New Virgin Australia strategy spells end of business travel arms race

Virgin Australia looks set to cut basic fares and start charging fees for items like checked baggage and food under new chief executive Jayne Hrdlicka, prompting a wider industry shake-up as the country’s airlines reawaken from the coronavirus crisis.

Virgin’s shift from being a full-service carrier will also mark the end of a decade-long arms race with Qantas Airways Ltd QAN.AX for corporate travellers involving lavish airport lounges, celebrity chefs and lie-flat business seats on longer domestic flights.

Unusually for airlines globally, both carriers include free checked baggage allowances, free Wi-Fi and complimentary food and drinks even in the cheapest economy class tickets on domestic flights.

Virgin, which entered voluntary administration in April, is repositioning itself in a mid-market spot under new owner Bain Capital as it looks to weather ongoing low demand from the pandemic.

Company sources and industry experts said they expect Hrdlicka will re-introduce fees the airline had cut when it went upmarket under long-serving former chief executive John Borghetti.

Unbundling, or charging fees for previously included services like checked baggage, seat selection, Wi-Fi, food and in-flight entertainment is a strategy that helps airlines attract price conscious travellers with a low base fare while allowing them to pay extra for chosen add-ons.

This could become even more important post-pandemic due to the economic downturn, analysts say, with Virgin’s move downmarket also opening options for Qantas to stop providing an international-style business class service on transcontinental flights and to consider charging for some add-ons on its cheapest sale fares without losing customers.

Corporate fares are more likely to be all-inclusive, but Virgin plans to reduce its airport lounge network and will no longer attempt to match Qantas’ premium product when it unveils its new offering in around two weeks, according to a company source who said the details were not finalised. Virgin and Bain declined to comment.

“I think at least it allows the optionality for Qantas to go downmarket,” said John Thomas, a Boston-based former senior executive at Virgin who helped introduce baggage fees in the United States more than a decade ago as an airline consultant.

“You can take costs out, you can do some unbundling, but that doesn’t mean that you have got to unbundle all of your passengers,” he told Reuters. “For your corporates and for your business clients and your premium passengers, you can still keep it as a bundled offering.”

Virgin’s fleet reduction under Bain will widen Qantas’ advantage in network size and flight frequency, which can be even more important to corporate travellers than creature comforts, said a Qantas source who was not authorised to speak with media. Qantas declined to comment.

VARYING FARE PACKAGES

One potential model for Virgin’s fare structure is Air New Zealand Ltd AIR.NZ. For domestic flights and those to and from Australia, it offers fare packages starting from a seat without checked bags and rising to “worksdeluxe”, including two checked bags, food and seatback entertainment.

“That would allow Virgin to straddle both sides of the divide,” said Judson Rollins, managing partner of Auckland-based consultancy Propel Aviation Solutions.

Hrdlicka, a former head of Qantas low-cost arm Jetstar, said in 2015 that Virgin had lost customers to Jetstar when it included baggage and food in its fares, because ticket prices rose.

“Virgin just became too expensive,” she said at an aviation summit.

Tony Webber, a consultant and former Qantas chief economist, said he expected both household and business customers would be price sensitive for the next few years, meaning it made sense for Virgin to gravitate more toward a Jetstar type of model.

Jetstar earned nearly 24% of its revenue from add-ons in 2019, according to IdeaWorksCompany, the 10th highest proportion among airlines globally and equating to $26.32 per passenger.