Don’t blame the virus. The real reason Virgin collapsed is all too human

The inevitable collapse of Virgin in most part isn’t especially noteworthy. Airlines collapse all the time.

It’s arguably one of the most difficult sectors to operate because it is subject to so many existential forces. COVID-19 is one of many examples.

What made Virgin’s collapse slightly more unusual was that it wasn’t so much caused by a virus or terrorism or a rocketing oil price, but by the vaulting ambition of its former chief executive John Borghetti and its board which allowed the former Qantas executive to essentially destroy a successful business. 

In 2008 Alan Joyce beat out Borghetti (and the former finance boss Peter Gregg, who would later be found guilty of falsifying books at Leighton Holdings) to the Qantas top job.

A decision by the astute Qantas chairman Leigh Clifford that will go down as one of the great Australian chief executive appointments. Borghetti, hurt and furious, fled to Virgin, and sought to assuage his sense of rejection by taking on the business that shunned him.

Until then Virgin was a very well-run and profitable business. Under founder Brett Godfrey it had followed the approach taken by the very successful Southwest and Ryanair, keeping a very low cost base and largely avoiding directly competing with the more premium Qantas.

In 2008 Virgin made a net profit after tax of almost $100 million; when Borghetti took over it had retained profits of about $300 million.

Bearing in mind that Godfrey had to deal with September 11, 2001, and more importantly the GFC, he didn’t exactly have a rails run (although the collapse of Ansett certainly helped).

Borghetti and the Virgin board abandoned the Godfrey model and directly took on Qantas. The move seemed strange at the time, and in hindsight it was suicidal.

In 2013 Borghetti told Virgin shareholders: “The 2013 financial year was a pivotal year in the game change program strategy, a strategy designed to position the Virgin Australia Group as the airline of choice in all market segments and ensure delivery of sustainable earnings benefits to the business in the future.”

He was wrong on every count.

Virgin’s expensive decision to attack Qantas was compounded by the baffling decision to sell 35% of its profitable Velocity frequent-flyer program in 2014.

Virgin essentially sold a chunk of its best asset to fund its fool’s errand. Even worse, when Velocity was partially sold to the private equity firm Affinity, Virgin also lost the ability to shift profits like Qantas does with its incredibly profitable and well-run Qantas loyalty business.

When Borghetti’s plans were unravelling in 2016, he stuck to the script, telling the AFR: “We turned the market from a monopoly to what is now a duopoly in every sector and Australia is better off for it. Why are you in business? You want to create jobs and make an impact on the community and the welfare of the country … It is a shame that so many in business today take a short-term view of things. People are focusing on the here and now rather than the big picture.”

The media loved Borghetti. He was the suave and charismatic underdog, favorably profiled compared to Joyce who was considered by many to be the argumentative outsider who unnecessarily grounded Qantas’ fleet in 2011.

In 2013 the AFR claimed: “John Borghetti, armed with only a high school degree, seemed to have outmanoeuvred Joyce, who has a master’s degree in mathematics.”

Even the usually shrewd Adele Ferguson fell into the trap, with a 2014 Good Weekend profile which fawned over his insatiable work ethic and noted: “In May 2010 he became Alan Joyce’s worst nightmare as he sought to transform Virgin from a no-frills, low-cost carrier into a full-service airline and, in that process, to dismantle what he’d spent almost his entire career building at Qantas.”

The nightmare ultimately belonged to Virgin shareholders. During his tenure, Borghetti transformed a business that had generated hundreds of millions of dollars in profits to losses of $2.1 billion between 2011 and 2019. There are few chief executives who can boast such a spectacularly poor record.

For his efforts, the Virgin board bestowed upon him plenty of riches: Virgin’s annual reports indicate that he was paid $34.3 million in remuneration during his tenure.

Borghetti’s replacement, the highly capable Paul Scurrah, was doing his best to return Virgin to profitability, but he simply ran out of runway.

As usual with corporate Australia, the architect of the multibillion-dollar disaster will escape Houdini-like with tens of millions of dollars for his trouble.