vision, inspire and create hope for company employees. My job is to provide the tools our staff need to deliver on that vision. An important element is face-to-face communication. I’m on a plane at least once a day. You have to talk to people – they know more about things than you do.