Air Transport World

After the honeymoon: the collapse of Ansett and Impulse helped propel Virgin Blue to a 30% share of Australia's domestic market in just three years, but further growth may be more difficult.(Profile)(Company Profile)

The honeymoon appears to be over for Virgin Blue. After a dream ride to the No. 2 spot in the Australian market, the low-cost carrier is set to confront a daunting set of challenges. These include, among others, a pugnacious Qantas, threats of new competition directly targeting its core market and a highly ambitious expansionary program that will take it overseas to New Zealand and several other Pacific destinations.

Added to that is the prospect of its joint owners, Richard Branson's Virgin Group and the transport conglomerate Patrick Corp., undertaking a partial float either in the final quarter of this year or more likely early in 2004. Branson in particular is eager to realize some of the value of his successful Antipodean venture. Born on shoestring budget of AS 15 million ($15.6 million) three years ago, Virgin Blue now is valued in the market at 100 times that. Not a bad outcome for what was original a high-risk speculative investment at best (ATW, 11/00, p. 76).

However, archrival Qantas's recent announcement that it may launch a low-cost venture of its own in the domestic market is sure to unnerve investors, as will the persistent rumors that a third player, possibly Ryanair, is considering entry into the high-volume Australian arena.

Some 20% of Virgin Blue will be offered through the planned IPO, maybe more if Branson's Virgin Group sells down its shareholding. The two partners recently struck a deal over the structure of the float which will involve an issue of A$400 million in new shares to bolster the airline's funds and could well see Patrick Corp emerge in control of the airline.

The float move coincides with a minor revolution taking place with Virgin Blue's product mix that essentially provides it with a full-service profile within a low-cost shell. Unlike the usual "no-frills" genre, the carrier offers airport lounges in major cities, valet parking, hot meals and a de facto business class for passengers willing to pay more for extra legroom.

Its strategic up-market push is aimed squarely at the big-spending corporate accounts that currently are monopolized by Qantas. But it also takes Virgin Blue further away from the archetypical low-cost model, establishing it more as a hybrid full-service operator. …

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