There is no doubting the tactical strength of Virgin Blue’s choice of John Borghetti to succeed its co-founder Brett Godfrey as the group’s second CEO in 10 years.
In his 36 years in Qantas, Borghetti was not only brilliant but durable, a rare if not unique phenomenon in anything higher than the middle management levels of any of the Qantas’s for whom he worked.
The Qantas of the early 747 era was quite different from the pre-privatisation Qantas of the late 80s, and that was nothing like the 90s Qantas that James Strong created in the blue team-kills-the-red team environment of a reverse take over of management by his Australian Airlines cadre prior to the sale of 25% of the enlarged Qantas to British Airways and the subsequent exceptionally successful post listing period of Qantas.
Borghetti served with distinction through all of these changes, and from May 7, will succeed Brett Godfrey, the co-founder of the only new entrant mainline carrier to defy and erode the dominance of the full service legacy models of Qantas and Ansett, the latter mismanaged, plundered, ruined and eventually cast off by Air New Zealand, in an ownership crisis that accelerated its inevitable demise.
Borghetti is demonstrably thus a hardened realist. He must know why Qantas is so challenged by the airline Godfrey created, as well as how the very nature of air travel demand has been transformed by low cost models and concurrent reforms in the political, business and regulatory environments at home and abroad.
Godfrey identified the merits of being in the ‘middle’ market well before Qantas decided to try its very successful dual brand strategy with Jetstar. The trouble for Qantas in one sense is that Jetstar also succeeded in encouraging customers to fly Virgin Blue, and that while regular fliers who need frequency, network, and wriggle room will have loyalties to the Qantas or Virgin Blue brands, the only loyalty to a low cost brand comes from its having low prices, and that from fickle bargain hunters who tend to fly infrequently anyhow while they save up for the next $20 fare and the $250 in airport parking fees.
The result of this is the exposure of Jetstar, which has become the major earner for the Qantas group, to fierce discounting from Tiger on domestic routes, and from Air Asia X as well as full service discounters on international routes. Tiger is a serious constraint on Jetstar’s pricing ability, while regular Qantas customers are being offered enhanced but competitively priced alternatives on Virgin Blue, and the domestic business class market is shrinking.
If that isn’t enough, Qantas faces the medium term expansion of Virgin Blue’s V Australia international services to everywhere the traffic treaties or open skies agreements will let it fly. America today, tomorrow the world. By about 2014 every significant air traffic treaty in force today will have gone up for renewal, or abolition.
The only real option for Alan Joyce at Qantas, in dealing with his stubbornly change resistant full service brands is to engage in major, deep and initially costly restructurings, something his predecessor Geoff Dixon seemed to lose interest in during the distraction of the failed private equity bid to take over the group.
In short Qantas is bleeding at the top, challenged in the middle, and being devoured from the bottom by Jetstar, although shareholders mightn’t have any qualms on recent trends at seeing earnings replaced by growth in the low fare brand.
Virgin Blue is doing well in the middle, has reason to be twitchy about keeping in touch with the ultra cheap market, and has a plan, which Borghetti will now review, to offer the top tier of business travellers a revised range of seating.
All in a world where sudden crises like bird ‘flu, SARS, 9/11, fuel price surges and banking collapses can make big cash reserves start to evaporate.
For John Borghetti, with a determined passion for airlines, and for Brett Godfrey, who broke the iron grip of the incumbents and took the low cost model to a higher level, the succession seems very well timed.