Efficient turbo props like the ATR (foreground) are being cut back at Virgin somehow
Efficient turbo props like the ATR (foreground) are being cut back at Virgin

Virgin Australia’s third quarter financial update this morning indicates that it is cutting back deeply with a five percent reduction of capacity halfway through its final quarter for this financial year, but mainly in regional services.

It has also revised its guidance for the full year to 30 June, saying it expects to make an underlying profit before tax of between $30-60 million, an improvement of between $79-109 million on financial year 2015. There was no explicit guidance as to a statutory result in this financial year.

On a year on year basis, the Virgin Australia group has delivered a token statutory profit after tax of $3.7 million.

While it claims an underlying profit before tax of $18.6 million for the quarter, a 16.2 percent improvement compared to the same quarter as year ago, it has posted a statutory loss after tax of $58.8 million in the same period, a deterioration of $30.5 million.

In the official ASX update Virgin Australia CEO John Borghetti says the ‘challenging environment’ in which the group is operating “has been impacted by weak consumer demand and sentiment, [and] uncertainty around the federal election and the resources sector downturn.”

Commentary

The structural difficulties referenced by Virgin Australia are manifestly correct.

However the same difficulties apply to its competitor Qantas, which nevertheless benefits from established brand perceptions or the rewards of incumbency.

According to those who study what is known about their respective hedging activities, Qantas has adopted a more intelligent and agile handling of fuel and currency management, and gained a significant benefit over Virgin over an interval when a decline in the purchasing power of the Australian dollar paralleled plummeting values of oil benchmarks set in US dollars.

The abrupt capacity cull announced midway through this quarter means Virgin’s solution will substantially benefit its Qantas group competitor.

Those with medium term memories will also known that when Virgin Blue uprooted its previous, and more profitable business model to become Virgin Australia, the transition to an radiant future built on taking away a substantial part of the Qantas juggernaut’s lucrative managed business travel accounts was to take about three years.

It is almost five years since that transition and restructuring began, and there is no sign that Virgin Australia will ever deliver the vision in the manner that stakeholders need, which is in real profits that match the rhetoric of 2010, and of every subsequent update until the somewhat subdued tones of this morning’s notification.

If Virgin Australia can’t do it now, when will it ever deliver? The overhang of unrealised assurances of success and thus abundant profitability weighs down on Virgin Australia, and clearly underlined the frustrations of Air New Zealand, which is trying to unload its 25.9 percent shareholding.

Virgin Australia has built a superb product offering, in a market in which it has a superb competitor in Qantas. Its management team and board would be entitled to feel disappointed and frustrated that their outstanding efforts have not delivered outstanding rewards, nor given their rhetoric of the past, any convincing indication that they will deliver any suitably outstanding rewards in the future.

Maybe it’s time for some deep and serious reappraisals to occur. Maybe even time to consider doing what Virgin America recently did, and find a buyer for the entire business or key components, notwithstanding some of the regulatory approvals that would have to be satisfied.

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