Jetstary ends Virgin's ride

[Keg]

Can't believe that I beat Wirraway to this one! ;) :p

It came from news.com.au which it appears has sourced it from the Sunday Telegraph in Sydney.


[b]Jetstar ends Virgin's ride[b]
By Chris Moriarty
March 21, 2004

COMPETITIVE advantage is doing something cheaper or better than someone else. Trouble is, no competitive advantage is sustainable; sooner or later, it goes away.

Virgin Blue held a big competitive advantage over Qantas. It was lean and mean.

Qantas couldn't compete, and Virgin Blue ate market share for breakfast, lunch and dinner. Virgin now has a 22 per cent share of the market.

Then the ride finished. Jetstar was born and Virgin Blue's competitive advantage dissolved.

Virgin Blue, now a bigger, more complex business, is no longer so lean and mean.

Its rampage is now reduced to a battle over $10. Jetstar, the new lean and mean player, has axed agent commissions.

Virgin Blue has blinked. If it axed commissions, all agents would book nothing but Qantas. It's now too big to rely on just Internet bookings.

Virgin Blue was once the revolutionary; now Jetstar is. Virgin Blue is now the one fighting for the retention of a traditional cost.

The high-growth days are over. Jetstar has wiped out Virgin Blue's cost advantage.

And Virgin Blue is now so big that continuing the high growth of the past is just not possible.

Sure, Virgin Blue has just announced the purchase of 50 new planes - but, as Macquarie Bank reports, the delivery period is over 10 years and almost all these planes will replace old jets due for retirement.

From this point, Virgin Blue will return to the pack. Airlines are complicated, highly leveraged, risky businesses. Margins are wafer-thin.

Virgin Blue founders Richard Branson and Brett Godfrey, along with suitor Chris Corrigan, have made a fortune out of Virgin Blue. And good on 'em.

Last December, they floated the company and capitalised a large slice of their profits.

Since then, Virgin Blue's share price has traded in a narrow band, slightly losing ground against the market.

If you invest in Virgin Blue, you are being exposed to the same risks as investing in any other airline.

And the upside is no longer so strong. Macquarie Bank analysts suggest Virgin Blue's market share will increase modestly, from 22 to 25 per cent, over the next two years.

The super profits have been made, and now it's down to the grind of daily business. Keep reality and hype in careful balance when making a decision to buy stock.

The Sunday Telegraph


(Edited to correct the thread title- Keg)

[rescue 1]

The high-growth days are over. Jetstar has wiped out Virgin Blue's cost advantage.

Southwest continue to be profitable and seem more than capable of maintaining market share in what is a highly contested US business segment.

Jetstar is replacing current QF services and is effectively only a "claytons" new entrant.

The competition from Jetstar can surely only help VirginBlue - employees now have a competitor when it comes to wages and conditions. Reading various posts on this forum has often led me to believe that Virgin employees think that they were employed with a full service airline and as such deserved the same conditions. The high salaries and often inefficient work practises cannot be maintained at $69 fare levels as with the value based carrier.

Actually, I think this is just the response that Mr Godfrey was hoping for. Lock in those EBA's now before the battle begins.

[Wizofoz]

It's now too big to rely on just Internet bookings.

HHMMM... easyJet and Ryanair book 20 000 000 and 18 000 000 pax per year respectivley, around 95% by Internet. I note a continued theme in the Aussie press that "It just can't go on" with the groeth of Lo Co airlines. Well it's been "Going on" in the States an Europe for over two decades, and the end isn't in sight yet!

[Buster Hyman]

Who, really, would want to invest their own money in an airline? Not anyone in the industry I bet!

[Col. Walter E. Kurtz]

It's not about removing market share from Virgin.

It's about lowering cost structure (of domestic initially) and increasing profit for the QF 'Group'.

[TIMMEEEE]

The truth of the matter is that Virgin Blue's cost structure is increasing all the time and before too long the phrase "low cost carrier" may not really apply.

As a consequence the entry of Jetstar into the market will hurt them - the fact that they have "given away" over 200,000 seats is testimony to that and Jet* hasnt really started yet in earnest !

This has been raised by the company that underwrote the float of VB (Goldman-Sachs JB Were).
See the PPrUne thread http://www.pprune.org/forums/showthread.php?threadid=123807

Their analysts have viewed VB's performance as less than favourable much to the discontent of Godfrey/Huttner.
They whine on TV but you dont actually hear from Chris Corrigan as he will only lend his face when he knows the facts are true or trying to persuade governments or airport bodies in a decision that will benefit VB.

[Groaner]

I'm a bit suspicious about the story. Macquarie Bank missed out on the IPO deal with DJ (it went to Goldman Sachs instead), so Macquarie (who also packaged airport investments - so a natural adversary of airlines!) has every reason to put DJ down.

And most of the 50 aircraft orders being replacements? DJ has thirty-odd right now, all NGs (I believe the last -300 was handed back). Most are new since their start (so 3-4 years or newer, average maybe 2 years or less). I'm sure there is some flexibility in numbers that DJ can hand back, and certainly in delivery options, but most of the new orders are for replacements of old jets? Pull the other one.

Mind you, some of the points in the article are valid - especially bearing in mind commissions as mentioned, and the likelihood of harder times and rising costs.