Virgin territory

Europe Business Review, March, 2000 by John Shaw

Sir Richard Branson, the middle-aged boy wonder of British business, plans to add Australian aviation to the international empire of 150 enterprises which bear his billion-dollar brand name.

Branson intends to establish a discount airline based in Australia before the Sydney Olympics to challenge Qantas and Ansett with a $100 fare between sydney and Melbourne, Australia's largest cities.

His Virgin Group plans to start flying in Australia before the Olympics in September, using a fleet of five, 143-seat Boeing 737 jets.

Branson's proposal of a $100 single fare of half Virgin's seats between Sydney and Melbourne compares with the present cheapest return fare of $239 for a 21-day advance purchase ticket on Qantas and Ansett, the main Australian internal airlines.

The Virgin plan is being challenged in advance by a Qantas offer of a $189 return fare of passengers paying 14 days in advance until at least April 2000 - and almost certainly beyond.

Sir Richard, 49, describes air fares in Australia as a "rip-off" and says his cheap ticket formula in nine European countries served by Virgin Express can be repeated in Australia.

"Australia is an enormous market. Australian aviation has phenomenally high air fares, and where a situation like that exists, Virgin enjoys to go," he says.

Virgin Group and Singapore Airlines (SIA), which agreed in December to buy 49 percent of Virgin Atlantic for $1.5 billion, will decide soon whether both airlines can or should participate in Virgin Australia.

The future structure of Virgin Australia is in question because of the SIA stake in Virgin Atlantic.

The SIA/Virgin Atlantic link may extend to SIA equity in Virgin Australia, according to Branson executives in Australia.

Virgin Atlantic's deal with Singapore Airlines, after secret talks in London, brings fresh cash to Virgin to fund its expansion into mobile communications and electronic commerce. Branson is planning an Internet service and is a favoured bidder for one of Britain's five new mobile phone licences.

Sir Richard described the partnership with SIA as a "marriage made in heaven". However, he says he will not relinquish control of Virgin Atlantic, though it has been suffering from a slump in trans-Atlantic traffic.

"The airline is not for sale and never will be. It is my baby and I am enormously proud of it," he says of his best-known creation.

Sale of part of the "baby" to Singapore was inevitable given the history of Branson's investment patterns which have assembled a stable of 150 companies with interests ranging from soft drinks to financial services,

The $1.5 billion price paid by SIA shows its determination to buy strategic stakes in airlines, because the current revenues from Virgin Atlantic would not justify such a price.

Virgin Atlantic is only one third of the size of SIA, but holds valuable landing slots at London Heathrow and access to North Atlantic routes.

The alliance with SLA helps Branson as he challenges the Qantas-Ansett control of Australia's aviation market.

The Virgin-Singapore partnership can be expected to give Virgin access to destinations in Asia and SIA facilities and marketing in the region.

Branson's Belgium-based "no frills" Virgin Express - the model for his venture into Australia - is a company independent of Virgin Atlantic. The economy airline flies to nine European cities for as little as $67.50 and is turning a modest profit.

Virgin Express's major asset is the busy Brussels-London route, which it flies under contract for the Belgian carrier Sabena. Branson personally owns 60 percent of Virgin Express, with 40 percent held publicly.

Express strategy is not to steal passengers from other airlines but to create a new market by making fares cheap enough for people who would otherwise not fly.

Virgin Australia chief executive, Sydney-born Brett Godfrey, 36, who helped establish Virgin Express in Europe, says lower fares increased traffic there - and believes that can happen in Australia.

After Express launched a Brussels/Milan service for around $75 each way - prompting other airlines to slash their prices - the number of people flying between the two cities increased by 45 percent.

Virgin believes there is a large untapped market in Australia for VFR, or Visiting Friends and Relatives traffic, between cities too far apart to drive frequently.

Qantas and Ansett are in good shape to meet a Branson challenge. The Australian airlines fly 102 Boeings and Airbuses in Australia while Virgin proposes to start with five leased Boeing 737s.

Most analysts had expected Qantas and Ansett to lose heavily in the Asian economic crisis in 1997-99, but both airlines cut costs, trimmed routes exposed to the downturn, and delivered large profit rises in 1998-99.

Ansett and Qantas profitably share Australia's $6 billion domestic air travel market.

Experience elsewhere suggests they could respond to rivals by offering discount services or some cheap seats on each flight while maintaining the price of business class tickets.

Branson may also target the Australian market for business and leisure travellers willing to give up extras to save money.