Virgin flies into trouble as leisure travel hit
A day after Qantas posted a modest profit, Virgin slumped to a $98 million annual loss - from a $23 million profit a year earlier - due to stiff competition in the domestic market, the disruptions caused by a new reservations system and the carbon tax. Revenue rose 2 per cent to $4 billion for the year to June.
The airline's underlying pre-tax loss of $35 million was better than market consensus. The figure did not include one-off restructuring costs and a loss from Skywest, the West Australian airline it bought earlier this year.
Virgin's three major shareholders - Air New Zealand, Singapore Airlines and Etihad - have thrown their weight behind the airline by providing a $100 million one-year unsecured term-loan facility.
It has helped ease fears Virgin will have to resort to an equity raising.
Virgin chief executive John Borghetti said the business travel sector was continuing a "good trend" evident over the last few months but the leisure segment was "quite fragile and it does need stimulating".
"Hopefully, once the election is out of the way there will be more confidence out there," he said.
Mr Borghetti said Virgin did not plan to draw down on the new funding facility "but it is nice to have it there".
White Funds Management portfolio manager Will Seddon said the underlying businesses of both Virgin and Qantas seemed to be "going backwards at a pretty rapid rate".
"They seem hell bent on continuing to add capacity when demand isn't growing quickly enough."
Virgin is holding firm on plans to boost capacity in the domestic market by up to 4 per cent in the first half, but it has declined to flag the likely increase in growth for Tigerair.
Virgin's domestic operations - the core of its business - made a pre-tax loss of $44 million for the year, compared with a $93 million profit previously. That included a $9 million loss from Skywest.
Its international business's pre-tax earnings also slipped to $8 million, from $24 million in 2011-12.
While the annual results were "disappointing", Mr Borghetti emphasised that Virgin had fast-tracked a reshaping of its business over the past year, which included the new booking system. "We did this during the most aggressive competitive period probably in the last two decades in Australian aviation," he said. He pointed out that yields had grown in each month of the last quarter due to it attracting more business travellers.
Despite Tigerair's losses running at $60 million a year, Mr Borghetti said he was confident of turning around the budget airline in which Virgin has a controlling stake within three years. Tigerair's long-term growth plans entail a doubling of its size by 2018, which will prompt a strong response from Jetstar.
Like Qantas on Thursday, Virgin has not given guidance for the new financial year due to the "uncertain economic environment". It also did not pay a dividend.
Macquarie Equities analysts said Virgin's cash burn remained a concern given the direction of fuel prices and the value of the Australian dollar. While the building blocks were in place, the analysts said "execution is yet to be seen in the form of improved results".
Frequently Asked Questions about this Article…
Virgin Australia reported a $98 million annual loss (down from a $23 million profit a year earlier). Revenue rose about 2% to $4 billion for the year to June. The underlying pre-tax loss was $35 million (excluding one-off restructuring costs and the Skywest loss). Domestic operations had a pre-tax loss of $44 million, while international pre-tax earnings slipped to $8 million.
The loss was driven by stiff competition in the domestic market, disruptions from a new reservations system, costs associated with the carbon tax, and losses related to the Skywest acquisition. Tigerair’s ongoing losses and capacity expansion amid fragile leisure demand also contributed.
Air New Zealand, Singapore Airlines and Etihad provided a $100 million one-year unsecured term-loan facility. Management said it does not plan to draw down the facility but the backing has eased concerns about the need for an equity raising, which is reassuring for investors.
Tigerair is running losses of about $60 million a year. Virgin, which has a controlling stake, aims to turn Tigerair around within three years and plans to double its size by 2018. That expansion will intensify competition with Jetstar and adds near-term execution and cash‑burn risk for Virgin investors.
Virgin plans to boost domestic capacity by up to 4% in the first half. Analysts have warned that adding capacity when leisure demand is fragile could press margins and cash flow, so investors should watch capacity moves closely.
No. Virgin did not give guidance for the new financial year due to the uncertain economic environment, and it did not pay a dividend for the reported year.
Macquarie Equities flagged cash burn concerns given fuel price movements and the Australian dollar. Asset managers such as White Funds Management expressed worry that both Virgin and Qantas are adding capacity while demand is not growing fast enough, which could worsen profitability.
Yes. Management said the business travel sector was showing a strong trend and yields grew each month of the last quarter as the airline attracted more business travellers. Executives also highlighted that the business has been reshaped over the past year, including implementing a new booking system.
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