As the heat goes out of the apparently dying embers of a capacity war with Qantas, and fuel prices sag to levels no-one in the airline game dared dream about even a few months ago, Virgin Australia is cautiously optimistic about the future.
In general terms. Summarising trends, hopes and hints is a hazardous activity for reporters as well as airlines, and the good indications that came out of the Virgin Australia group AGM in Brisbane today also deal largely with indications that should work well for the Qantas Group.
Virgin Australia CEO John Borghetti was guardedly upbeat in his comments to the media following the AGM.
In material terms, Virgin Australia is expected to be in underlying profit in the second quarter of this financial year.
Given that we are in the middle of that quarter ‘expected’ has a very good chance of meaning ‘is.’ Mr Borghetti also said Tigerair’s second quarter losses were expected to be halved in the period, indeed, the whole Tigerair Australia franchise should become a break even operation by end of FY16, as distinct, dare it be said, from a break operation.
What remains unclear is whether Virgin Australia’s improving profitability will be wiped out by Tigerair’s losses, even if they are smaller losses than before. That mightn’t yet be known yet with sufficient precision to even be included in guidance to the immediate future.
That answer will probably be delivered by the leisure sector, which generally speaking, is flat. If the leisure sector decides to fly more than it has been showing signs of doing so far in the peak leisure month of December, Virgin Australia’s owners might have a happy festive season, as might those holding Qantas stock given their exposure to the equivalent low fare brand of its Jetstar subsidiary.
John Borgetthi also had some luke warm water to toss over anyone who thought that dramatically reduced oil prices meant an immediate surge in profitability.
He made the point that with hedging in place, Virgin Australia doesn’t see the full benefit of lower fuel prices delivered to the bottom line for a period of time. Provided that the downward movement in fuel outpaced the downward exchange value of the Australian dollar, the net position for Virgin will indeed be positive.
“Expect to see a bigger benefit from this in the second half”, he said.
The very significant benefits that Virgin Australia sees from its success in growing its participation in managed corporate or governmental or institutional travel accounts is such that it now aims for deriving 30 per cent of its revenue from those sources by 2017. They were 10 percent of revenue in 2010 and are currently 25 percent, and they are a critical element in turning VAH around, not to mention giving business accounts real choice.
It is very clear from today’s briefing that the pursuit of the managed corporate travel account dollars is going to be the major battleground for Australia’s big two carriers for years to come.
Today’s briefing also kept the capacity and route expansion cards close to the Virgin bosum. Qantas would love to know how accurately it has assessed the cost reductions Virgin as a group will get from the complete integration of Tigerair’s support functions into its operations.
Needless to say, its CEO wasn’t saying. The only thing Mr Borghetti did say which might have caught its opponent’s attention was a fleeting reference to ‘when’ the Tigerair transaction (for $1 for the 40 percent currently owned by Tiger Airways Holdings in Singapore) would be completed.
He clearly wants to close that deal pronto.