Air Travel

Virgin Australia’s drastic business class fare cut means turmoil ahead

Virgin Australia

Virgin Australia’s sweeping decision to permanently cut business class fares by up to 60% is the latest move in the ongoing battle to control the lucrative market that has cost airlines hundreds of millions of dollars over the past of the last 10 years.

After Ansett’s demise in 2001, Qantas enjoyed a monopoly on business class for nearly 10 years until John Borghetti, who rose to head Qantas, became chief executive of Virgin Blue in 2009.

A few months after his arrival, he announced a reinvention of the airline, unveiling Virgin Australia, with a new business class offer.

Mr. Borghetti, who loved Italian suits and fast cars, brought his love of luxury not just to the front but to the entire aircraft.

He even asked model Elle McPherson (below) to debut the new uniforms.

Credit; Virgin Australia

The first shot of the war in business class sent Qantas into a tailspin with Mr Borghetti introducing 300-seat twin-aisle A330s with a much roomier business class configuration of six people, split into pairs and more space for legs.

At the time, Qantas offered business class on its A330s which was virtually identical to premium economy on its 787s today with a 2-3-2 layout.

Qantas immediately ditched this unpopular middle seat to retain customers, who had complained about the cramped business class layout.

qantas premium economy 787
Qantas’ A330 2-3-3 domestic business class was nearly identical to the airline’s new 787 premium economy.

But the battle was just beginning and Mr Borghetti fired his second shot by launching a business class price war.

Suddenly, business passengers were getting a lot more space for a lot less pain in their wallets.

Mr Borghetti told AirlineRatings.com at the time that for 10 years, when economy fares and promotional fares had dropped significantly by almost 50% due to competition at the low end, he did not there had been no competition at the top end since Ansett had stopped flying.

The lowest airfare index fell from 113.5 in August 2001, the month before Ansett collapsed, to 53.6 in May 2010.

Qantas saw yields plummet and profits fall, before disappearing altogether.

The Business Class Fare Index has stagnated for almost 10 years and hovered around 97. In January 2011 it crashed to 77.2 and continued to decline until 2012 to 62.9 .

In 2014, the two airlines recorded a combined loss of more than $3 billion, although a large part of Qantas’ $2.8 billion loss was an impairment of its A380 fleet.

But there was a drastic fall in Qantas’ domestic profits from $365 million in fiscal year 2013 to a paltry $30 million in fiscal year 2014, while Virgin’s domestic loss was $59.2 million.

Despite the losses, the war was far from over and at a gala in 2014, Singapore Virgin unveiled flat bed suites (above).

The reconfigured A330s were introduced in August 2015 and this coincided with the opening of the new Virgin Australia terminal at Perth Airport.

Qantas responded to the competition and rolled out its first A330 with flat suites (below) that year.

The airfare index has slowly started to recover from its low to reflect the improved supply. But then the decline in the resource sector, as the price of iron ore hit US$37.35 a tonne, affected demand.

Despite offering the best domestic air service in the world, Virgin Australia has failed to attract enough people from uptown to its platforms.

Mr Borghetti could not budge the companies that were wedded to Qantas’ frequent flyer program and its growing international network at the time with new 787s that included the Perth to London non-stop.

Virgin Australia made the decision in 2017 to remove some A330s from the transcontinental route and deploy them to what has become a list of Asian destinations, starting with Hong Kong.

The airline simply lacked scale and had a fragmented fleet and dysfunctional shareholders.

A reset was needed and Mr Borghetti announced his retirement in 2018. Paul Scurrah took over in March 2019.

Mr Scurrah was well into a restructuring, stripping away the glitz of business class, when COVID-19 hit and the airline went into receivership.

The A330s and 777s with their flatbed suites are gone and a leaner Virgin Australia has emerged with a new ‘value proposition’ mantra. On Thursday, the airline continued that mantra by announcing it was resetting prices to a more conventional domestic business class, similar to that in the United States.

Virgin Australia’s business class offer.

Credit: Virgin Australia

The price also matches that of REX, which has transcontinental aspirations with a similar product in its 737s.

Virgin Australia Group chief executive Jayne Hrdlicka said on Thursday that the airline’s plan to create a more affordable and accessible business class offering had come to fruition.

“The pricing of our business class airfares is another example of how we reset our cost base and then invested in creating premium travel experiences at very affordable and competitive prices,” said Ms. Hrdlicka.

While Qantas will continue to claim the top deal with its widebody A330, the pressure will force the airline to make fare concessions to corporate accounts.

The new price war will likely force the airline to consider only A330 operations for transcontinental flights to Perth to avoid its business passengers paying top dollar for a commercial 737 experience.