In the big picture of its half yearly financial results released this morning Virgin Australia has managed to lift fares and operating efficiency to levels that go way above the net exchange rate adjusted benefits of cheaper fuel.
While it might be wise to wait for forensic studies by financial analysts, several broader points can be made from the figures and presentation lodged with the ASX this morning.
The first is that cheap oil is being overdone in some commentary. With the help of an expert who doesn’t have to worry about rushing into print, the notional $9 million benefit to Virgin for every $1 fall in the price of delivered fuel was devoured by the fall in the value of the Australian dollar.
Including an approximation for the impact on other lease, finance or hedge costs of a weaker Australian dollar, each cent that it fell took away something like $7-8 million of the benefits produced by cheaper fuel.
So to use a metaphor, to run up an elevator that was often going down, Virgin Australia’s team under group CEO John Borghetti, had to also make restructuring of the business (and charging more for fares) do some serious work.
In general terms, Virgin Australia’s first half 2015 results improvements come about 30 percent from less expensive fuel and 70 percent from doing things like migrating Tigerair’s lower back office costs into Virgin Australia functions, or flying jets more optimally, to use what seems to be a popular word in Virgin today.
Which is what seems to have done in five of the 18 Embraer E190s in Virgin Australia’s fleet, from which they will fly away to new owners by September. Although overall passenger numbers declined a little in the half year, there was much more success than decline on some routes where the result was the timetable needed a jet the size of a 737-800 instead of an E190. Bye-bye nice roomy E jet and hello full Boeing, where a late booking or lower fare means you get seated in the middle between two people bigger than you because hey, that’s what happens to indecisive cheapskates.
As Mr Borghetti said during the result’s media briefing, the E jets won’t be replaced by anything other than existing 737s working harder than before, which could be read as an indication that a capacity contest with Qantas is not likely for some time.
The Virgin numbers and methods also suggest that its experience with restructuring delivering more benefits than cheap fuel is very much like that of Qantas when it offered a dissection of its full year result to 30 June.
After Qantas reports it current half year results, on 23 February, it should become easier to see if each airline group is doing more or less of the same thing, or if one or the other is much better at it. But only up to a point, because the size and complexity of the Qantas group dwarfs the Virgin Australia group. There is no neat overlap for comparison purposes.
There are some other notable achievements in the Virgin Australia half year results. It lifted domestic yields by 9.1 percent, which in lay terms means the product and schedule is good enough to charge a lot more than before, or, the proportion of those paying its bargain fares has diminished compared to those where the price doesn’t matter nearly as much as the availability of a seat. Its domestic EBIT margin rose to 7.1 percent from 3.1 percent.
Virgin Australia’s wholly owned Tigerair low cost franchise is a much smaller operation than the parent company, but it lifted its yields by 12 percent, and its EBIT margin of 5.7 percent in the half compared to a negative -12.1 percent in the previous half.
The group also appears to have won some traction for its often derided new foray into air freight, with a heads of agreement for an exclusive five year deal with TNT from July announced this morning. Qantas will not be amused, but it still has Australia Post and other major clients the Virgins presumably stalk.
What does this means for travellers? Well , for those that spend their own money, it means you are unlikely to see your Virgin fares come down, unless you adjust your preferred flight times more to off peak, or feed yourself to the Tiger. It also means your flights may be fuller, and on some routes, the dreaded middle seat more likely.
On the other hand, in 2000, before Virgin Blue and Impulse wreaked havoc on the privileged and costly domestic market of those days, it was commonplace to spend $700 in economy for a return flight between Melbourne and Sydney, which without any adjustment for relative spending power, is probably more than most Qantas and Virgin economy class flyers would pay on those routes today.
Although today’s catering and seating arrangements on both major domestic carriers sometimes seem to be framed with a view to starving you into the space available.