As far as corporate nicknames go, you could do better than The Bagman.
But John Thomas, Virgin Australia’s second in charge, doesn’t shy away from the moniker and how he earned it.
John Thomas pioneered non-ticket revenue and says he will use it to improve Virgin Australia’s profitability. Photo: Peter Rae
It was mid-2007, oil was on an unprecedented surge towards $US148 ($A195) a barrel and American airlines were teetering on the edge.
“Oil was going through the roof and basically the North American airline industry was about to go totally bankrupt,” Thomas recalls.
Virgin ran at a loss last year, weighed down by restructure costs and soft demand. Photo: Tian Law
Thomas was working for consulting firm L.E.K. out of Boston advising US airline how to ride out the financial storm unleased by the September 11 attacks.
In response to the oil crisis, Thomas – who was born in Wagga Wagga and raised in Sydney – masterminded one of the biggest innovations in commercial aviation history: he convinced airlines to make passengers pay to bring checked luggage.
“We were urgently trying to find any mechanism to find more money. That led with bag fees, because that was the quickest way to get money in the door.”
It riled the public, but today Thomas makes no apologies.
People fly for different reasons but airlines treat them the same, Thomas says. Photo: Peter Rae
“It literally did save the industry,” the 58-year-old says.
After more than 20 years working with the world’s biggest airlines, including seeing United through a post-bankruptcy restructure and negotiating a merger between Delta and Northwest, Thomas returned to Australia in September last year to run the day-to-day operations of Australia’s No.2 airline – a move that has sparked strong speculation he will succeed John Borghetti at the top of the business.
“What I saw here was a huge opportunity,” says Thomas, who got his pilots licence at age 17 and still occasionally flys.
“Virgin Australia is an incredible brand, it’s got incredible assets, so how then do you take it to the next level of making it a much more profitable airline?”
Virgin Australia is an incredible brand, it’s got incredible assets, so how then do you take it to the next level of making it a much more profitable airline?
Thomas’ appointment as the group executive has freed up Borghetti to focus on Virgin’s partnerships, especially with Chinese carriers HNA and Nanshan, which each own 20 per cent of the airline.
The two Johns have known each other since 1991 when Borghetti worked for Qantas and Thomas was advising on its merger with Australian Airlines.
“John has worked for me on a number of assignments over the years and I have always loved his energy and enthusiasm for the industry,” says Borghetti of his new right-hand man.
Virgin ran at a $244 million loss last financial year and posted a $21.5 million loss for the six months to December, dragged down by investment in a three-year restructure, soft demand and strong international competition.
This tough environment has dragged Virgin’s share price to equal its lowest ever point at 19 cents a share. This has happened even as Qantas has kicked upwards. Over the past three years Qantas shares are up 10.3 per cent against a broadly flat performance from the ASX top 200. Virgin at the same time has declined 63.46 per cent.
The soft half-year result prompted a dip in the price but beat some analysts’ forecasts. Macquarie analysts cheered an unexpectedly good performance in Virgin’s international operations, which swung to a small underlying profit.
Thomas says he is applying to Virgin one the biggest lessons from his work in the US: that airlines can’t turn a profit just selling tickets. They need to squeeze revenue out of customers in other ways.
The “ancillary revenue” cash stream Thomas pried open now earns $12 billion for the US airline industry a year. But he’s quick to paint it as a way to give passengers more choice, rather than for airlines to gouge customers.
About three-quarters of ancillary revenue in the US comes from “enhancements”, such as extra leg room, priority security screening and lounge access, while only a quarter comes from “takeaways” such as bag charges, he says.
Thomas has started making moves to “extract the right economics” from Virgin passengers, last month revealing a new class called Economy X, which will be rolled out on all 75 of its Boeing 737 workhorses. For $29, passengers will get more leg room, reserved overhead baggage storage and priority boarding.
Thomas was behind a similar product on JetBlue, a US carrier about the same size as Virgin. Those seats generated $US228 million ($300 million) in revenue for JetBlue in 2015.
“If you look at the economy cabin there’s probably 15 different segments of people – young couples, honeymooners, retirees, families with kids, singles, corporates,” he says.
“They’re all flying for very different reasons but the airline industry historically has said, ‘well, because you’re flying in economy, we’re going to treat you all the same’.”
“If you actually realise what people want and actually give it to them, they’re actually willing to pay you more for it,” he says.
Facing external headwinds, Thomas says Virgin has moved sensibly by cutting underperforming routes domestically and shifting its international network away from Europe and the Middle East and towards North America and the lucrative China market, with flights starting to Hong Kong in July.
Investment in a new business class product is winning premium fares, he says, somewhat off-setting softer yields in the back of the plane while a savings drive – including a 10 per cent cut to management jobs – is on track.
Borghetti, who transformed Virgin from a low-cost carrier to a full-service airline going head-to-head with Qantas, marked seven years in the top job at Virgin earlier this month.
The average CEO tenure in Australia is 5.5 years, according to PwC, and Thomas’ headhunting from the US sparked immediate speculation that he was being groomed for the top job.
If Thomas does have eyes for the top job, he’s not giving anything away.
“I’ve got my hands full at the moment and I’m having a lot of fun at the moment,” he says. “Lets keep it at that.”
The reporter travelled to Los Angeles with John Thomas as a guest of Virgin Australia