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financial analysis

Mar 21, 2016

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Is a single person entering an apparently deserted premium lounge a snapshot of Virgin's problems?
Is a single person entering an apparently deserted premium lounge a snapshot of Virgin’s problems?

This is an awkward moment for Virgin Australia in that today’s announcement of a $425 million unsecured loan from its rich and powerful airline backers buys it more time to fix its finances.

That’s a high price for no guarantee of an acceptable outcome as well as a confirmation of a persistent problem.

It is almost six years since the company under former Qantas senior executive John Borghetti took it to big red with an ambition to become a higher quality Big Red.

That’s a bit too long to make sense, yet the progress it had made toward what could be just a mirage on the highway to the future cannot be discounted.

For all of those wins, well described in this AFR column by Jamie Freed, the entrenched incumbency of the dominant Qantas brand is dragging Virgin back to earth from the heights it has been climbing toward.

Consider what Virgin achieved in the last year, including the first half of this financial year. It made much more money that it had so far as the Virgin Australia brand, often charging more for its product than Qantas and despite carrying fewer passengers than previously, because it was successfully establishing itself as a preferred service for a core of regular flyers who thought the premium was well worth it.

But has it paid too much to win what looks like a shrinking part of the overall market, where corporate account managers tend to channel Mr Scrooge more than before, and growth may well belong more to ordinary people deciding they can afford to fly much more than before?

That’s a set of issues that also affect Qantas, but it seems from the financial results, less so than is the case for Virgin. Neither Virgin nor Qantas run their loyalty ‘schemes’ as being rewarding anymore, but as rule ridden points confiscating data base marketing programs that quite possibly annoy people more than they recruit them. The hostile reduction in benefits available through bank issued credit cards hasn’t helped them either.

The market is getting harder nosed, although the notable differences in the quality and customer experience offered (on a good day) by their respective low cost brands of Jetstar and Tigerair may not quite be working out the way either Qantas or Virgin intended.

Tiger has undergone an exceptional turnaround in viability, but unless Virgin decides to greatly expand its low fare brand’s fleet and reach, it won’t deliver the sort of proportionate support to its owners that Jetstar does to Qantas investors.

Disaffection with low cost travel, and in general terms, more competitive fares from Qantas, may be adding to Virgin’s struggle to win and keep good paying customers.  Presumably, Qantas and Virgin are investing a lot of time and effort into trying to understand these market dynamics, but the question for Virgin is why the competitor with a shade less premium in its premium lounges, and business and full fare economy offers, is nevertheless on top and in charge.

The painful question for Virgin Australia is whether it needs to reconsider its product strategy and redefine its concepts of where growth, relevance and sustained profitability reside. Its critics also need to recognise that they don’t have any easy answers to offer either.

Air travel is entering a period of renewed disruption. Stripping amenity and quality off existing full service economy products might only result in people reconsidering the declining passenger experience in general, and deciding they don’t need to be frequent flyers after all.

Ben Sandilands — Editor of Plane Talking

Ben Sandilands

Editor of Plane Talking

Ben Sandilands has reported and analysed the mechanical mobility of humanity since late 1960 - the end of the age of great scheduled ocean liners and coastal steamers and the start of the jet age. He’s worked in newspapers, radio and TV in a wide range of roles as a journalist at home and abroad for 56 years, the last 18 freelance.

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4 comments

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4 thoughts on “Virgin Australia’s pursuit of excellence gets another top-up

  1. Dan Dair

    It seems like quite an odd scenario….
    Virgin Blue was so successful that it effectively forced Qantas to create JetStar,
    yet, at a time when most airlines have been cutting ‘benefits’ Virgin have gone the other way.

    As you say Ben,
    clearly they’re pursuing a market-model which they think / believe will yield profitability & the latest figures support that point-of-view,
    but rather like the QF statement from a couple of years ago it appears that Virgin would be profitable if it didn’t have all these massive debts.?

    Perhaps TigerAir will start to feature on more routes, including possibly extending the aircraft utilisation by duplicating VA routes at less-ideal departure times.?
    That way they’d be offering low fare options without poaching their own higher-yielding customers away.?

  2. ghostwhowalksnz

    Im curious as to why Virgin didnt succeed with ‘best Italian furniture in its lounges approach’ as opposed to the Southwest model which made it the largest US only airline ( and only consistently profitable one)
    Could it merely be because its leadership and shareholders were full service background and couldnt understand or make work the US LCC model.
    The me it seems that the money or whatever has allready been lost because if it were a true loan it would be from the people who do that full time, ie bank of financial entity.
    It does seem a rather contrast that Qantas is returning money to its shareholders ( probably by increasing its borrowing) while Virgin is ‘taking money’ from its shareholders.
    I bet Joyce is saying ” let them try and copy THAT”

  3. Crocodile Chuck

    From the linked article in the AFR:

    “in the intervening period, Qantas has fixed its balance sheet with help from cost-cutting, better use of assets and the lower fuel price”

    To be more accurate:

    “in the intervening period, Qantas has fixed its balance sheet with help from cost-cutting, better use of assets and the lower fuel price, & its fuel surcharge levy”

    FIXED!

  4. endeavour.paul@gmail.com

    The latest news:

    Virgin Australia in a trading halt on the stock exchange whilst Air New Zealand mulls over divesting some or all of their holdings. Christopher Luxon to depart the Board of VA immediately.

    Sounds a bit like Air NZ got outvoted by the other owners over something important. My Air NZ shares are rising at the prospect of getting out of VA!

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