Much of Virgin Australia’s 2013/14 results presentation on Friday is expected to centre on the financial performance of its budget arm Tigerair Australia.
Virgin purchased 60 per cent of Tigerair Australia in October 2012 from Tigerair Holdings based in Singapore, which held onto the remaining 40 per cent.
The low-cost carrier has never made a profit in Australia since commencing operations in 2007 and struggled to achieve scale in the local market. Moreover, its standing in the community was severely damaged after the Civil Aviation Safety Authority grounded the airline for six weeks in 2011 due to safety concerns.
Since paying $35 million for Tigerair Australia, Virgin chief executive John Borghetti has become chairman of the Tigerair Australia board, new chief executive, Rob Sharp has taken the reins and the airline has rebranded from Tiger Airways to Tigerair. However, the latest financial accounts from Tigerair Holdings suggests that Tigerair Australia is still very much in the red.
While Tigerair Holdings’ latest financial results released in late July did not break out the financial numbers of the Australian unit, analyst estimates say Tigerair Australia lost about $29 million in the three months to June 30 2014. This amounted to a little over $2 million a week.
“Tiger Australia’s standalone performance should be a focus,” CBA Institutional Equities analysts Matt Crowe and Vana Makaric said in a research noted dated July 25.
Virgin Australia was expected to post a net loss after tax of $214 million for the 12 months to June 30 according to a median of five analyst estimates gathered by Australian Aviation. This compared with a net loss of $98 million in 2012/13.
In terms of underlying profit before tax, which the airline regards as the best indication of its financial performance, analysts tipped a loss of $210 million for 2013/14, compared with an underlying loss before tax of $35 million in the prior year.
CIMB analysts Mark Williams and Alexander Lu said how the airline was managing its costs, as well as the turnaround plan for Tigerair, were two areas of particular interest in the full year results.
“The key we see for VAH will be keeping its unit cost growth below that of yield growth, something it hasn’t been able to do over the past two years,” the pair said in a research note dated August 5.
“Improving the financial performance of Tigerair Australia is also critical given the rise in losses in recent quarters.”
The airline was also expected to update the market on its fleet plans, particularly the Airbus A330s that fly between Perth and Australia’s east coast capitals.
In early August one of Virgin’s older A330-200s that it acquired from Emirates, registration VH-XFA, was ferried to Singapore for what industry websites said was end-of-lease maintenance. A second ex-Emirates A330, registration VH-XFB, was expected to follow shortly, although a Virgin spokesperson declined to confirm the departure of the aircraft from the fleet.
However, Virgin has replaced some A330 services from Brisbane to Perth with smaller Boeing 737 aircraft, following a review of its network.
Meanwhile, Qantas has flagged zero capacity growth in the domestic market in the three months to September 2014.
“We believe the move to rationalise capacity in the domestic market by the major carriers is a positive step forward,” Deutsche Bank analysts Cameron McDonald and Entcho Raykovski said in a research note dated August 1.
“If successful, this may result in easing yield pressure.
“However, given the previous capacity growth within the system and low load factors we don’t see yields immediately improving – just easing the downward pressure.”
Analysts were tipping a tough road ahead in the current financial year for both Australia’s major airline groups, with Virgin and Qantas not expected to return to profitability until 2015/16.
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