John Borghetti: why Virgin Australia "had to attack Qantas"

Virgin's move to go head-to-head with Qantas was less a matter of choice than a matter of survival, says the former CEO.

By David Flynn, June 29 2020
John Borghetti: why Virgin Australia

Former Virgin Australia CEO John Borghetti has defended his strategy which took the airline from the low-cost Virgin Blue to a full-service and full-throated Qantas competitor, saying his ambitious "game change" plan was the only way to ensure the airline's success.

Speaking with the ABC ahead of a special Four Corners report on Australia’s aviation crisis and the future of flying, Borghetti said "I think it was the only strategy because Virgin had found itself placed in the middle between Jetstar and Qantas and it had outgrown the low-cost space but hadn't quite penetrated the corporate space, so you needed to go one way or the other."

"You couldn't go back to the basic low-cost carrier phase because your cost base was too high, so you only had one way to go and that was to attack Qantas and get the corporate market."

Richard Branson and John Borghetti at the launch of Virgin Australia on May 4, 2011.
Richard Branson and John Borghetti at the launch of Virgin Australia on May 4, 2011.

Borghetti's work is now being undone by Virgin's new owner Bain Capital, which will reposition the airline as a mid-market 'value-based' carrier rather than fight Qantas for high-end corporate travellers – and in the process significantly downsize the airline, pare back its business class offering, let go of its Airbus A330 jets and close its elite invitation-only The Club.

"We are not looking to take Qantas head on, especially in their corporate part of the market," Bain Capital's local managing director Mike Murphy has said, noting that Virgin's previous battle for the high-end, suited-and-booted business travel brigade "wasn’t a happy outcome for anybody."

"There will always be different segments that will want the much more high spend Qantas experience," he said, but Bain's Virgin will stake out the broad middle of the market and put an emphasis on value.

Read: Here is what Bain Capital's Virgin Australia 2.0 will look like

Former Virgin Australia executive John Thomas – a long-time friend and colleague of Borghetti, who joined the airline in late 2016 and was seen as Borghetti's successor, but ended up hired and fired in the space of a year – tells the ABC that the 'Qantas-lite' approach was unpopular within the airline.

"When I arrived at the airline, a lot of frontline staff said, 'Look, can we, can we please stop trying to be like Qantas... Qantas is a great airline. You're never going to beat Qantas at Qantas's game."

Virgin Australia chair Elizabeth Bryan, who took up the post in 2015, said the airline was "hell-bent" on getting market share.

"But you've got to be able to afford it. You have to be able to afford going into those things. And in the end, deep pockets win and Qantas is the deep pocket, not Virgin."

Bryan also implies that it was the board's decision to have Borghetti resign in early 2019 and be replaced by current CEO Paul Scurrah, who is tipped to remain in that role under Bain's ownership.

"What the board can do if they don't like the way the CEO is running the company is to change the CEO. And that's eventually what the board that I led did. It was not prematurely, it was not done in an undignified fashion," Bryan told the ABC. "I think he'd done his stuff and the board thought it was time for a change."

Grounded: Australia’s aviation crisis and the future of flying will screen on ABC TV's Four Corners on Monday June 29, 2020 at 8.30pm Eastern, and will also be available on ABC iView.

David

David Flynn is the Editor-in-Chief of Executive Traveller and a bit of a travel tragic with a weakness for good coffee, shopping and lychee martinis.

That huge debt will be a huge part of his legacy. Resentment about not getting the Qantas CEO position probably motivated him to attack Qantas with huge consequences.

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 367

"probably motivated him ..."? Oh, you're way too kind LLL, I'd say he was possessed by it.

16 Dec 2016

Total posts 45

Ego and pride has led to VA's demise. John Borghetti was always arrogant with small man syndrome and didn't have the smarts to know where to draw the line.

06 Feb 2018

Total posts 4

I'm not surprised he declined to appear on the program and just released a statement. His approach led Virgin Australia to the precipice and unfortunately Covid tipped it over. Virgin never had the capability to take on Qantas and all Borghetti cared about was trying to make a Qantas MkII. He basically ruined them with poor decisions on routes, aircrafts and surrounded himself with admirers on the board. Want to know why they were $7b in debt? He is the reason.

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 367

Yep, when you have well-dressed, Caltex petrol pump attendants on the Board .....

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 258

Not surprising that JB didn't "have the guts" to face the music as his other lieutanants in an interview, instead chosing to 'release a statement'

Qantas - Qantas Frequent Flyer

07 Aug 2013

Total posts 203

@DanV - He is speaking on 4 corners tonight...I don't necessarily agree with VAs past decision - but Borghetti brought about a change in a billion dollar business - it's easy to critiscie but at the time everyone was applauding Borghetti for the change he was bringing about. Now it's gutless and coward, short man syndrome - pretty appalling to see - remember there were 4 major international airlines behind the company too - each with their own interests deciding future of VA.

Qantas - Qantas Frequent Flyer

25 Sep 2013

Total posts 1243

Borghetti was the James Hogan of VA, sadly.

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 367

I'm not so sure: Hogan's errors of judgement, as appalling as they were, could easily be characterised as understandable, perhaps forgivable? After all, we don't rally know what instructions or freedoms were given to him.

Borghetti's motives were nothing other than prove to the Qantas Board that, in his mind, they'd made a mistake choosing Joyce over himself. Fortunately for AJ (and if we overlook his 'childish' attacks on VAH), his performance within the Qantas campus proves he was well and truly indeed the better choice for Chief Executive.

29 Jun 2020

Total posts 1

It might not be fair from Virgin Australia chair Elizabeth Bryan to put a blame solely to former CEO John Borghetti. It took Ms Bryan only 4 years to realise company is heading into wrong direction!? The desire to be like Qantas must had been likewise compelling to the Board.

At the end it is the responsibility of the Board to provide strategic direction of the organisation and for delivering accountable corporate performance.

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 367

Too true, she should have stuck to pumping petrol (VAH would have been better off).

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 258

Bryan was also responsbile for her and her team rubber stamping everything that JB & his shareholder buddies such as Hogan (EY) put forward.

Keep in mind Bryan & the board also stood behind Borghetti when Luxon (NZ) called Borghetti out by tried to break the "power trio", but Luxon got outvoted by the "power trio" and the VA board. As a result, Luxon subsequently pulled NZ out of VA by selling out and forming a partnership with QF.

19 Jun 2020

Total posts 21

Absolutely right, a good board sets great strategy and gets the CEO and management to implement and then takes ownership of the results good or bad

A bad board (and chairperson) blames the CEO and management when the strategy doesn't work.

Clearly Elizabeth Ryan ran a bad board

By the way, I doubt very much that the Business class strategy and having the "Club" had anything to do with the downfall - Plane leases, inefficient routes, wrong planes, poor agreements with airports and a group of overseas airline owners sucking the best parts out of it is why it failed

19 Jun 2020

Total posts 16

"Virgin had found itself placed in the middle between Jetstar and Qantas"

So Bain is essentially taking VA back to where it was. Has that market niche magically appeared all of a sudden?

06 Feb 2018

Total posts 4

Not all of a sudden perhaps, but maybe now they have people in charge that can actually run the airline based on where it fits and not where an egotistical CEO wants it to be?

19 Jun 2020

Total posts 16

It's ironic, I always saw it as a middle player anyway. Certainly the passengers ‘looked' like a good middle mix, some obviously business folk. Small and medium businesses make up about 60% in Australia so I'm told. That demographic isn't going to waste $ on the front for a few hours flight unless it's redemptions. That argument has been rehashed here before with Aus BT's focus on ‘business' class product. It's not the only game in town and I'm glad it looks like Bain and Scurrah realises it.

29 Jun 2020

Total posts 2

Interesting point isn't it, Bain coming in and putting VA exactly where Borghetti said it wouldn't last long term, we're about to find out if it was the strategy or the implementation that was wrong....

10 Apr 2016

Total posts 45

but through the administration process they can strip the costs out. I give it a much better chance

Virgin Australia - Velocity Rewards

15 Aug 2012

Total posts 175

That's an excellent point, VA in my mind has to make a decision, are they competing for Jetstar passengers or Qantas?

I cants see a middle market, I hope I'm wrong.

Qantas - Qantas Frequent Flyer

11 Oct 2014

Total posts 551

Nope. Bain & Co will experience the same issue that John Borghetti did. Pincer position for Virgin, with Jetstar able to price underneath VA and QF able to take all the higher end.

The essential difference is that after putting lipstick on an ugly child, Bain will have the luxury of being able to put VA on the market for a profit. It won't endure major losses for too long. A bit of a makeover and then a profit opportunity by sale. Exactly how buyout specialists work.

Joe
Joe

03 May 2013

Total posts 542

The board are equally, if not more so, complicit in VA demise. Why did they wait so long to make that "change?" . The bank balance alone should have told them that. Anyhow...watch this space. MK II ghosts will definitely be lurking

Qantas - Qantas Frequent Flyer

01 Nov 2016

Total posts 134

@Joe you are absolutely right. Unfortunately Virgin has had a combination of a CEO who has made some wrong choices and a board that clearly didn't question rigorously the choices and decisions of Borghetti that has resulted in the long time struggles of the business. The sad part of all of this is that due to Borghetti, Bryan and members of her board there are many good people from Virgin unemployed and waiting to see if they will have a role in Virgn Mk II.

06 Feb 2014

Total posts 119

Exactly Joe. The four corners episode had a board chairwoman really crab walk away from responsibility. The board allowed an ownership structure that had virtually no free float of shares and conflicted shareholders. Debt was a huge issue, but arguably as big an issue was a ownership structure that made equity raises difficult / if not impossible. It's easy to hang the ceo for this, but the board needs to own the outcome.

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 258

@maabot. The shareholders as well.

It also proves that SIA/Singapore Airlines aren't the "so-called saviour" that some people claim to be, and SQ/SIA aren't much better than the rabble that is Etihad's investments.

VA is now SQ's "third failure" at the Australian market (after SQ's involvement in AN (through Air New Zealand) and Tiger Airways failures in Australia, SQ also had full control of Tiger Airways at the time before 'flogging' that off to VA after the Tiger maintenance debacles)

29 Mar 2017

Total posts 9

Most European and North American Airlines have going down a cost plus approach - the basic airfares get you a seat and you need to pay for everything else. So John Borghetti has been running quite contrary to international trend. It is most likely the corporate travel budgets will be slashed in the next few years as the economy struggles after COVID 19 and people becoming used to virtual meetings. So Virgin Mark 2 is probably the right way to go and the question is whether Qantas will need to go down the same route.

QF

11 Jul 2014

Total posts 531

I actually think the Four Corners episode showing the chairperson going on the attack was pretty pathetic, watching the body language gave a different light to the interview. Whether VA was cashed up or not they would have had a similar out come and hopefully Qantas doesn't have a similar outcome. Every company should have been treated equally, if it was the private sector we would have been done for insider trading with the extra support one airline got.

11 Jan 2017

Total posts 4

STOP .. Why is it in Australia that the media and other high ranking industry leaders don't tell things as it is .. John Borghetti's role is to manage the company so it doesn't fall over. He failed to do this. So whatever comes out of his mouth, he is accountable!!!!! Whatever his mantra, it means nothing and to the shareholders, you deserve what you got. Shareholders and the Board are all guilty of failing and the Virus (or Trump just for those in the room who might feel left out) has NOTHING to do with it. So full of excuses ... so careful not to ruffle feathers ... all too scared to stand up and challenge ... Air NZ did and whose laughing at them now? Air NZ weren't going to be lead by another Australian Qantas Ego-head down a big black hole again ... Airline (Ansett) collapse No 2. John Borghetti should be held accountable for the average corporate man he was ... A brighter executive would have embedded Virgin with Star Alliance years ago and would have worked a deal to ensure Star Alliance carriers owned 50.1% control and the others would have come. But John was protecting his job, not the airline. Self centered fool and I am not trying to be cruel. The Board should dip their heads in shame too. What a waste of money all of this is ... Just like Masters which again was built on ego. John, you're guilty!!!!

10 Apr 2016

Total posts 45

will we get a class action from the shareholders who now have shares that are not worth the digital media they are stored on. There is certainly a case that the Board did not provide the necessary oversight to get it into a 7bn hole.

19 Apr 2020

Total posts 1

Completely agree GC Steve !!!

CD
CD

01 Jul 2020

Total posts 2

Virgin Australia did not have to attack Qantas. Virgin was then profitable, and operating in a duopoly and only the ego and arrogance of it's CEO took in down the path of ruin. Think of all the people this arrogance has impacted in a negative fashion. Their CEO left the company after being remunerated millions of dollars so there is no real consequence for such a reckless approach. No wonder he was overlooked for the Qantas CEO role. The Qantas board had been exposed to him for years and chose to not give him the job, but he desperately tried to prove them wrong. The whole sorry waste of money and people was indeed a very personal battle.

Qantas - Qantas Frequent Flyer

13 Jan 2017

Total posts 74

Of course there is a market between JQ and QF.

Wouldn't it be great to book a reliable airline that has a simple fare that includes a seat, one bag and seat selection without add ons and bull dust and takes care of its passengers if the flight is cancelled.

A <2hr flight does not need food and beverage, doctors have proved you will actually live if not fed every hours or so.

Simple, reliable and customer friendly for the golden triangle at least will suit any non “bare bones” traveller who is looking for value for money.

Rex survives and thrives deliberately not trying to be QF or JQ and has virtually no debt.

Qantas - Qantas Frequent Flyer

11 Oct 2014

Total posts 551

Yes, there is a market inbetween JQ and QF. However, it doesn't necessarily mean that it's a profitable market,

There are two wonderful comparable carriers in the USA that illustrate this perfectly. JetBlue and Alaska Airlines. Both with interesting similarities to VAH.

JetBlue set out to address exactly a same market. Built it's business on a low fare principle with 1 PC of included luggage and complimentary snacks and free soft drinks. Eked out a great reputation in the Boston / NYC market. When margins began to get squeezed, it had to change to chargeable luggage and add Mint business class. Bingo - it stopped growing approx 5 years ago. Still sitting there,

Alaska had a great low fare product complete with business class. Able to profitably undercut AA for business passengers but was reliant on a web of code share agreements with anyone. When things got tight, the strategy had to be changed to a growth model, so it bought an ailing Virgin America - good product but not very profitable,.

Alaska grew, but only through route acquisition from the Virgin America move. It subsequently shut down Virgin America and was saddled with Airbus A320s. Next move? Join Oneworld. Ultimately, one has to wonder if a takeover by AA is on the cards some 10 years down the track?

Two similar carriers - both forced to confront the need for growth and taking entirely different strategies. There are tons of market niches but not all are profitable.

19 Jun 2020

Total posts 2

I emailed JB in 2016, when VA were about to undertake their most recent $1 billion reset. I said to him that he could use my Australia International Airlines plan if he wanted to, but he said, "too late, Steve, the Board had already decided upon a plan of action. "

So, by 2016, the totally dysfunctional VA Board were making the decisions, so for ms Ryan to blame JB, was just to use him as a convenient scapegoat for the Board.

Let's not forget that SIA wouldn't let VA compete against them for the business in Asia. Etihad didn't want them going to Europe, and Air NZ only wanted them to feed people to them for the US market via their Auckland hub.

The higher services level domestically was more to satisfy the needs of the disparate airline shareholders requirements, than anything else.

And anyone who says that AJ has done a stellar job at QF, has simply been asleep for the last 12 years. Wake up and actually look at the facts instead of only reading what the QF spin doctors tell you.

AJ took over QF late in 2008. It had just made a $1.4 billion profit and paid shareholders a 35 cps fully Franked dividend. Within 12 months he had that down by 87% to $181 million. A small interim dividend was paid in 2009, but shareholders got zero dividends for the next 7 years after that. Who would want to be a QF shareholder?

By 2014, we had the Senate Qantas Inquiry. Why? Because AJ had just about sent QF down the gurgler. He blamed everyone for the QF woes. The unions, the staff, the competition, the Qantas Sale Act, the crappy planes that he inherited, the high cost of oil, the end-of-line theory, the Federal government, the GFC, the previous QF management , to name just a few things. After all, he wasn't to blame because he had only been CEO for just over 5 years.

And almost tearfully he stood in front of the Inquiry and said that he has a plan. A turnaround plan.

But if you look at the 2009 Annual Report, he had already implemented a Transformation Plan. What ever happened to that plan?

What Was going to be different this time around? So, in 2014, QF took a loss of just over $600 million and bundled a further $2.2 billion of accelerated depreciation or write downs into it, to put all of the bad news into one year, and to make the turnaround seem like that much more when it comes.

So, in the 2015 Annual Report, AJ waxes lyrically about the amazing $1200 million that his wonderful Transformation Plan has delivered in just one year.

So, how did the amazing transformation actually come about? Not because of him, that's for sure.

Over $600 million was from the price of oil dropping to $US40.70. More than half a billion was from selling the family silver, the QF SYD terminal facilities. $120 million was from the change to carbon credits. And nearly $300 million was as a result of decreasing depreciation because of the $2.2 billion write down in 2014.

And, he put 5,000 QF staff on the dole queue at the same time remember.

So, how many cps did QF shareholders get rewarded with as a result, in 2015? Zero cps! And how much did AJ get rewarded with in 2015? $11.9 million. So how come he didn't have to make up his losses before he could start making bonuses?

In fact, QF shareholders have only been paid an average of 8 cps per annum in the entire time that AJ has been CEO. And in the same period he has averaged $8 million per annum for himself. 8 cps average pa for the owners of the airline versus $8 million pa for AJ! Sounds fair, doesn't it?

So, QF has been asset-stripped, asset-aged, and 11,000 valuable staff have been sent to the Knacker's yard for parting-out. Who even noticed just recently that QF had disposed of its share in Jetstar Pacific. No big fanfare there, was there?

The CEO has publicly threatened, humiliated, and bashed around the ears, QF pilots. Take his offer or else he will bring in pilots from outside.

And his trusty sidekick GE did the same with Jetstar pilots. Take his deal or he said that he would sell the Jetstar B788's so that they didn't have a job any longer.

So, who sill thinks that QF is a well-run company, as AJ recently told the PM? They have received nearly a billion of taxpayer's money over the last few months to pay the bills.

Shareholders are used and abused, staff are publicly threatened and are a disposable item, customers have had to fly around in old dungers, because QF management took more than $3 billion of shareholders' cash out of the bank to buy back shares instead of getting new technology fuel-efficient in-demand aircraft. AJ has personally cancelled over 50 B787's on firm order during his time as CEO. Thousands of Australian jobs have not only been lost at QF recently, but also given away by AJ with his partnerships with Emirates and others.

I have tried many times in the past to get in front of the QF Board to tell them that there is actually a better future for QF instead of the one foisted upon them by AJ, but I can't get past his gate-keepers. In fact for more than 6 years now. But for some reason they are enchanted by him. Instead, what about looking after shareholders, after staff, the Customers, and Australia.


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