No doubt to the dismay of those behind rumours that Virgin Blue is variously poised between imminent closure, or bleeding cash at a rate not seen since Ansett went down, the airline today posted disappointing but far from terminal results for the 6 months to 31 December 2008.
The headline numbers in the real announcement, the one lodged with the Australian Stock Exchange, are ugly, but nothing was going to look pretty in relation to a half year in which fuel reached record highs, only to collapse almost as quickly as the Australian dollar, wiping out much of the benefit that even then would only have been partly reflected in the unwinding of hedge positions.
In the half year, Virgin Blue lost a net $101.4 million, a huge turnaround from a net profit of $113.3 million in the six months to 31 December 2007.
The underlying profit ( or everything Virgin Blue is good at doing as a domestic airline minus ‘other activities’) of $60 million was also less than one third as impressive as the $193.3 million the group pointed to in the corresponding previous half year.
On the cockpit display of Virgin Blue management, to use a flying metaphor, there are some obvious red warning lights. The net assets of the group fell to $604.8 million compared to $925.3 million on 31 December 2007. Correspondingly, the net tangible assets per ordinary share were at 53 cents at the end of last year versus 81 cents a year earlier. The cash flow statement in the lodged report must be ready carefully in relation to other notes in the interim results, with Godfrey pointing out that some of the new reporting requirements used within it are more likely to require interpretation by corporate lawyers than chartered accountants.
Where Virgin Blue has an advantage over its adversary is that it doesn’t need to roll over any finance or raise cash through equity placements for at least two years. It has put 360 seats into its new Boeing 777-300ERs which start flying to Los Angeles this Friday, giving it a claimed operating cost advantage over the Qantas A380, in which only 450 seats have been installed. It says that its high seat count means that in terms of fixed costs it can beat a giant Airbus where a competitor has chosen to fly a comparatively low seat count. The truth in these claims has to await both types being in service for longer, and even then the outcome will depend on how many of those seats each airline fills and at what price.
Virgin Blue highlighted the $60 million underlying profit on its media release this morning, apparently in the deluded belief that finance journalists wouldn’t be in the room or hanging off the end of teleconference lines.
The real loss didn’t appear, and then only in a table, until page two of the media handout. This was like the last day of Tesna and Ansett Mark 11 all over again, with media managers issuing a press release about an exciting new menu for the about to be reborn carrier less than one hour before Lindsay Fox and Solomon Lew capitulated to reality almost seven years ago to the day.
Except that Virgin Blue has a long way to fall to replicate the Ansett fiasco, and does in truth have considerable underlying strengths and a very strong management that hasn’t so far blinked.
Whether it, or for that matter, Qantas, is to blink will clearly depend on whether the early overseas signs of a 20% decline in passenger numbers spreads to Australia. That’s when the tears might start to flow.
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