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Virgin Blue Announces Birth of the “New World Carrier” in CAPA Report

30/11/2005

The emergence of a new type of airline, the New World Carrier (NWC), is set to throw down a major challenge to full service airlines globally, according to Virgin Blue.


Virgin Blue predicts that the evolution of some Low Cost Carriers (LCCs) into New World Carriers will expand the scope of competition with legacy full service carriers. New World Carriers will seek to leverage their low cost foundations and ability to add valuable new products to increasingly penetrate the lucrative business market to strengthen yields and profitability.


It is the first time the carrier's latest strategic analysis of global airline competition has been published, and is contained in the Centre for Asia Pacific Aviation's (CAPA) weekly report, Peanuts!, covering LCC news and developments worldwide. The analysis is taken from the keynote address delivered today to Virgin Blue's Senior Management Conference detailing the airline's expanded strategic direction, including its "Corporate Traveller Strategy".


"Until recently, the competition between LCCs has largely been a form of land grab in short haul markets, and the profits of the legacy carriers have been almost incidental victims. Now the ground has largely been staked out, and it's time for LCCs to start working their claims. As the limits to profits to be wrung out of the low end of the market become apparent, they have the yields of legacy carriers in their sights", said Virgin Blue.


Peter Harbison, the Centre's Executive Chairman, stated, "We welcome Virgin Blue's decision to provide this thought-provoking analysis first through the Centre's Research Unit. The LCC model is constantly evolving, as we see every week in Peanuts!, and this is a timely contribution to the debate on the future of the global airline industry".


Virgin Blue says that NWCs have the potential to benefit from the "best of both worlds", with an LCC cost base and legacy carrier yields.


The key elements of NWCs include:


A low cost base, driven by high asset and people productivity;

An ability to develop valuable new products on a profitable pay-per-use basis;

Competition directed at customer segments, as opposed to the traditional route-by-route competition of LCCs;

Providing a comprehensive network with internal connections and interline/codeshare to access networks of partner airlines;

Focus on meeting needs of national and international corporate business travellers;

Seamless operations within corporate booking processes;

Innovative development of "many of the trappings" that affords legacy airlines' healthy yields, with a "barely perceptible" impact on costs.

In the wide-ranging report, Virgin Blue states that there are only some "dyed-in-the-wool" LCC businesses, or "category killers", which have an unassailable cost base driven by scale and a stripped-down commodity product. These carriers enjoy good growth prospects according to Virgin Blue.


The carrier also says that the "baby LCC" strategy (carriers set up by legacy airlines) face many problems and none have yet made an adequate return on capital. The main challenge confronting existing low cost carriers is the situation where they directly take on legacy carriers in core trunk markets where the latter have a yield premium to cushion their cost disadvantage. This situation "increasingly will be the case", according to Virgin Blue and low cost alone is not enough to compete effectively.


The full report is available in this week's edition of Peanuts! The Low Cost Airline weekly, and to CAPA Gold and Platinum Members.


Virgin Blue is a former CAPA Airline of the Year winner. This year's CAPA Aviation Awards for Excellence winners will be announced at a gala ceremony at the Centre's 2nd annual Asia Pacific and Middle East Aviation Outlook 2006 Summit, to be held in Kuala Lumpur on 5th December.