The consumer take away from this morning’s Virgin Australia first half financial briefing is that profitable competition will continue to rule on domestic routes, at least for the time being.
For investors, the key messages include a much higher benefit from reduced oil prices assuming current lower levels continue in the second half of the financial year ending 30 June.
Virgin Australia’s CEO John Borghetti said the modest $3 million benefit from less expensive fuel in the 31 December half could become a $50 million benefit taking into account its hedging activities in the second half.
A second signal to investors this morning was that the now record levels of restricted and unrestricted cash reserves held by the group might be applied in part to refinancing some debt.
(The full ASX filing for the December half for VAH can be accessed here.)
However Mr Borghetti and his chief financial officer Sankar Narayan kept the competitor Qantas in the dark as to amounts and timings.
Mr Borghetti also signaled some major initiatives on international routes by Virgin Australia, describing that part of the business, which is 14 percent of the whole, as “underperforming.”
“We have major initiatives we are working on that will get international back on track” he said.
While he didn’t give away the details in advance he did refer several times to the particular challenges the group faced on the shorter haul routes to Asia.
The industry for some time has speculated as to how Virgin Australia the group could exploit the Australian flag carrier status that now applies to Tigerair Australia following VAH’s purchase of all of the low cost franchise last October.
That speculation has been encouraged at times by Virgin Australia. The industry is on the edge of its seat, so to speak, waiting to see how Tigerair Australia could variously take on AirAsia, as well as Jetstar, on routes suited to its single aisle A320s which could be deployed on flights to Bali as well as to New Zealand, or to Fiji and other south Pacific destinations.
Virgin Australia gave positive but unspecific guidance that the current second half of this financial year will be an improvement over the same half last year.
It expressed caution about consumer confidence as well as the immediate future for movements in the oil price and the falling value of the Australian dollar, the double barreled factors that could work in tandem to improve airline finances, or against each other, to diminish the net benefit.
Mr Borghetti said that business travel activity remained a plus for Virgin Australia, where it was continuing to win market share from Qantas, and where business travel demand overall was healthy.
However he pointed to the leisure market activity as a concern, with subdued consumer confidence (which contributed to an overall 0.7 percent decline in passenger numbers in the December half. )
As to Tigerair Australia becoming sustainably profitable, he said the turnaround to a nominal profit in its second quarter results encouraged him to expect it would achieve that status even sooner than the end of 2016 as previously outlined.
He indicated that Tigerair’s Australian operations had achieved a remarkable turnaround in financial performance even during the current period of subdued leisure travel demand.
For those looking forward to the new business class product in Virgin Australia’s A330 fleet, that would not be introduced until the middle of the year instead of from late next month.
But it will nevertheless be completed by August, the original target.
“In all of these programs there are always some issues you find along the way that you need to adjust, but it’s not just issues” Mr Borghetti told the briefing.
“You also find some things you can make a little better, so you take the time and tweak that.”
He said “We do have a date that we want to launch it, but we want to make a big song and dance about it, so we’re not going to reveal it today.”
The installation of the new business class product in Virgin Australia’s Boeing 777-300ERs, together with a new premium economy cabin, is unaffected by the A330 delay, and is on schedule for the end of this year.
Mr Borghetti wouldn’t be drawn about the continued use of the 777s to Abu Dhabi, other than to say that the alliance on that route with major shareholder Etihad continued to provide substantial benefits to Virgin Australia and its customers.
He said the new business class product would be the best on the Australia-US routes, a comment given context by the Qantas decision not to upgrade its business class cabin on its A380s to the standard of the new product now being deployed across its large fleet of domestic and international A330s.