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.
“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.”
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.
“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.
“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.”
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.”