Virgin Blue half yearly profit drop in line with forecast

written by australianaviation.com.au | February 23, 2011
(Andrew McLaughlin)

Virgin Blue Holdings Limited has reported an underlying net profit before tax of $72 million, down almost 63 per cent, while posting a net profit after tax of $24 million (down 8.5 per cent), for the half year ending December 31.

The company says the underlying and net profit results were in line with guidance it announced to the market on January 25. VB’s revenue increased 11.8 per cent to $1.69 billion over the previous half year.

Virgin Blue CEO and managing director John Borghetti said the results demonstrated “the core Virgin Blue business is sound”, taking into account the current spate of changes affecting the airline. This includes a number of codeshare deals and strategic alliances with Etihad, Air New Zealand and Skywest airlines.

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“This is a very solid result considering the impact of a number of significant one-off factors, including the Navitaire IT system outage, restructuring costs and unusually severe environmental events in Australia and New Zealand,” Borghetti said, noting that last year’s October Navitaire outage had an estimated pre-tax profit impact of $15-20 million.

A further blow came as Virgin Blue issued a full year profit downgrade on January 26, blaming the impact of the Queensland floods and a slowdown in consumer spending for slicing an expected $40 million in revenue for the current financial year.

“That being said, we have seen yield improvements in both short and long haul, with long haul in particular seeing a strong increase,” Borghetti noted. “With a $17 million improvement in its operating position during the first half, our long haul business is on track for reaching close to breakeven by year end. This follows the cancellation of non-profitable routes, changes to current schedules aimed at profit maximisation and the beginning of the benefits flow through from our international alliance strategy.”

VB’s short haul operations posted earnings before interest and taxes (EBIT) of $102 million, while the “long haul business is on track to reach close to breakeven at the EBIT level for the full financial year”. VB’s cash balance at the end of the half year remained a respectable $772 million, with “funding secured for 90 per cent of all aircraft deliveries scheduled up to the end of FY12.” Those new aircraft deliveries will include 18 recently announced ATR72 turboprop aircraft to service VB’s new strategic alliance with Skywest airlines, and two Airbus A330s. Both aircraft types will start being rolled out by mid 2011.

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Borghetti said the operating environment, in particular the lack of growth in consumer discretionary spending and continuing uncertainty in the economic outlook, validated Virgin Blue’s strategy to reposition the Group to capture a larger share of corporate flyers while maintaining a strong presence in the leisure market. “We have continued to invest in our Game Change Program, adding the management skills necessary to take the Group to the next level. In addition, we have gained approvals for our alliances with Etihad and Air New Zealand to enhance our international network and announced a strategic alliance with Skywest covering a codeshare and wet lease turboprop agreement”, he said.

VB predicts a “challenging” outlook for the second half the year, with both domestic and international sectors still in a state of economic recovery after a difficult start to 2011. The airline predicts the major challenge of rebuilding Queensland tourism after the sunshine state’s recent floods and cyclone Yasi to take some time. Fifty per cent of all Virgin Blue flights are scheduled within, into and out of Queensland, meaning the airline’s financial impact from the state’s recent spate of natural disasters is expected to be in the order of $50 million.

In light of this, VB’s domestic capacity growth remains under review and the company retains the option of reducing capacity below the full year forecast of six to eight per cent if required. Rising fuel prices are also expected to impact on passenger fuel surcharges, fare increases and fuel hedging stategies. Borghetti again highlighted Virgin’s ‘Game Change Program’, which is set to be a vital part of the airline’s strategy to respond to “changes in future market conditions and ensure a stable and solid future for the Virgin Blue Group”.

“As we roll out the program, our efforts will be directed toward optimising our domestic network, building an international network of airline partners and diversifying our revenue base by increasing our share of the corporate market,” he added. “We are on track to significantly strengthen our position in both leisure and corporate markets in FY12.”

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