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Virgin feels cost pressures – projects operating loss and sets higher fares

written by australianaviation.com.au | August 5, 2013
Virgin is forecasting a smoother landing in FY14. (Rob Finlayson)

Aggressive competition in the domestic market, rising operating costs, restructuring costs and investments in Skywest and Tigerair have resulted in Virgin Australia expecting to post a loss after tax of up to $110 million for the 2012/13 financial year.

In a statement to the Australian Stock Exchange, Virgin CEO John Borghetti said the company’s performance for the 2013 financial year had been impacted by a number of factors including “the difficult economic and competitive environment, one-off pre-tax restructuring and transformation costs and the carbon tax”. The company also blamed the transition to its new reservation system for it taking longer than usual to reconcile revenues.

“Although today’s update is disappointing and notwithstanding a challenging environment, we have made significant progress on the execution of our Game Change Program,” Borghetti said. “We now have the right platform in the Australian market to generate sustainable earnings benefits.”

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After its capacity spree to wrest marketshare from Qantas and its two major investments in Tigerair and Skywest, Virgin Australia said its full-year losses are anticipated to be around $100 million.

With those removed, Virgin would have still posted a trading loss of up to $50 million.

Virgin Australia also paid an estimated $50 million in carbon taxes during the year.

During the last financial year the airline increased capacity, but carried fewer passengers. The airline added 6.1 per cent in capacity on its domestic network, but carried 1.3 per cent fewer passengers. Internationally, Virgin fared better, recording passenger growth of 3.5 per cent against a capacity increase of three per cent. Across the network, Virgin’s average capacity increase was five per cent while carrying 0.7 per cent fewer passengers.

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Balancing this was an improvement in yields on domestic and international networks, the airline said.

Virgin will be keen to consolidate earnings from Skywest as a material contributor to the Group’s profits. However, with the addition of Tigerair to Virgin’s accounts during the current financial year, the historically loss-making budget airline stands to compound Virgin’s group losses unless a quick turnaround can be effected – something unlikely given the systemic issues facing the low-cost airline.

In response to its current financial situation, rising fuel prices and unfavourable exchange rates, Virgin has announced it will increase fares and international fuel surcharges. The airline said fuel costs had risen by 13 per cent.

Virgin Australia chief commercial officer Judith Crompton said of the fare increases: “As a result of the competitive environment, Virgin Australia has been unable to recover previous increases in fuel costs and is now facing higher fuel costs primarily due to the fall in the value of the Australian dollar.

“In making these changes, we have been very conscious of balancing our commitment to providing competitive fares with the operational costs of our business.

“We will continue to closely monitor fuel prices and consider increases or decreases to our fuel surcharges and fares in line with changes in market conditions”, Crompton said.

The following changes will apply to tickets sold from August 22. Long-haul International will suffer increases of between $25 and $65 depending on the class of travel and destination.

Short-haul International will get a three per cent increase in base fares on the majority of short-haul international routes, while domestic fares will suffer an average three per cent increase in domestic and regional base fares.

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3 Comments

  • Phil C

    says:

    Perhaps Ditch tiger domestic altogether ,absorb & rationalise staff, aircraft (or sell and or return the Tiger A320’s) and equipment into the Virgin brand & fold . Keep the Tiger AOC ‘s & overseas routes
    This would also free up various slots at Sydney & Melbourne which can only help Virgin fine tune schedules

  • Dee

    says:

    I agree with J.B. that the carbon tax is hurting not only VA, but a lot of Australian Company’s whose last quarter figures will soon be released, and will show how bad this tax is to Australian Business.

  • Freddie

    says:

    Despite all of the above the Virgin staff are running on empty. They have been constantly working beyond and above EVERYTHING to attempt to keep things running on an even keel. They aren’t robots and should be given a tad of consideration to be able to recoup before having to go back to work after impossible shifts. I feel that some Managers and departments should be given a good looking at….as they are no entirely blameless in this situation.

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