Borghetti says demand gap closing

The softening in the national economy, coupled with a weaker Australian dollar and the huge influx of additional seats in the local and international markets pushed Virgin Australia to a statutory net loss of $355 million in 2013/14.

It was, Borghetti says, one of the most difficult operating environments in the history of Australian aviation.

Although Virgin declined to provide earnings or capacity guidance for the current year, citing an uncertain economic environment, Borghetti says there may be some light at the end of the tunnel with supply coming closer to matching demand.

“It is very hard to see beyond six months to be frank but certainly from what we are seeing now the two lines appear to be getting closer,” Borghetti told reporters at the company’s full year results presentation in Sydney on Friday in response to a question.

“Clearly the market is still going at about three or 3.5 per cent and if you see capacity growing at a rate less than that then the gap gets smaller.”

“But there is a hell of a gap.”

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Underlying profit before tax, with was regarded as a better indication of the airline’s financial performance, came in at a $211.7 million loss, broadly in line with market estimates of a $210 million loss.

Revenue rose 7.1 per cent to $4.31 billion, Virgin said on Friday.

Virgin has added domestic market capacity, such as by replacing 176-seat Boeing 737-800s with Airbus A330-200s fitted with 278 seats on routes from Perth to Australia’s east coast capitals, as it chased the corporate travel market.

Meanwhile, Qantas and Jetstar responded with more flights and additional frequencies in a move that was described in the past as maintaining a 65 per cent “line in the sand” market share, but was now talked of as a way to keep the Qantas group’s network and schedule advantage over the opposition.

Qantas has flagged near zero domestic capacity growth for the first half of 2014/15.

Virgin Australia’s domestic operations suffered an earnings before interest and tax (EBIT) loss of $86.9 million in the 12 months to June 30 2014, compared with a $2.3 million loss in the prior corresponding period.

Meanwhile, its international operations swung to an EBIT loss of $80.2 million, from a profit of $8.3 million a year ago on the back of weakness on routes to Bali and Phuket.

On a positive note, Virgin’s proportion of revenue from the corporate and government sector to 25 per cent, and the goal was to hit 30 per cent by 2016/17. Yields – or average airfares per passenger – rose 1.2 per cent.

On the back of last year’s capital raising that resulted in its airline partners – Singapore Airlines, Air New Zealand and Etihad – taking seats on the board, Virgin made a further move to shore up its balance sheet on Friday with the partial sale of its Velocity frequent flyer program to fund manager Affinity Equity Partners.

The 35 per cent stake was expected to bring in $336 million to Virgin’s coffers and reduce Virgin’s lease-adjusted balance sheet gearing by eight per cent. It also valued the frequent flyer business at $960 million.

“Critically important, going forward, optimising the balance sheet will be central to our strategy,” Borghetti said.

Velocity currently had 4.5 million members, with a target of having seven million members by 2016/17.

The move to sell part of Velocity was in contrast to Qantas’s decision not to offload a stake in its Qantas Loyalty division, although Borghetti said the two situations were different.

“In our view, the other program has reached maturity. Ours has not,” Borghetti said.

“Ours is only just taking off and what we want to do is make it take off a lot faster and turbo charge its development.”

The 2017 targets for Velocity membership levels, corporate and government revenue and yield improvement were part of Borghetti’s Virgin Vision 2017 for the next three years.

“We have invested in order to grow and to ensure a strong future for the business,” Borghetti said.

“We are focused on achieving profitability in financial year 2017.”