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Fixated on profit not Qantas: Virgin’s Paul Scurrah searches for clear sky

Behind the scenes, Scurrah is making equally drastic changes to how the airline is run and where it flies in a attempt to stem the flow of cash from the business.

Tough decisions

After running up almost $2 billion in losses over the past seven years, and with the share price sitting at all-time lows of 15¢, Scurrah has spent his first eight months looking for costs to save, including through 750 redundancies, shrinking the size of its fleet, and dropping unprofitable routes.

“We’ve got to make tough decisions that really weigh heavily on me – no one would tell you they enjoy doing things like we’ve had to do,” the former DP World stevedores and Queensland Rail boss tells The Age and Sydney Morning Herald.

“I have to remind myself on occasion that what we’re doing is for the greater good of the majority of our employees.”

Scurrah is starting to roll his strategy out at a time when the slowing Australian and global economies are weighing on the aviation sector. Qantas – which has delivered record-high profits and share price over the past four years – last month noted weak demand across its business, and particularly among holidaymakers.

Sir Richard Branson, founder of Virgin Group, arrives on a giant sushi train at the Brisbane-Tokyo announcement.

Sir Richard Branson, founder of Virgin Group, arrives on a giant sushi train at the Brisbane-Tokyo announcement.Credit:Attila Csaszar

Almost as soon as he arrived in the job Scurrah delayed delivery of $2.5 billion worth of 737 MAX aircraft he decided Virgin couldn’t afford. In August it announced 750 office jobs would go to cut $75 million from its annual wages bill, and it’s looking to save another $50 million by renegotiating supply contracts.

Last week Scurrah swung the axe on a string of loss-making routes, including Melbourne to Hong Kong and Sydney to Christchurch, reducing the group’s network capacity by 2 per cent.

“I think it’s the start of the way we’re going to do business,” says Scurrah, who from the first day in the job has stated returning to profitability – not wining market share against Qantas – is his priority.

“We won’t fly everywhere and particularity won’t fly where it’s not profitable to do so”.

Virgin is also looking for new routes to open up that will be better money makers – including internationally, where it has bled the most cash. This week the airline’s co-founder Richard Branson, who still owns 10 per cent of the airline, was in Brisbane to promote its new service to Tokyo which will launch in March next year.

‘Stop the bleeding’

Peter Harbison, executive chairman of industry intelligence group CAPA – Centre for Aviation, says the clear priority at Virgin was to “stop the bleeding”.

“There’s no silver bullet at all – it’s really just a matter of working through, and looking at every area where you can stimulate efficiencies that probably weren’t being focused on before,” he says.

“They’re fortunate in that Qantas is not at all eager to increase capacity in the domestic market… so Virgin is in a good position.”

Harbison said there was plenty of room for a second airline in Australia, including one that catered to corporate travellers with business class products.

“It’s really just finding where that balancing point is of how much market share you can get.”

Scurrah said cutting costs is just one side of the strategy. He believes Virgin can grow – partly by focusing more the leisure travellers who flocked to Virgin Blue when its launched in Australia almost 20 years ago. That’s where “Wiggy” the flying toupee comes in.

He also sees the opportunity for Virgin – which has been described as “Qantas in shorts” for mimicking the strategy and product offering of its larger rival – to reclaim a unique identity in branding and service.

That includes by tapping more into product innovations adopted by its major shareholders – which include Singapore Airlines, Etihad Airways, and Richard Branson’s Virgin Group, which also owns most of UK carrier Virgin Atlantic.

Together with the Chinese conglomerates HNA Group and Nanshan Virgin’s major shareholders own more than 90 per cent of the company.

“Any business that is to be successful as a challenger brand does need to focus on its strengths that make it different,” he says. “The subtle change here is that the products we introduce in the future will be ones that customers have told us they want”.

But Scurrah rejects the suggestion Virgin is giving up the fight for the corporate dollar, saying its 30 per cent share of the business travel market was a priority now and will continue to be.

Virgin is planing to increase capacity on the so-called “golden triangle” between Sydney, Melbourne and Brisbane, he says, to cater to business demand. Meanwhile, its loss-making budget arm Tigerair would continue to fly its 13 aircraft flying on leisure routes, and Virgin would fly routes with both leisure and corporate demand.

Scurrah says he’s committed giving the still loss-making Sydney-Hong Kong route the best opportunity of success, and thinks the route will improve with the recently approved tie-up with Virgin Atlantic. This will mean passengers can connect through to London on a single ticket.

“We’re confident that Hong Kong in time will be a very profitable route,” he says.

Richard Branson, whose Virgin Group still owns 10 per cent of Virgin Australia, says he saw the airline moving toward profitability as the airline made cost-cutting decisions.

“I think just having a chief executive who is a good listener and is taking tough decisions and getting them over with as fast as possible, so the company’s in a better position to move forward,” he tells The Age and Herald, shortly after emerging from a Brisbane Airport baggage carousel re-purposed as a giant sushi train.

“Obviously as a shareholder [I] would love to see the shares doing better, we’d love to see it making profits.”

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Geoff Wilson from Wilson Asset Management, which owns 7 million Virgin shares, said he was pleased with Scurrah’s focus on profit.

“He’s seen as very focused on, rather than worrying about market share, looking at the profitability of the business and for the business to be sustainable that needs to be the focus,” he said.

However Wilson says Virgin needs to address is the fact more than 90 per cent of its shares are tightly held by its airline investors, which he says holds back its valuation.

Harbison says one of the biggest elements of Virgin’s path back to health will be its Velocity loyalty program. Scurrah took on $700 million in fresh debt to buy back a 35 per cent stake in its the frequent flyer program from private equity group Affinity, giving the company full control over what has been an increasingly profitable business even as the airline business struggled.

Branson says he though the price was “quite expensive” but the right decision.

Harbison said the “real money” is airlines in the future was tied up with loyalty schemes, and points out Qantas was on track to be making half its earnings from it frequent flyer division within a couple of years.

“They’ve been very smart for them to go and get back the bit that they dumped. He’s smart enough… to leverage that a whole lot better than they have in the past.

“The far more important part of operating airlines is not buying flying tin and buying them, it’s actually the whole sale and data side.”

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