financial analysis

Feb 19, 2015

Virgin Australia flags major international initiatives

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

Ben Sandilands — Editor of Plane Talking

Ben Sandilands

Editor of Plane Talking

Virgin Chiefs John Borghetti and Sankar Narayan playing poker with strong hands

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.

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4 comments

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4 thoughts on “Virgin Australia flags major international initiatives

  1. ghostwhowalksnz

    A note of caution about so called cash or cash equivalents. These are likely to be prepaid tickets. Its less than 2 months of ticket revenue.
    Generally large businesses use the term loosely, Boeing for instance calls its completed planes cash, wether they are either a few weeks away from being paid for (787, 777, 737) or the terrible teens for the 787s that are unsaleable on normal terms.
    General motors had billions in ‘cash’ even when it went into bankruptcy, as they have 2 -3 months of completed cars in delivery channel, which nominally can be turned into cash

  2. wildsky

    Hey Ben,

    Could you just explain how you think this works:

    “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.”

    I didn’t realise that “Australian flag carrier status” is bestowed by commercial transactions, especially when the buyer is majority foreign-owned…

    [It’s a consequence of Australian ownership and control. Go back over the many many reports on this, although you may not find them convincing in their detail. If (shudder) Sandilands Air or Wilksky Air (not really a good name for an airline) was 51% owned by Australian shareholders and managed in Australia through whatever clever structure we used to create such a legal result, we are flag carriers, should we wish to fly internationally and the relevant traffic treaty has capacity.

    Qantas has now seen the “virtues” of this, in so far as it has made no secret of pursuing a similar structure to spin off 49% of Qantas International to a foreign investor courtesy of the recently amended Qantas Sale Act.

    I suppose one way of looking at this is to conclude that if Australian investors aren’t going to support an Australian controlled airline then who cares where the money comes from, well, sort of, you know ….. Pyongyang need not apply!

  3. ghostwhowalksnz

    wildsky, surely you know that Qantas has a majority of its shares beneficially owned overseas. THose mostly private equity/investemnt funds merely have a plaque on a local accountants door for the shelf company they control.

  4. wildsky

    The problem for Tigerair is that, unlike the in-specie closed trust arrangement that VAH set up for VAIH before the VAH ownership crossed the 49% limit, that option is no longer available because VAH is 85% foreign-owned. I doubt that DIRD are willing to collude with VAH to avoid the Air Navigation Act (again)- too many watchers!

    Ghost, please don’t call me Shirley…

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