Virgin Australia posts first quarter loss as subdued domestic market hits revenue

Virgin Australia says domestic conditions are subdued. (Rob Finlayson)

Virgin Australia says it is focused on cost-cutting and “disciplined capacity management” after slumping to a 2016/17 first quarter loss amid a sluggish domestic market.

On Wednesday, the airline group reported a statutory loss after tax of $34.6 million for the three months to September 30 2016, compared with a statutory profit after tax of $1.7 million in the prior corresponding period.

Virgin said the first quarter result was impacted by restructuring charges from its Better Business program, which aims to cut costs through the reduction in fleet types and improving productivity across the airline group.

The company was also in the red on an underlying basis, which removes one-off items and is regarded as the best indicator of financial performance. The company posted an underlying loss before tax of $3.6 million in the 2016/17 first quarter, compared with underlying profit before tax of $8.5 million in the prior corresponding period,

“The result was impacted by subdued industry trading conditions during the quarter, particularly in the domestic market, which affected revenue,” Virgin said in a statement on Wednesday.

Virgin’s domestic network grew capacity, measured by available seat kilometres (ASKs), by a slender 0.6 per cent in the quarter, while demand, measured by revenue passenger kilometres (RPKs) was up 4.4 per cent. As a result load factors improved 2.9 percentage points to 77.6 per cent.

The company’s low-cost unit Tigerair Australia posted a 30.4 per cent rise in ASKs due to the start of flights to Bali from Adelaide, Melbourne and Perth earlier in 2016, with RPKs up 34.7 per cent in the quarter and load factors 2.8 percentage points higher at 88.4 per cent.

Virgin’s international flying was impacted by the transfer of some Bali services to Tigerair and the suspension of Sydney-Abu Dhabi services for much of the quarter due to the refurbishment of its Boeing 777-300ER fleet with new B/E Aerospace Super Diamond business class seats, a refreshed premium economy cabin and a new Panasonic inflight entertainment system.

As a result, Virgin’s international ASKs were down 13.1 per cent in the quarter, with RPKs 13 per cent lower. Load factors were steady at 84.8 per cent.

“Capacity is being actively managed in response to the trading environment,” Virgin said.

“The group will continue to exercise disciplined capacity management in line with trading conditions.”

As part of efforts to improve its balance sheet and reduce costs, Virgin is withdrawing all 18 Embraer E190 jets and between four and six ATR 72 turboprops over the next three years.

The airline group’s low-cost unit Tigerair Australia will also transition from Airbus A320s to Boeing 737-800s during that time.

Moreover, the company was targeting improving operating efficiencies in crew and ground operations, as well as in maintenance, engineering, procurement and its supply chain.

Virgin said cost per ASK decreased compared with the prior corresponding period, without providing details.

“The program is already generating savings in the 2017 financial year and the group expects to deliver net free cash flow savings increasing to $300 million per annum by the end of the 2019 financial year (on an annualised basis),” Virgin said.

“The group continues to drive structural change in its cost base through ongoing cost-saving activities and new efficiency initiatives under the Better Business program. This includes the fleet simplification program and organisational rightsizing.”

Meanwhile, Virgin said it had “accelerated” its fuel hedging program to take advantage of lower fuel prices. It said 90 per cent of the airline group’s expected fuel needs were already locked in for 2016/17, while hedging for the first half of 2017/18 was already underway.

Virgin began issuing quarterly updates some years ago in line with one of its major shareholders Singapore Airlines (SIA), which is due to report its first quarter results on Thursday.

On Monday, Qantas reported a three per cent decline in revenue across the airline group to $3.98 billion for the three months to September 30 2016, compared with $4.11 billion in the prior corresponding period.

Meanwhile, unit revenue, measured by revenue per available seat kilometres (RASK), fell 5.5 per cent in the quarter.

Qantas said the result was due to “increased competition on international routes and a subdued domestic demand environment in the first two months of the year”.

 

Australian Aviation

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