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Brett Godfrey's Speech To The Australian Airports Association National Convention

11/11/2002

AIRPORTS SPEECH IN ADELAIDE – NOV 11 2002

Good morning ladies and gentlemen - I guess there are two types of people in the audience today, those that don't like us and those that are have yet to have to negotiate with us.


I make this poor attempt at humour today because the reality is that the relationship between airports and airlines throughout the world has always had an adversarial nature. It’s an arranged marriage and while we hope to be together for many years to come, there is no doubt that there is a bit of tension under the one roof.


In the past two years, Virgin Blue has had more than its fair share of spats with airports and while we are glad that they all have been settled in good faith, I can't put my hand on my heart and say these sorts of things won't happen again.


The big question is, can a way be found to completely eliminate the inherent conflict we face?


Disappointingly, I doubt it - but I do believe we can make the relationship a little better if we all admit a few truths about things and get on with life. In fact, whilst our marriage may never be a love-in I do believe it could actually be made to work.


The first truth is that airports are monopolies. Regardless of what the Productivity Commission Report may have noted, our ability to negotiate is, in reality, rather limited. If this was Europe or the US, there would be a certain amount of competitive tension from the airport down the road, but that doesn't exist in our local market. There are few significant secondary airports in Australia that have the capability to allow Virgin to operate our jets into.


Second Truth - (and this one's about us) airlines are never 100% satisfied. There are very few airlines that will say everything at the airport is just the way they want it - the ones I know that did are no longer in business. We always appear to want more and we are usually not too keen to spend a lot of money to get it. I will not try to stand here and say all the problems in the relationship rest solely with our airport partner.


Last truth - Some of you paid too much for what you bought. That's great for the government, but it’s bad for our market and it’s bad for both your business and ours. There is this perception that you will always make money because you can simply up the rates, charges, rents and fees. I will address this later as we feel there are still some who believe it, and in our view it is somewhere between naive and perhaps arrogant. It assumes that no matter what happens or how inefficiently you manage the asset, you'll be guaranteed a profit. Airlines that don't mange their cost structures well, go out of business, but airports that fail to run their business in an efficient manner have the ability to raise their fees to cover the fat. Airlines can not change their production overnight, but a passenger can. So we end up junking seats until we can rationalise the fleet and the airport can continue to derive an improved return from the incremental charge. You are all business people and you know as well as I that this is not best practice. The more I think about it the more I'm convinced that Charles Darwin would have been baffled by airports.


So why Virgin is whinging again - what do we want now? We simply want you to charge us less. Now I realise that this statement comes as a shock to nobody here, but please let me tell you why. The less you charge us the less we charge the public. This is not a net sum game between you and us.


Remember, we are the airline who is too cheap to buy anyone a cup of coffee. Yet we are an airline that is focused on looking after the customer - which we refer to as Guests.


What if we gave them that cup of coffee or soft drink, then we charge them an extra dollar or two on their ticket. I'll tell you, and it is quite simple and that is, one less person decides to fly and importantly for you, their family won't be there to see them off, go shopping in your terminal, eat in your restaurants and park in your parking lots. We have shown how we stimulate markets through low fares and I won't even mention the fact that most people would rather get the cup of coffee from some of your vendors since I have yet to meet the airline who can serve a great cup of coffee at 35,000'.


By piling on costs we are simply depressing demand. It’s the same demand curve that we all studied in economics 101 years ago. Virgin Blue, like most low fare airlines is doing something that would be heresy to some in this industry, or any industry - we are pricing based on costs instead of our competition - and we are lowering our cost to lower our prices. For example, if the Ansett Levy is removed tomorrow, we plan on passing the entire $10 return to the customers instead of keeping $5 for ourselves. By doing this we will make our profit off the volume of those new customers who otherwise would have driven, taken the train or simply stayed at home, creating a missed opportunity for both you and us.


Nearly every single airline in the world talks of improving their yield. Essentially this is the price paid for a ticket. We will do whatever we can to lower our costs, because that allows us to lower fares and that is the magic formula for what we are doing. Lower fares can dramatically stimulate demand for air travel. The volume is where we will make our profit, not on improving yields.


We live by what we preach every day, and we are only asking you to see that there is a benefit to looking at the world from our point of view. The old school believes that you can raise your fees and we just add it to our fares and somehow, the public will just keep flying no matter what you slug them for. In the past few years there has been a lot of evidence, both in Australia and abroad that this is not a sustainable relationship.


There are a few airlines out there that are well known for driving a hard bargain with the airports, they are EasyJet, Ryanair, Southwest and others like us. Yet these airlines have brought back to life assets such as London-Stansted, Brussels-Charleroi and Paris-Beauvais that a decade ago most people would have seen as both white elephants and write-offs.


Let’s also consider the strong regional benefits from lowering fares. Virgin Blue is now flying 737's into Launceston, Mackay, Coffs Harbour and soon also Rockhampton. Every one of these are airports that two years ago were only seeing Saab's, RJ's or BAE 146's with less than 100 passengers at best. Our pricing model is the only way these communities can benefit from sustainable jet service with the lower fares that large jets can bring. It’s the only way that routes such as Adelaide to the Gold Coast can survive year round or even Trans-Tasman flights from places like Dunedin or Palmerston North. But for those of you from the larger airports don't forget that all these services from these regional centres originate or disembark into your capital city airports.


There are only 20 million of us in Australia and we believe what we are doing now is your one big opportunity to sustain passenger growth and profits above traditional levels and that is why we sincerely ask you to try and see our point of view on charges.


Now I'm sure that during this conference someone will wheel out the stat about Australia being among the least expensive airports in the world. This is one of our favourites. It’s a lovely idea if you are blind to the whole concept of purchasing power parity - what the Economist often refers to as the Big Mac Index. Yes Tokyo-Narita and London-Heathrow cost more, but their CEO salaries and other labour costs are inflated, inputs are inflated and everyone in this room is well travelled enough to know that the salary that you would make for the same job in Europe would be a lot greater, but your purchasing power would not rise. The middle class Japanese citizen is wealthy by our standards - but only if you go by the assumption that this Japanese person could dispose of his or her income in an Australian economic environment. At the same time Australian airports may not be as cheap as they appear if you look at the ability of the average Australian to pay their recently increased fees relative to the market basket of other goods that are available to that consumer.


A better comparison may be the recent UK stats on Operating Profitability of Airports, where 4 of the top 15 airports in the world happened to be in our own backyard, with operating margins of 70%or more. While many of you are excellent managers and run a good business, I have to say you have a certain advantage vs. your colleagues overseas in achieving these results. Australia has chosen to throw away even the smallest shred of airport regulation as far as we can tell. While we hope and plan for more, we assume that there is very little appetite at this moment for the government to use its powers to review airports more regularly than the five-year stated minimum.


Therefore if an airline finds that an airport has unreasonably raised its charges, it has very few avenues to pursue. The ACCC has been leashed and is powerless to intervene, unless airports are declared under the Trade Practices Act - an avenue we feel we are compelled to explore even though it is a very long-term prospect. But the only other channel we have to draw attention to these matters and create greater urgency in Canberra is through publicity, something that you would be aware Virgin is not afraid to resort to if we feel that negotiations have been less than balanced or that the national interest is at risk.


Airports often highlight that they are key partners in the community in which they operate and we intend to hold them to their word on this. If the airport acts in a way that clearly damages the economic interests of the community they are a part of, we will make sure the public is aware of the impact upon their business's bottom lines and their household budgets. We feel this will be the only way to activate the government review process any earlier than their five-year minimum standard.


Perhaps your shareholders paid too much for the airports, perhaps there was over regulation before. But now the pendulum has swung firmly the other way. It is potentially good for your shareholders…but really only for the short term, your shareholders should be quite concerned if they feel that your actions, or the actions of one of your airport brethren, may well result in heavy-handed regulation being reintroduced.


We are of course trying to suggest what you should not be doing – but that’s pretty easy and it wouldn't be fair for us to do that without highlighting what could be done. There are other ways to improve your bottom line. Clearly opening virtual shopping malls and other property-based opportunities is one of them, but another is to try and do what the airlines have been doing every day for many years just to survive let alone make money - look at your costs. Look at the way your business is run. Look at all these upgrades and capital expenditures that are constantly being required. New terminals, new aerobridges, new this and that; staff for a variety of functions that we have never even thought of. There are very few who will deny that there is fat in organisations and facilities that were inherited from the FAC within the last decade. The global aviation industry has, for the past half century, strived and achieved improving efficiencies, new technologies and lower costs. During the same period, some local airports have seen charges follow a steady uphill climb. Whereas some airport charges may only rise by CPI, airfares are lower than they were 10 years ago and yet the airline industry still managed to lose over $10B last year. In a single digit margin business something inevitably has to give.


Last year, every one of you was heavily impacted by an airline that lost control of its costs. For us cost control is one of the core aspects for our survival. For you it may not be as critical, but it would have been had Virgin Blue not been here to help fill the empty terminals left by Ansett.


You may walk away from this ‘lecture’ thinking that this CEO is full of it and VirginBlue are a pack of whingers as someone once said - but if you can take away one thing that might make our arranged marriage a satisfactory one and, dare I say it, perhaps a palatable one, let it be this. Focus on your costs, your concessions and efficiencies not your fees.


I'd like to offer a final example where partnership should override intransigence:


Recently we asked a lot of you to allow us to park our aircraft nose in and both deplane and board using both the front aerobridges and importantly via the rear stairs. One of our “partners” offered a multitude of reasons why it can't and shouldn't be done. But if we do it, we can cut our turn times by about 5-10 minutes, which means one more sector per day, per aircraft, which means more revenue for you. In fact an extra 180 passengers per day per aircraft. This efficiency saving of 13% would result in 13% more revenue for you without any increase in fees. And its not as though there isn't precedent. Last week we had a team in New York visiting JetBlue who is doing the exact same thing at JFK. The Port Authority of New York and New Jersey isn't questioning JetBlue why they are doing this - they are simply happy that during a time when many of their customers are struggling to pay the bills, one is actually expanding and fully utilising a terminal that was empty until recently and otherwise would have been mothballed after the death of one of the founding brands of aviation - Trans World Airlines. If bringing people up the back stairs is one small way we can avoid becoming Ansett or TWA, we hope you will facilitate our efforts, not block them.


With a little more understanding like that we will all be more successful and while we are certain to have our differences, we'll both be able to focus on the goal of getting more people flying. This has got to be something that clearly all of us as well as both our shareholders and our stakeholders would like to see happen.


I thank you for kind attention and for not throwing any of your bread-rolls in my direction during this speech.