Virgin Blue has made its name with low ticket prices, but when prices get too low so do revenues. With passenger numbers on the rise and new flights from Brisbane to Los Angeles in the sky, CEO Brett Godfrey tells Brisbane Business News about a feeling of déjà vu as the airline expands into the lucrative and ultra-competitive international market.
NINE years ago, Virgin Blue CEO Brett Godfrey was told he was 'nuts' when he wanted to break down the duopoly in the Australian airline industry.
Since then, his idea to offer affordable airfares has generated profits of more than half a billion dollars for the Sir Richard Branson-backed airline (26 per cent).
Godfrey concedes he won't be adding to that figure this year given the company's latest $101.4 million loss, but even with the current economic conditions he is less scared now (with V Australia) than he was launching Virgin Blue against Qantas and Ansett when a number of airlines had tried but failed.
"It's no bigger gamble than it was launching Virgin Blue nine years ago, when there were a lot of people telling us we had rocks in our heads," says Godfrey.
"We started to bump our head on the ceiling here. The beauty of V Australia is that it's competing in a market that's tough to do in a low cost carrier concept because it's flying 14 hours, so we've gone the other side of the coin and made it what we think is arguably the best product on the Pacific today."
In January, domestic passenger numbers were up by 7.4 per cent, while internationally they skyrocketed by a third.
"It's a market that Australians have been held to ransom for so long. It's broken what was a cosy duopoly on the Pacific," says Godfrey of the new trans-Pacific venture.
US company Delta Airlines has also joined the trans-Pacific market but they have partnered with V Australia in an interline agreement, allowing for seamless travel on the networks of each carrier.
While the new route to the US might seem a bit risky for Virgin given the current economic climate, it will account for less than 10 per cent of business in its first year. Four planes in operation is all it takes to trigger the break down of a cosy duopoly between Qantas and United Airlines.
"We've got a fleet of 78 today so it will be a small percentage, which is why it's still risky but it's mitigated by the fact it's not 10 or 20 aeroplanes," explains Godfrey.
"I'm somewhat risk averse, but I see that there is huge upside if this thing works for us, and the response has been very encouraging given the climate we are in."
Godfrey believes the share price falls are mainly a result of market volatility and when the economy gets back on track Virgin will be in a good position to benefit.
"We don't worry that people think the share price is a cause for concern our focus is on the business and we're quite happy with the way the business is doing, relative to the rest of the planet," he says.
"At the end of the day we've got a very good business model and when the tide turns I think the share price will go with it."
As for job cuts, Godfrey wants to do everything in his power to keep staff, so that when the economy bounces back, Virgin will have the right people on board.
Earlier this year he had flagged that 400 staff would be made redundant in May, but he told Brisbane Business News this number could be delayed until June or July.
"We don't want to make anyone redundant quite frankly and were looking at a whole bunch of other initiatives to see how we can bring that number (400) right down. We're doing job sharing, part-time work, leave without pay, and other clever things that allow people to stay on," he says.
"To echo Bernanke's (US Federal Reserve chairman) comments when it turns it will kick very quickly and to get good people on can take you six to eight months so we don't want to lose the resources we've got. So the idea is even if you have to pay a bit more you want to try and hold on to them so that when it does turn they go from part time to full time very quickly."
Godfrey had the idea to start a low-cost carrier in Australia after working with Sherrard Aviation, but the business plan he put together with Rob Sherrard was knocked back by banks and other airlines for about six years. So in the early 90s when he worked for Virgin Atlantic and Belgian airline Virgin Express, the Australian low-cost carrier concept was put on hold waiting on the desk for the right moment.
His advice from the ordeal 'don't let anyone ever tell you that your idea sucks'.
In 1996 he met Richard Branson who later would ask him to run Virgin Express and his response was that he would be happy to for the summer, but after that he wanted to return to Australia. He proposed the Virgin Blue concept and after their discussion he went back to his office in Belgium, took out the business plan and sent it to Branson that night.
On a Monday morning he received a call from his bank manager who Godfrey thinks must have thought he had become a Colombian drug lord, because there was suddenly $10 million in his account 'were you expecting a deposit?'
"That was cool because it showed that he trusted me. So that says a lot of things how quickly that was done and how quickly he understood the vision," he says.
Godfrey says he has taken Branson's business example and has backed a few people who have hatched ideas that required capital.
"If you don't trust people they shouldn't be in your business. If you trust them you get out of the way and if they come to you with an idea, chances are it's a very good idea," he says.
"It's been the conviction we had that if we could get the fares down that would stimulate and create a stampede, which is exactly what it did. It was a revolution in this country."
Billionaires that want to become millionaires
Godfrey believes the airline industry is the most competitive and dynamic industry in the world - a tough industry to do well in as its high profile attracts a lot of personalities, or 'billionaires that want to become millionaires'. But he wakes up every morning with a firm belief that each day will be better, knowing that the economic downturn means now is the best time for people to travel domestically.
"Everyone, whether it's a hotelier or a car company, everyone in the travel insurance industry is looking to discount (and) this is the best time to travel domestically and has been the best time in two decades to get deals," he says.
It is perhaps Godfrey's international upbringing that inspired his ambitions to offer consumers more affordable air travel, having grown up in Fiji, Honolulu and Vancouver before he started high school in Melbourne. He certainly didn't get into the industry because he loved planes.
"I definitely didn't get into it because I saw planes as exotic or exciting, I just see them as big chunks of metal that you should be able to get a decent return on," he says.
At the moment Virgin shareholders will be wondering where this 'decent return' is going to come from, but remember Godfrey has been told before that his ideas won't fly. Once again the airline is facing great challenges and the Virgin Blue boss is confident the airline will be able to differentiate itself on quality, not just price, so that when prices rise from their record lows, the business will be profitable again.
"We've had nine good years and we might have one or two bad years, but no doubt we will return to good times. And that's great consumers will be the beneficiaries of these times if they can afford to spend," he says.
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