Virgin warns managers to cut costs

Virgin Australia's senior executives have been directed to keep a closer eye on costs, including "off-site entertainment", in a memo that highlights the tough conditions gripping the industry.

Following a profit downgrade in May, Virgin chief financial officer Sankar Narayan issued the memo to the senior management team about the need for "cost-control measures". In the leaked directive, Mr Narayan warned managers not "all cost controls are being adhered to" and it was "imperative that our business continues to sustain cost discipline during periods of growth".

Mr Narayan told executives any expenditure that was "not essential or operationally critical" should be removed from the end-of-year forecast.

"We should continue to look across our business for cost savings opportunities and start pushing savings down the line," he said. "Furthermore, we should investigate areas that have previously been 'politically unfeasible' or consider 'sacred cows'."

The latest cost-cutting measures included not automatically replacing full-time staff who had resigned, unless they were from "operationally or safety critical" roles, and reducing consultants and contractors. He also called for fewer "off-site gatherings at external venues" and "off-site entertainment [such as] elaborate team dinners".

Investors have been wary of Virgin's ability to keep costs under control while it turns itself into an upmarket competitor to Qantas. The two airlines have been engaged in a hard-fought contest in the domestic market, which is the core of their earnings.

While growth in capacity in the domestic market has slowed in the second half, the intense competition will still weigh heavily on both airlines' full-year earnings.

A Virgin spokeswoman said the airline needed to maintain its low cost base. "Making sure we have strong financial discipline in place is essential, particularly in a tough economic environment," she said.

On Thursday, analysts from CIMB reduced their recommendation on Virgin to "underperform" from "neutral", amid concerns Tigerair Australia will be a drag on its earnings. Virgin completed the purchase of a 60 per cent stake in the budget airline early this month.

The analysts believe it will take three years for Tigerair to break even. They also said Virgin appeared to have "misread market conditions" earlier this year by pursuing higher yields - or return on fares - instead of filling seats through more aggressive pricing.

The market expects Virgin to post a pre-tax profit of $40 million for the year to June, and Qantas $91 million.