In an environment of very mixed performance in which some carriers are struggling deeply while others manage to excel and still many more linger lethargically somewhere between, Virgin Atlantic accomplished a critically important feat. Although clearly stated as a two-year goal back in 2013, the return to profitability for the most recent financial year ending 31 December 2014 with a pre-tax profit of £14.4 million (US$22.2 million) still came as a pleasant surprise “We’re on a bit of a journey really,” observes Virgin Atlantic’s director of cargo, John Lloyd. Th is key turnaround for the airline which has suffered a long thin dry patch in terms of profitability rests squarely on the shoulders of Craig Kreeger who was brought on board in February 2013 to set the carrier on a new path to profitability.
“We’ve been in a world over many years where the profits have been marginal at best and that’s sort of okay; make a little bit of profits in a good year and then something happens somewhere in the world and you lose the money – but you can’t carry on like that.” Things changed fast under Kreeger who set a two-year timeframe for return to profitability, although it was not without pain. “He’s brought in change in the way we do business,” Lloyd explains. While the brand and the culture remain the same, the group now has more structure, more discipline and a clear direction, which Lloyd candidly notes, “we really didn’t have before”.
Th e last couple of years have been about stabilising the group’s business and getting back to the profits. And now with that done the group is on a “pretty fixed road heading to a place which we can actually get some sustainable profit which will allow us start growing again,” Lloyd says. Last year was another good year for cargo, he says, although revenue was down 1.8 per cent year-on-year, evidence that although the impact was only slight, Virgin was not immune to the ongoing lethargy in global air cargo markets.
“Generally our load factors have been have been very good last year, our network load factors averaged 78 per cent and when you think about peaks and troughs we get in this industry this is way above average. In April – and I know it’s been going crazy this first quarter – outbound from the UK we had 99 per cent load factor, so I’m very pleased with that.”
The benefit of this solid cargo contribution has not gone unnoticed within the organisation, as Lloyd points out. “Another thing we’re finding, again looking at this plan going forward and how profits build up, is the real significant recognition of the part cargo plays in that, which is great. We are a passenger airline but there does seem to be recognition right through the whole company that cargo is a key part of it.”
Route rationalisation
The recovery plan, while clearly a success, was not without its pain however. And particularly for the cargo division which lost two key destinations in Mumbai and Tokyo last year. “What was happening was we were losing money and part of the recovery plan was looking at our route network and actually looking at fully allocated costs into each route and saying which ones are making money which ones are not. Not all routes make money but there might be strategic reasons for being there or it might be that the route is on the path to profitability,” he says.
But in this case there were two clear routes that had been long-term lossmaking routes that weren’t really ever going to show any signs of recovery, Lloyd adds. It didn’t help that both Mumbai and Tokyo were very intensive routes in terms of aircraft and crew required, along with the high cost of operating out of Japan. Th e problem with Mumbai was that apart from pharma traffic most of the rest is low yield cargo, which combined with poor performance on passenger side, doomed the route. New Delhi, Lloyd adds, is a different story with much better yields and a healthy passenger business.
“Th e loss of Mumbai and Tokyo had a bit of a blow when we started putting our budget together for this year and had to strip that out those big cargo routes. Some pretty tough decisions were made but actually by pulling out of the routes and repositioning the aircraft somewhere else we could make more money and that’s really proved to be the case,” he says.
Repositioning those aircraft meant a new destination in the form of Atlanta, and an up scaling of frequencies to New York JFK, both of which are doing “really well,” according to Lloyd. “We are doing really well on New York and actually outbound from UK into New York our load factors are excellent and were backlogged with five flights into JFK we had a four-day backlog at one point,” he says adding that obviously customers were informed and cargo was rerouted over Boston for instance. “Atlanta is actually doing really well too,” he notes adding Virgin now operates three flights a day to Atlanta.
Delta dawn
Delta, which bought out Singapore Airlines 49 per cent share in Virgin in June of 2013, plays centrally in Virgins business. At the point the two carriers wed, a baseline was established of all the routes that all under the joint venture, in terms of profitability. From that point on the two carriers began working together, first on the passenger side and then on the cargo side.
Th is union gives Virgin access to the Delta network and vice versa. As Lloyd notes Virgin is a bigger brand in UK in terms of corporate markets and in the US the situation is reversed with Delta being the dominant brand. “From the US point-of-sale perspective this brought big benefits to our network and then what happened with that baseline over the last 18 months or so, the route profitability has gone through the roof,” he says. Th e two carriers are effectively operating as one, even though they are still operating separate aircraft, different crew, etc.
“From a cargo angle when we first got together we had long sessions talking about what are the opportunities, what are we going to do,” he says noting that the initial steps involved a lot of joint procurement activity for contracting, handling, etc. It also saw Virgin moving into the Delta facility at New York JFK.
“We are pretty much co-located on the whole of the East Coast – there is procurement savings there which is fine, but what we’ve also got to concentrate on joint revenue delivery, joint sales and things like that,” he says adding that the two cargo carriers don’t sell as one product, but continue to sell two separate products.
Both carriers have access to each other’s flights, but each sells for its own brand. “They [Delta] have a slightly different product offering in the market.
We are a bit more niche and because of our size our product can be more flexible and we can do things they cannot.” On the other hand Delta has scale and network, which as Lloyd notes is a bit of a different product. “I think different customers want different things and I think if we merged together we would lose some of those customers, whereas we can just put the two side-by-side and then we can offer service right across the entire spectrum,” he says.
“Key for us, we believe there are huge benefits for us working together, but we want to move to a point where effectively we are operating in a sort of metal neutral world where we can sell a Virgin Atlantic Cargo product, but it will travel on their aircraft and they do the same on ours because between us now we’ve got eight flights a day between JFK and Heathrow.”
“Th e two products together, it’s a pretty powerful offering,” Lloyd observes pointing to the amount of capacity they are able to tap – roughly 20 per cent of the total transatlantic capacity. But getting there requires substantial work, with something like 36 different work streams going on simultaneously he says.
One of the main projects currently ongoing, aimed at making the metal neutral goal a reality is some fairly major system integration. “We want to do system integration to a degree that no one else has done in a cargo alliance and we’re realising there is a really good reason why no one has done it, because it’s going to be tough,” he says with the laugh.
But once the duo have overcome that hurdle, their customers will be able to call into one of the carrier’s contact centres and have access to capacity on either of the carriers. Th e two carriers are hoping to have it go live by next year, Lloyd says.
“Hopefully next year we will be there and will have the key ports from handling point a view, co-located so we’ll be in a situation where we can get Heathrow, JFK, Atlanta and maybe at some point LA under one roof, then it will be effectively seamless – two products under the same roof.”
Size matters
A reoccurring theme in the conversation with Virgin, is size – and no matter what people may say, size does matter – except in this case, small is good. Clearly of more diminutive size compared to the large combination and even many of the belly-only cargo carriers of the industry, Virgin does have multiple daily flights from its main hubs, but even then some like Hong Kong and Shanghai are still only one flight per day.
“The load factors are obviously extremely good I don’t want to say we are choosy, but the fact is we can obviously keep our pricing up a little bit and lets us target sectors that we think play to our strength in terms of service and how we operate.” This, notes Lloyd, helped Virgin avoid much of the impact that the larger players, particularly those with freighters, felt from the capacity surplus in the industry. Th e drop in fuel prices have helped the maindeck operators, at least for the moment, in making their business more viable. Perhaps surprisingly, Lloyd reveals that “in the last few years we kept toying with the fact certain routes, do we do something with someone else whether freighter, or otherwise but the barrier now has obviously come down a fair bit, but the question is if it’s going to stay like that?”
More than size
One area where Virgin appears to have at least partly moved along with the rest of the industry is in the area of differentiated products. For many years Virgin resisted the industry trend by which carriers introduced typically a whole swath of product offerings. “We’ve always been told we don’t need to have a whole range of products because our standard product is extremely reliable and we’ve got a very, very good flownas- booked record,” Lloyd says.
“But we do have other products; we have an express product, a pharma product and we have a guaranteed move product called ‘Must Ride’ which is very popular and actually because our general cargo product has been so reliable it sort of trades off a little bit,” he notes.
And this is the crux of what Virgin Atlantic Cargo focuses on – selling a high quality product – which to naturally attract the high-yielding traffic because shippers and forwarders can be confident that their shipments will get to destination as promised. Indeed this something a great swath of the industry still struggles with and is the focus of an IATA-led initiative to strip out 48 hours from the end-to-end air cargo supply chain.
“Really some of the more negative stuff about the industry and how reliable it is, or isn’t tend to play into what we offer, really well. As for the 48 hours, I really don’t know where it would come from because we have an extremely high fl own as booked record,” Lloyd reiterates.
While Virgin does move transit cargo through London Heathrow, “we don’t have a massive hub and I think sometimes with these big hugs, that’s where the delays can happen, but we don’t really experience issues like that.”
He adds by way of example that Virgin will sell from Delhi through to New York, for example, but knows exactly what the connection times have to be to get the product there and delivers. “It won’t really dwell in London and as far as the point-to-point cargo, as long as it gets delivered 4-6 hours before the flight, it goes 99 per cent of the time,” he says.
Fleet & network
And while Virgin remains one of only eight or so carriers still operating the four engine A340-600s, a measured intake of the latest generation B787s are gradually replacing them. “Th e A340-600 from a cargo point of view, is a fantastic plane but it is now legacy and obviously with four very thirsty engines on it, from an economic point of view it just doesn’t stand up.”
Th is led to some unhappiness in the corridors of the cargo division, but Lloyd says the B787 is “proving a lot better than we thought and it is actually better than the B747-400 fleet.” Currently Virgin has five of the Dreamliners operating from a total order for 16 with options for five more. Most of these are for replacements, but will expand the fleet by one or two.
With Asian routes limited to Shanghai, Hong Kong, New Delhi and Dubai (and Lagos and Johannesburg in Africa) the key question is whether Lloyd sees an enlarged engagement in the near future.
“Th ere is no new plan to fly to Asia at the moment,” he says, adding, “it’s just one of those things – we’re in this world of ‘let’s stabilise profits and any new incremental expansion we can do, let’s put it into the US because at the moment that’s where we get to biggest return’.”
But he does add this could change particularly as more B787s are delivered in, because these new fuel efficient aircraft make the longer routes more viable – “so hopefully we will”. Lloyd won’t be drawn on what could be possible new routes down the road, saying there are no plans for route expansion at this point. But he does of course have some favourites on his wish list – which he says, with a twinkle in his eye, he’ll keep to himself.
Competition
Th en there is the hot topic of Middle East competition. Again the size issue looms large – “because of our capacity and the kind of traffic we deal with and the kind of product we’re selling, it doesn’t really compete with a deferred service via somewhere else. I think if you’ve got freighters and you’re trying to fill them and perhaps the cargo is not so time sensitive, it’s more of a problem. But as you get into products like pharma and things like that, particularly fast run products, its not really going to be an option to go and sit in Dubai.
“Yes, obviously their growth is massive, but at the end of the day,” trotting out a well-worn stock phrase of the industry, “we welcome competition providing its fair,” he said. “But I can see from a market point of view, an industry point of view, yes it’s game changing,” he said forsaking the marketing message for candor.
As to whether the ‘sleeping giants’ as some have referred to the Chinese carriers who are rapidly growing their fleets and expanding internationally, will have an impact on Virgin, Lloyd agrees they will inevitably have an impact, but he added, “I think again, we’ve got one flight a day out of Shanghai and although that sounds a bit unambitious, but it just allows us to focus on specific things and there’s always going to be demand for just one flight a day it’s just what you go for. If we just bought a B777 freighter or something like that we might be thinking something different.
“We’re just in a slightly different market, we’re not in that mass volume market and it just plays to our strengths in terms of reliability you can deliver it to us and we’ll move it that day and it will be there as we promised.”