Cyrus wants Virgin Australia to be a smaller, mid-market airline

A 'hybrid' Virgin Australia would seek a middle-of-the-market meld for business and leisure travellers alike.

By David Flynn, June 15 2020
Cyrus wants Virgin Australia to be a smaller, mid-market airline

Investment firm Cyrus Capital has laid out its flight path for Virgin Australia 2.0, should the New York-based company be successful it its bid to take over the failed airline.

The reborn Virgin Australia would be repositioned as a downsized mid-market ‘hybrid’ airline to compete against both Qantas and Jetstar.

Business class would be retained but sharply-priced to compete against Qantas without gunning for the high-end corporate market, while also offering a range of affordable economy fares appealing to Jetstar’s more cost-conscious market.

Virgin Australia 2.0 “should sit below that very top tier of where Qantas plays so strongly in, and above and maybe overlapping slightly where Jetstar sits,” suggests Cyrus Capital senior adviser Jonathan Peachey, who briefed Australian media over the weekend from his home-office in New York to outline the company’s plans to reboot the airline.

Cyrus’ playbook leans heavily upon its involvement with Virgin America, of which it was a cornerstone investor, with Peachey as CEO of the Virgin Group in North America from 2008 to 2013 before Alaska Airlines bought Virgin America in 2016 for US$4 billion.

Finding the sweet spot

"We had a lot of success in the US with Virgin America with the hybrid business model, which is a model that has product and service that appeals to the business traveller," Peachey reflects, “but a cost-base able to provide a range of fares that can appeal to the value-orientated leisure traveller and that encompasses passengers who fly on Tiger today.”

“We think there's a really sweet spot in the middle where Virgin can play very strongly. And that's exactly what we saw in the States with Virgin America.”

Also read: Could the new Virgin Australia be more like Virgin America?

Cyrus would retain the Virgin Australia brand – no surprise, given its links to Richard Branson, which also saw Peachey sit on the board of Virgin Atlantic and Virgin Galactic – but would drop the budget Tigerair brand.

“We think that the core Virgin Australia business can actually serve the majority of people who fly Tiger – with an offering that as well as appealing to them also appeals to the business traveller,” Peachey suggests.

“We don’t intended to take it back to the Virgin Blue days, the pure low-cost carrier of the past,” Peachey emphasises. “The brand has evolved, the business has evolved and the market has evolved as well. We don’t think the market needs that, with Jetstar’s presence.”

Ditching Tiger would also let Cyrus focus fully on Virgin Australia rather than managing and differentiating two airlines.

“Trying to operate a full service carrier and a low cost carrier within the same group is very complex and very difficult,” Peachey admits. “There aren't many airlines around the world that have been able to do that successfully.”

Qantas, obviously, is a standout, but the incumbent benefits from size and muscle which Cyrus cannot match.

Smaller and streamlined

“We believe Virgin Australia can be the best airline in Australia,” Peachey says. “It doesn't have to be the biggest – Virgin America wasn't the biggest – but it can be the best, and we think that it will be.”

Cyrus sees the new Virgin Australia as a smaller airline, likely in terms of both fleet and routes, with an initial focus on the domestic market and some short-range overseas flying such as New Zealand.

“Our thinking on size and focus is ­driven by the need to simplify the airline,” Peachey explains.

"It has become too complex over many years” in in its journey from low-cost Virgin Blue to a full-throated Qantas competitor, he elaborates, “with lots of pieces added and multiple different businesses operating inside of Virgin Australia.”

“We intend to simplify. That doesn't necessarily mean ‘shrink dramatically’, but it means to have more focus around what needs to get done from a network and a fleet standpoint.”

“We believe the simpler the business is, the more focused management can be in returning the core engine of the business, which is the domestic and short-haul international business to profitability against the uncertainty of the COVID backdrop.”

As to how much smaller the right-sized Virgin 2.0 will be, Peachey wouldn’t be drawn, apart from saying “we think it needs to retain a good amount of scale in order to be a viable carrier.”

But a key plank of simplifying Virgin would be to strip its fleet back to just the Boeing 737 and, as demand for international travel returns, replace both the Airbus A330s and Boeing 777s with Boeing 787 Dreamliners.

This is the same recovery plan put forward by current Virgin CEO Paul Scurrah, and Peachey says Cyrus is “very much in alignment” with Scurrah and his management team.

A trajectory to profit

“When Paul (Scurrah) came in with a mandate to return the airline to profitability, we were very supportive of that,” Peachey reflects. “We believe this management team is best placed to do that.”

Notably, that team includes Virgin Australia chief commercial officer John MacLeod, who was Virgin America’s senior vice-president of planning and sales from mid-2012 to early-2017 – along with stints at Alaska Airlines, Air Canada an Air New Zealand – and whom Scurrah appointed in late 2019 to over see a restructure of Virgin’s routes, network and revenue management.

Peachey believes that working with Scurrah to recast Virgin Australia as a smaller, streamlined mid-market airline would dramatically change Virgin's trajectory and could return it to profitability within three years, depending on how quickly the market recovers from COVID-19.

“No one knows how long it will take for the airline to recover, or even if the market will fully ­recover. We are all optimistic that it will.”

But Cyrus has “no intention or need to do a 'quick flip’ here,” Peachey attests.

“We absolutely believe the business can return to the public markets as well. We’re fully expecting to remain involved to that point and then beyond.”

Bringing back the Virgin vibe

Virgin Australia would borrow another page from the Virgin America flight-plan in embracing the parent superbrand’s unique and highly recognisable attitude.

"We would like to bring back that core DNA of the Virgin brand and reinvigorate the service and the culture," Peachey says, adding that Virgin Australia had become “a little too corporate.”

“Our plan would be to harness the power of the Virgin brand and bring back some of that sort of early challenger DNA.”

“The cultural ­element which Virgin brings to the table is really key,” he says, with that element being an“employee first, customer close second” strategy.

“The word I use is ‘entrepreneurial’. Giving employees of an airline the ability to be entrepreneurial, giving them permission to think for themselves, allowing them to bring their personality to the table, is the key to making the customer experience really special.”

Also read: Could the new Virgin Australia be more like Virgin America?

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.

Virgin Australia - Platinum

26 Jun 2011

Total posts 72

Placing the business model between QF and JQ sounds like a solid plan.

17 Apr 2020

Total posts 3

Does the Australian traveler want the Virgin DNA? To my mind it was too "in your face" and aimed at the youngest demographic. In more recent years the tone of the airline had morphed into something more acceptable to all demographics. May this trend continue!

Qantas - Qantas Frequent Flyer

07 Aug 2013

Total posts 150

Theres always an element of risk with business - Virgin tried and perhaps perhaps became too corporate as article suggests - it went after QF, with the mindset of an ex QF executive at the helm. This strategy that Cyrus may get the opportunity to put into action is a tried and tested model, backed with experience. Virgin does not need to become the next Qantas nor perhaps ever could. It needs to firmly shape itself as a different business giving choice and alternative to the flyer. Their business class will need to be sharply cheaper than Qantas if the competition keeps the large number of A330s flying east west...that is until VA can plug the gap with a narrow body full flat product - think of America and flights between LA and NY - mostly narrow body B757/A321 aircraft with lie flat at front. No brainer the cost to run these aircraft are far cheaper then larger widebodies and could be a cost effective strategy to fulfill the hybrid model keeping top end flyers happy for the approx 4hr flights cross country.

If the price is right, people will fly Virgin. Sad to see that the A330s & B777s likely to leave. ATRs as well I gather, maybe. Sounds like lots of lay offs coming to Virgin Australia. Hopefully the entire board of directors get fired.

24 Aug 2011

Total posts 692

The previous Board of Directors are removed by definition. They represent shareholders whose shareholding has been wiped out. Unless some of these group buy back into a shareholding via the winning consortium, these directors no longer have a role.

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 213

Chances of any of the other 'existing' shareholders (apart from Branson) getting involved in VA mk 2 from a shareholding perspective would be very close to zero.

Saying that two of the existing (soon to be former) shareholders (EY, SQ) may (or may not) co-operate through a codeshare/FF agreement in the future should a sale eventuate.

Qantas - Qantas Frequent Flyer

01 Nov 2016

Total posts 130

Sounds a very solid and coming from an experienced group. For VA Mk2 to succeed it needs to adopt the simpler approach rather than the bigger and bolder tone it has had which has unfortunately created it's current problems.

Virgin Australia - Velocity Rewards

02 Jun 2019

Total posts 13

Any speculation about how a VA and Velocity member in Sydney would continue to fly to LA in the meantime? I would love to hear people's thoughts on likely alliance partners...

bmc
bmc

Virgin Australia - Velocity Rewards

22 Aug 2013

Total posts 157

Alliance and lounges are the two words I want to see but fear they are off into the never never

24 Aug 2011

Total posts 692

Given international travel will remain rare for the next year, there is no rush to even examine alliances. Personally, I doubt there is much attraction for VA2 or any airline for that matter to bother with new membership of the 3 major alliances for the foreseeable future.

I suspect lounges will survive though the model will probably change. Some of this will be because Covid has changed the way these services are delivered. Others will be because the lounges will be treated as a standalone business with a significant part of user pay.

08 May 2020

Total posts 40

It will be interesting to find out if and with which Airline Virgin A 2 will have some collaboration. There are obviously major Airlines e/g Singapore Airline, Emirates and may be even Qatar which will be looking for a feeder Airline to major Hubs in Australian Airports. Of course the 2nd issue will be whether there will be a alliance with Velocity and any other Miles earner for points and status credits. Interesting times ahead.

Virgin Australia - Platinum

26 Jun 2011

Total posts 72

I would assume Emirates would continue with their agreement with Qantas as would Qatar, being a OneWorld member. Can't see any reason for change.

QF

11 Jul 2014

Total posts 454

Qatar and Qantas CEO's aren't the best of friends, with Qatars bank balance anything is possible.

Qantas - Qantas Frequent Flyer

26 Nov 2012

Total posts 43

Have I missed something and the deal is done or this just more conjecture and PR spin?

Qantas - Qantas Frequent Flyer

07 Aug 2013

Total posts 150

Its either this deal or the other - so atleast there's some weight behind the speculation now your hearing what Cyrus actually wants to do should they be successful.

QF

11 Jul 2014

Total posts 454

Always thought this is the best model, next you will find Singapore putting cash in to pick up the Australian international market share followed by Delta to the USA. Would be funny if Qatar came up with cash as well.

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 213

Give up the tired old "Singapore to buy into VA" thing a rest. If SIA thought VA1 was a "so-called" good investment, they would've "bought them out" by now. The fact that SIA had decided to invest/Rescue their Vistara India investment rather than Virgin Australia suggests that India is a bigger market for SIA.

If anything, if there was to be any SQ/VA2 relation outside of a codeshare, it would likely be SQ's parent company Temasek looking at investing in the future, rather than SIA.


QF

11 Jul 2014

Total posts 454

Whether it's Temasek or SIA at the end of the day they want to protect their 20% market share, and others will want to pick that share up. So is the market forces of the world giving us in Australia good long term options for the future.

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 213

SIA can easily go it alone if they wanted to and can easily survive alone on the QF and VA2 interlines without the need for a codeshare.

But considering current conditions it'll be a while before the likes of SQ's 737s (SilkAir) and Scoot start covering the larger Australian Regional towns in lieu of an Australian Partner.

QF

11 Jul 2014

Total posts 454

Doesn't make sense, why would they do that? It is easier to just have a feeder like VA for there 20% Australian market share.

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 213

SIA has stated that Australia whilst an important market, the Indian market makes more money for them, hence why Temasek's funds went towards Vistara India, not Virgin Australia.

QF

11 Jul 2014

Total posts 454

Any business person would have followed the current course.

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 213

Exactly, SIA stated that VA lost money for them whilst Vistara was only starting to give them returns. So makes perfect sense for SIA to not get involved in VA mk2 financially.

The most co-operation SQ will have with VA mk2 is a codeshare at the most, but at the same time they have the brand recognition to go it alone in Australia if SIA still have enough bailout money once COVID-19 subsides.

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 213

You may keep on putting on the thumbs down as you hold onto the "SQ to buy out VA!!11" recurring theme over the years but the quote from this article says it all.

"In a written response to shareholders questions ahead of the meeting published on April 29, SIA decline to discuss Virgin Australia's recent announcement on voluntary administration saying that it is too early for any further comment. SIA owns 20 per cent of Virgin Australia. It however said that it has no obligations or requirement to put in capital for Virgin Australia, that the equity investment is fully provided for in its books, and it has made no loans to the stricken Australian airline.

At the same time, it stated that Vistara, its 49 per cent owned joint venture airline with Tata, is well-positioned for recovery post COVID-19 and remains committed to support Vistara in its fleet plans."

Lee Kah Whye, May 4 (across Yahoo News, Forbes, etc).

I'll repeat what I said, if SQ thought Australia was a bigger investment, they would've "bought out" VA by now.

Joe
Joe

03 May 2013

Total posts 479

Back to basics where they belong-it's what worked and will work again. Looking at Virgin through rose coloured glasses was and is unrealistic. It will never be Qantas.

Qantas - Qantas Frequent Flyer

07 Aug 2013

Total posts 150

@joe I agree...so putting aside the majority of population who don't give rats about airline loyalty and will go with whoever is cheapest, those who like the choice choose not to fly Qantas - that's where virgin won - they set out to compete and did so taking a sizeable market away from Qantas. Yes bad behind the scenes business decisions were made which were costly including the web of major shareholders.

Thos people who choose to fly Virgin don't want virgin to be Qantas. Nor did Virgin ever set out to be the next Qantas - just as much as virgin Atlantic didn't set out to be next BA when they started. They set out to compete - it's about providing a difference and choice to customers. Qantas is not some holy grail that airlines aspire to be. Like all others they had their ups and downs too.

02 Dec 2016

Total posts 93

I already thought VA was between JQ and QF.

As a platinum Velocity member there is no special lounge, where as QF offers their Platinum the business lounge. No food in economy, just snack, where as QF provides a meal of sorts. Prices tend to be line ball or even higher than QF.

Qantas - Qantas Frequent Flyer

07 Aug 2013

Total posts 150

Get rid of the free meals I say and offer soemthing more substantial and premium for the $10-$15 price tag. if you really need the penne pasta that cost QF 50c to make that's been frozen for some months then pay the (usually more expensive ticket) to fly QF and enjoy!

08 May 2020

Total posts 40

Emirates may find themself in a 1/2 way market with Qantas, as Qantas is so desperate for Australia /London & Frankfurt in a Non stop travel where as Emirate will not be interested to fly past over their Homeside Airport in their Journey to Europe. So I believe there will be a soul searching between Etihad, Emirates and Qatar. It all depends who will benefit most will be keen to offer some deal to VA2.

04 Jun 2018

Total posts 18

Will be interesting to see what happens to VARA with either of these deals, no doubt Alliance would be very happy to buy the charter business but the WA intrastate network on the other hand... potential spin-off / demerger of the old Skywest?

Virgin Australia - Platinum

26 Jun 2011

Total posts 72

With Alliance having just completed a new share placement to raise capital for 20-25 more aircraft, I would assume they would be looking at taking on any charter/routes that were VARA.


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