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ACCT30002 Enterprise Performance Management

Workshop 2 tasks:
Discussion Questions
1. Read the Flamholtz (1996) article and
a. summarise the four functions of control; and
b. outline the key components of the core control system.

Tasks
2. Preparation: See the attached article: Virgin flight path impeded by some severe headwinds
Required:
a. Outline the change in strategic direction that Virgin has undertaken in recent years. What
factors are driving the change in strategic direction?
b. How might the nature of the controls (for example performance measures and incentives) alter
as the strategy alters; and operations begin to reflect the new strategic direction?
c. More recently, Virgin has taken a major stake in Tiger Airways. How might this effect strategic
direction and the control system more generally?
d. Perform a little research on the current status of the airline industry. As a result of this, what
advice do you have for Virgin Australia? How does the new strategic direction for Virgin seem to
be unfolding (see second and third attached articles)?
In-class task:
e. Look at the extract from the 2015 annual report of Virgin Australia. Compile a list of each of the
performance measures reported.
a. How do these measures help Virgin execute its strategy?
b. Which of these are financial; non-financial? How would each be calculated?
c. How might these measures be connected?

Weekend AFR 26-27 March 2011

How
w Borrghettti got tthe la
ast lau
ugh foor Virg
gin

The Australian
February 077, 2015 12:00AM

Steve C
Creedy

Virgin cchief execuutive John Borghetti


B
sayys the airlin
ne is ahead of
o schedule on all frontts.
Picture:: James Crooucher Source: News C
Corp Australlia
THEY laughed when
w
John Borghetti
B
u
unveiled hiss strategy to
o transform
m Virgin Blue into
a full-seervice carrrier capablee of taking on the entrrenched miight of Qanntas in a market
the flyiing kangarooo had mon
nopolised ffor almost a decade.
It was sshortly afterr his first ressult in 20100 as he was doing the obligatory rooadshow, an
nd he
recalls oone particullar group whose workpplace he can
n see from his
h office in Sydneys
Macquaarie Place.
As he taalked aboutt his strategy
y, and wherre the company was going, the peoople on otheer side
of tablee laughed annd began tellling the airlline veteran
n why.

I thought, I cant believe this, these guys dont get it, theyre supposed to understand the
landscape. I walked away thinking Ill see who laughs in three years time and Im glad to
say Im here to laugh.
The airline that was conceived on a beer mat in a British pub will reach a milestone on
Tuesday when the final Virgin Blue red aircraft enters service in the new white livery of
Virgin Australia.
It comes as the airline yesterday revealed it moved back into the black with an underlying
pretax profit of $55.3 million for the second quarter, equivalent to an interim underlying
profit of $10.3m, and a net profit of $11.3m. Budget subsidiary Tigerair Australia, which had
been haemorrhaging money, broke even and could now beat its target of achieving
profitability by the end of fiscal 2016.
Borghetti, looking relaxed after a short break, says the airline is ahead of schedule on all
fronts.
He said the airline had wanted 20 per cent of its revenue to come from corporate and
government passengers by the end of fiscal 2014. However, this had been achieved by the
end of fiscal 2013. Now were way above it, lets just a say a number between 25 and 30
(per cent), he says. Were targeting 30 by the end of 17 and Im very confident well
achieve that. So in that regard, thats way ahead of schedule.
In fact, were actually ahead of schedule in every key performance indicator we enunciated
back at the launch, whether it be Velocity members, revenue mix, route networks you
name it, were ahead of it.
Virgins game change strategy was unveiled in May 2011, when Borghetti joined partowner Richard Branson to unveil the carriers new livery on a two-class Boeing 737 and
vowed to lift the airlines proportion of revenue from corporate and government business
from 12 to 20 per cent.
The strategy included Airbus A330 widebody aircraft on transcontinental routes, new flight
attendant uniforms, a new in-flight menu designed by chef Luke Mangan as well as new
lounges.
Over the next three years, the airline would significantly boost its fleet and establish a global
virtual network through alliances with major partners Etihad, Singapore Airlines, Delta Air
Lines and Air New Zealand. Australias liberal domestic aviation regimen would allow three
of the partners to become major shareholders as Virgin itself went out to acquire Perth-based
Skywest and budget carrier Tigerair Australia.
There would be major expansions of lounges in Sydney and Melbourne, a new lounge in
Cairns and second lounge in Perth to accommodate charter and regional customers.
In addition to a world-class domestic business class, the airline launched complementary
snacks on major routes and rolled out wireless streaming across its Boeing 737 fleet.

A revamped Velocity Frequent Flyer program resulted in membership topping 4.5 million
and Borghetti would surprise the market by selling a stake in the loyalty program with a
target of boosting membership to seven million over three years.
Borghetti recalls getting on a plane about two years into the transformation and trying to find
something on the aircraft that was unchanged. Everything that I could see was new, was
different, he says.
Ultimately, he says, the airline is about brand and services rather than aircraft. He also
strongly believes it is about people and he has added 4000 staff during his tenure to bring the
workforce to more than 10,000. Everyone flies the same aeroplanes, theyre just painted a
different colour, he says. So what makes the difference? The differences are the people and
the way you project your brand. And a lot of airlines forget thats whats the business is
about; its a service business, it happens to fly aeroplanes. Weve tried to maintain that
philosophy and certainly while Im here well keep it that way.
Borghetti is pleased by the recognition Virgin has received in brand surveys, one of which
put it as the nations third most respected, and the accolades it has received. The airline this
week found it had been voted one of the top 10 business-class airlines in the world by readers
of Conde Nast Traveller. What the team have done is nothing short of heroic, frankly establishing your brand, positioning it in a way that youre the third most respected, way
ahead of your competitor, and also in recognition for the sector of the market you said you
were going to target, he says.
But it hasnt all been gourmet food and fine wines there were issues with the Virgins
Navitaire reservations system that led to flights being grounded and the lesser pain of
transitioning to its new SabreSonic system.
Qantas also responded to the Virgin strategy and the resultant increase in its fleet and number
of seats sparked a fare war and profits tumbled at both airlines. The Flying Kangaroo at one
point thought it had its rival on the ropes as Virgin continued to burn through cash but Virgin
bolstered its balance sheet with an enhanced equipment note offering and a controversial
$350m rights issue that resulted in its airline shareholders increasing their stakes in Virgin
and joining the companys board.
The Virgin rights issue prompted Qantas to launch an unsuccessful lobbying campaign
claiming foreign airlines were funding Virgins growth as part of a foreign takeover of
Australias skies.
The Virgin boss still finds it hard to believe the misunderstanding about Virgins part in the
so-called capacity war.
He says the airline outlined its fleet plan in his first 12 months and brought up the same chart
at every results presentation but there had been a shock, horror reaction when the aircraft
finally arrived.
The only additions to the plan, were a few ATR turboprops but people had not being paying
attention, he says.

The introduction of widebody A330s on transcontinental routes saw a big increase in


available seat kilometres but Borghetti believes commentators would have been better off
counting seats. He says Qantas counteracted Virgins ASK boost to maintain their so-called
65 per cent market share by putting in many more seats on shorter sectors such as
Melbourne-Sydney. Well you then say look at the seats dont look at the kilometres and
theres no wonder what people found was that we were putting in something like 500,000 to
600,000 seats and Qantas putting in three million seats because they were all on short sectors.
So I just found that whole thing quite bizarre, he says. But, you know what, you try and
explain it, people dont understand it and you just move on.
While Borghetti says hes happy with the current capacity growth, the network is the crucial
thing because airlines need to fly to destinations passengers want to visit at the time they
want to go. By network, I mean are you flying the right footprint and have you got the right
frequency, he says. And thats what our fleet plan was all about from day one . we now
have that. Sure therell always be a bit of tweaking here and there but weve got it.
Consumers benefited from the influx of capacity with lower fares and Borghetti does not see
an end to low lead-in fares as the average cost of tickets trends upwards.
He notes that the same conditions that pushed down fares also prompted airlines to slash
costs Virgin has a $1 billion cost-reduction program and this means a more sustainable
industry as demand and supply become closer. What may change, though, is the proportion of
cheap fares.
Its quantity rather than the absolute number that will change, he says. Theyll still be
great fares out there and theyll be just as good as theyve ever been, in fact I can argue the
case where you might see even better offers.
The airline veteran has always maintained he is not after a specific market share but on
capitalising as much as possible in each segment. He believes this approach using multiple
brands marks a major difference from the Qantas-Ansett duopoly.
He points to the decision to acquire 100 per cent of Tigerair Australia, saying he has no
ambition for the budget airline to gain 20 or 30 per cent of the market but for the carrier to
find the level that makes sense to the group.
While conceding there have been concerns about the low-cost carrier, he defends the decision
to retain the Tigerair name, arguing Virgin has been able to boost confidence in the brand.
A major problem at Tigerair was the continual changes in management, something Borghetti
says is now fixed under chief executive Rob Sharp.
Hes really consolidated the group, hes improved its efficiencies, improved its service
proposition and I emphasise service proposition not reinventing the product and has
started to build scale again to get some of the efficiencies, he says.
Where Tigerair goes from here will depend on the market but Borghetti is adamant the two
brands will never blur but stay in their distinct segments.

Virgin has brought forward its estimates for Tigerairs profitability several times and is
currently saying the end of fiscal 16.
So will it come forward again?
Frankly were very, very happy with the progress were making at Tiger, Borghetti says
with a smile.
Turning to Skywest, which has targeted revenue to up to $200m by 2017, the Virgin chief
acknowledges the slowdown in the resources industry but notes Virgin still has a small slice
of the market. So even if the total pie has shrunk a little its still a very big pie, he says,
adding that Virgin has brought to the market competition and the lower pricing procurement
officers seek in hard times.
He expects Virgin Australia to remain a primarily a domestic carrier but notes that doesnt
mean it might add or subtract routes. Were fortunate weve got four international carriers as
very strong partners.
Asked how partners have affected the transformation, Borghetti says they have been terrific
partners and continue to be so as board members. It is business as usual in terms of the
strategy.
I think its a great testament to the strategy that they, or some of them, have elected to buy
into the company, he says, adding that all of them at one point a have publicly endorsed the
plan.

Virgin Australia in profit as domestic


airfares surge
Date
February 11, 2016 - 4:27PM FROM SYDENY MORNING HERLAD

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Read later

Jamie Freed
Senior Reporter

View more articles from Jamie Freed


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Virgin chief executive John Borghetti said the airline had nearly met its target of 30 per cent of domestic revenue from the
corporate market. Photo: Daniel Munoz

Virgin Australia's decision to limit the number of flights in the domestic market at a time of weak
demand and its ability to pick up more business traffic has paid off.
The carrier charged an average of 9.1 per cent more for its mainline domestic fares and 12 per cent
more for fares at low-cost arm Tigerair Australia in the first half, helping to drive an eight-fold rise in
first-half underlying profit to $81.5 million.
Both Virgin and rival Qantas have kept seating capacity at relatively flat levels since May 2014, when
the pair ended a financially damaging capacity war that left both airlines in the red.

Virgin CEO John Borghetti and Financial Officer Geoff Smith brioef media on the half-year result. Photo: Daniel Munoz

Virgin chief executive John Borghetti said an increased mix of business and government travellers
had boosted average fares for Virgin in the first half, while Tigerair had benefited from product
improvements at Melbourne Airport and its better on-time performance than rival Jetstar.
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"Certainly capacity growth has been slower," he said. "But we have to be careful to not jump to the
conclusion that airfares are going through the roof. When we started this journey five years ago [to
take Virgin upmarket] we said we'd bring competition and airfares would go down. Fares today are
cheaper than they were five years ago."

Weaker consumer confidence

Virgin Australia has returned to a first-half profit. Photo: Glenn Hunt

However, Mr Borghetti said weak consumer confidence combined with Virgin picking up more
corporate and government traffic, meant passengers were booking their flights a closer to the date of
travel.
That, in turn, affected the timing of the airline's cashflows, with Virgin reporting a $133 million cash
outflow in the first half.
"I've seen this many times [over my career]," said Mr Borghetti, who earlier worked more than 30
years at rival Qantas Airways.
"Typically speaking whenever sentiment is low, people don't commit as early. It is typical human
behaviour in anything."
Virgin also benefited from a lower oil price during the half, although the majority of the gains were
eroded by a weaker Australian dollar which pushed up the cost of its US dollar debt and supplies.
Overall, the airline reported a $33.5 million net gain from the lower oil price. Its fuel is hedged at an
average price of $77 a barrel in the second half and it has little exposure to any participation in the
downside at a time when the spot price of oil has fallen to $43 a barrel in Australian dollar terms.
In its domestic division, Virgin reported underlying earnings before interest and tax (EBIT) of $130
million in its domestic division, up from $69.7 million a year earlier, driven by its ability to boost
fares rather than filling more seats.
Virgin's revenue per available seat kilometre rose 7.1 per cent in the domestic market, which is far
higher than the 1.5 per cent rise Credit Suisse expects from rival Qantas Domestic.
Mr Borghetti said Virgin was already "knocking on the door" of a target of 30 per cent of domestic
revenue from the corporate and government market by the end of financial year 2017.

Jets for sale


On Thursday, Virgin disclosed plans to dispose of five of its 18 Embraer E190 jets by September,
with the flying to be covered by increased use of its Boeing 737 fleet in a move that will help cut
costs.

Chief financial officer Geoff Smith said the airline did not expect any new owned aircraft deliveries in
the second half.
Virgin's international division, which took a $19.2 million EBIT hit from volcanic activity in Bali
during the first half, remained loss-making. Virgin's international underlying EBIT loss was $30.8
million, which was better than the $39.5 million loss a year earlier.
Low-cost arm Tigerair Australia reported a major turnaround, swinging to underlying EBIT of $13.9
million in July-December from a $24.8 million loss in the year-earlier period.
On a bottom-line basis, the airline swung to a $62.5 million first-half profit from the year-earlier
$47.8 million loss.
Virgin had already revealed its half-year results figure last week as part of a December-quarter market
update. Deutsche Bank analyst Cameron McDonald last week said the $81.5 million underlying profit
figure was below his expectation of $85.8 million, while Citi analyst Anthony Moulder had expected
an even higher $95.5 million.
Read more: http://www.smh.com.au/business/aviation/virgin-australia-profits-rise-as-domestic-fares-surge-20160210gmqr1w.html#ixzz3zup5Hutq
Follow us: @smh on Twitter | sydneymorningherald on Facebook

OVERVIEW

2 2.3
18. 2

18 .6

2009

2 010

18 .6

2 011

1 9. 4

1 9. 3

2 01 2

2 01 3

2 0.0

2 01 4

2015

PASSENGERS CARRIED (MILLIONS)

4 ,749
4 , 3 07
3 , 92 0

4 ,02 0

2 01 2

2 01 3

3 ,27 1
2 ,9 8 2
2, 635

2009

2 010

2 011

TOTAL REVENUE AND INCOME ($MILLIONS)

V I R G I N

A U S T R A L I A

G R O U P

2 01 4

2 015

45,969

2015

35,774
42,218

2014

33,084
41,800

2013

31,300
39,800

2012

31,100
37,092

2011

29,569
34,012

2010

26,894
27,816

2009

21,800

Available Seat Kilometres (ASKs)


Revenue Passenger Kilometres (RPKs)

RPKs/ASKs (MILLIONS)

FINANCIAL HIGHLIGHTS

2015
($million)

2014
($million)

Total revenue and income

4,749.20

4,306.60

(93.8)

(355.6)

Statutory net profit/(loss) after tax

OPERATING STATISTICS (Group)

2015

2014

46.0bn

42.2bn

Passengers carried

22.3m

20.0m

Revenue load factor

77.8%

78.4%

Available seat kilometres

A N N U A L

R E P O R T

2 0 1 5

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