Virgin Australia expects the full benefit of the recent drop in fuel prices to come in the second half of 2014/15, as the airline group points the market to an underlying profit for the three months to December 31 2015.
In an update to shareholders at Wednesday’s annual general meeting in Brisbane, Virgin chief executive John Borghetti said conditions in the local market were moderating.
Borghetti said yields, an industry measure of average airfares per passenger, in the Australian domestic market were higher during the first four months of 2014/15 compared with the prior corresponding period.
“Whilst the continued uncertain economic environment and subdued consumer sentiment make it difficult for us to give guidance for the 2015 financial year, Virgin Australia expects to achieve an underlying profit in the second quarter of the 2015 financial year,” Borghetti said.
On October 17, the airline group reported a $59.1 million statutory net loss for the first quarter of 2014/15.
The airline, which has moved to a quarterly reporting of its financial performance, posted an underlying loss before tax for the three months to September 30 2014 of $45 million, an improvement of 18.3 per cent from the prior corresponding period.
Virgin Australia chairman Neil Chatfield, who was running his last AGM after announcing his intention to step down, said conditions in the Australian domestic market were improving, “with domestic capacity growth beginning to moderate and some improvement in fuel costs”.
“We believe the business is well placed to significantly improve performance in the 2015 financial year,” Chatfield said.
“While the domestic market continues to suffer from over-capacity, there is evidence that this is easing.”
Speaking with reporters after the shareholders meeting, which lasted just over an hour and featured just one question from the floor, Borghetti said demand was catching up with the amount of seats in the local market.
“The moderation in capacity has certainly meant that the demand/supply equation is getting closer to a more sustainable level,” Borghetti said.
“There’s no question that we are in a position where we are still continuing to win corporate share, which gives us better yields.”
Borghetti declined to offer commentary on how the projected 2014/15 second quarter underlying profit would compare with the result in the prior corresponding period.
Virgin chief financial office Sankar Narayan noted the second quarter was typically stronger than the first quarter
Narayan said the airline’s fuel hedging program meant any gains from the lower fuel price would not be immediately felt.
“The net impact of the fuel reduction along with the Australian dollar devaluation, because that actually increases the Australian price of fuel, the net impact is positive,” Narayan said.
“We expect to see a bigger benefit in the second half as we actually get the benefit of some of the options that we have.”
“We haven’t put a number on it but it could be a meaningful number.”
Meanwhile, Borghetti also flagged an improved performance from Tigerair Australia, with the low-cost unit forecast to halve its underlying loss in the three months to December 31, compared with the prior corresponding period.
Moreover, the battling budget carrier, which has never made a profit since commencing operations in Australia in 2007, was expected to reach breakeven by the end of 2015/16, six months earlier than previously forecast.
Virgin Australia bought the remaining 40 per cent stake in low-cost carrier Tigerair Australia that it did not already own in late October for $1.
Borghetti said once the deal received the necessary approvals, Tigerair Australia would move out of its existing premises in Melbourne and into Virgin facilities, saving rent.
It was savings such as these, as well as synergies of being part of the Virgin group of airlines, that would lift Tigerair Australia to breakeven and, it was hoped, profitability, Borghetti said.
“It helps you get to profit quicker but it also lowers the cost base to allow it to be more competitive,” Borghetti told reporters.
“It is now in a position when compared to 12 months ago where the brand is much stronger than it was.”
Chatfield, who announced he would step down on October 28 after eight years as a director, said his chairmanship of Virgin Australia was “without doubt one of the most fulfilling roles of my career”.
Air New Zealand chief executive Christopher Luxon, Singapore Airlines chief executive Goh Choon Phong and Etihad Airways chief executive James Hogan were all elected to the board.
While Luxon attended the meeting in person, Goh and Hogan were not present due to prior commitments. Hogan addressed shareholders via a pre-recorded message, while Singapore Airlines’ senior vice president for cabin crew Marvin Tan spoke in person on Goh’s behalf.