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One-off charges thanks to cost-cutting and fleet-reduction efforts have pushed Virgin Australia to a $224.7 million statutory loss for 2015/16.
While the airline group’s financial performance for the 12 months to June 30 2016 was down from the statutory loss of $93.8 million in the prior year, the result includes between $410 million and $450 million in one-off charges that were previously disclosed on July 6.
Virgin said in a trading update on Thursday underlying profit before tax, which does not include one-off charges and was regarded as the best indication of financial performance, came in at $41 million for 2015/16.
The result was a turnaround from an underlying loss of $49 million in the prior year and within previously issued guidance of a result between $30 million and $60 million.
Virgin chief executive John Borghetti said the airline group managed to improve its underlying performance, grow passenger numbers and lift load factors amid a “challenging operating environment” in the fourth quarter.
“During the quarter, the group took action in response to operating conditions through strategic capacity reductions in line with demand,” Borghetti said in a statement.
As part of efforts to improve its balance sheet and reduce costs, Virgin is withdrawing all 18 Embraer E190 jets and between four and six ATR 72 turboprops over the next three years.
The airline group’s low-cost unit Tigerair Australia will also transition from an all-Airbus A320 fleet to the Boeing 737 during that time.
Moreover, the company was targeting improving operating efficiencies in crew and ground operations, as well as in maintenance, engineering, procurement and its supply chain.
Virgin’s traffic figures showed the airline reduced domestic capacity, measured by available seat kilometres (ASK), by two per cent in the fourth quarter in line with consumer demand, while revenue passenger kilometres (RPK) was up 5.8 per cent. As a result, load factors rose 5.8 percentage points to 78.5 per cent.
The airline’s domestic network carried 4.28 million passengers in the fourth quarter, up 4.6 per cent from the prior corresponding period.
There was also an improvement at Tigerair Australia, where 23.7 per cent growth in ASKs was more than matched by passenger demand, with RPKs up 28.7 per cent. As a result, load factors were up 3.3 percentage points to 85.6 per cent. The low-cost carrier carried more than one million passengers in the fourth quarter, up 15.4 per cent from the prior corresponding period.
Macquarie Securities analysts Sam Dobson and Pete Vanns said Virgin’s capacity reductions reflected a “rational response to demand weakness”.
Further, the analysts said in a research note dated July 28 the improvement in load factors highlighted a “rational, demand-led approach to capacity management”.
“While no unit revenue information was provided, we expect this contraction in capacity and boost in load factors will benefit domestic RASK (revenue per available seat kilometre),” the Macquarie analysts said.
Restructuring charges related to its cost-cutting and fleet reduction initiatives also pushed Virgin to a $228.4 million statutory loss for the fourth quarter of 2015/16, compared with a statutory loss of $17.8 million in 2014/15.
Virgin said the fourth quarter result was “impacted by previously announced charges from efficiency activities and the Better Business program, which will deliver significant, sustainable savings going forward”.
“The group is targeting net free cash flow savings increasing to $300 million per annum (annualised run rate) by the end of the 2019 financial year through the Better Business program,” Virgin said.
“In addition, the group’s existing efficiency initiatives will have delivered over $1.2 billion in cumulative cost savings by the end of the 2017 financial year.”
The airline reported an underlying loss before tax of $21.9 million for the three months to June 30 2016, up from an underlying loss of $36.9 million in the prior corresponding period.
Virgin will release its full 2015/16 financial results on August 5, but reports quarterly in line with one of its major shareholders, Singapore Airlines (SIA).
SIA, which accounts for Virgin’s financial performance in its own quarterly reporting, was due to publish its latest results later on Thursday.
Virgin shares closed unchanged at 21.5 cents on Thursday.
JG
says:Nice Job Borghetti, great decisions been made here. Lets buy brand new 170’s for regional, no wait lets get rid of them. Lets buy 190’s, no wait lets sell em. How about we buy brand new ATR’s and Skywest as well. No, lets sell the ATR;s now as well.
Stu Bee
says:How do any investors see Virgin as a good investment? Bleeding, bleeding…
CrashnBurn
says:I thought the last “transformation project” was to reap millions of dollars of savings … So they need another one? …. Because why????
Unsure how a Low Cost Carrier can turn into this, would they would have been efficient in the first place!
My advice whilst most would like it … Get rid of international, stick with domestic only with a pure partnership international feeder network. Virgin Blue did this and was profitable!
Adrian
says:Funny how the a330s and 777s which are causing all the problems aren’t even mentioned
SS
says:Oh my, what are they doing? Do not buy the aircraft if you know you will get rid of them in the long term plan.
andrew Ferguson
says:JG;
I think you are being a little unfair here. Firstly ar the time that the Embraers were leased it made good business sense. Virgin had 737-700 that were obviously not the right sized aircraft for routes e.g. Canberra – Brisbane and Canberra-Coolangatta. The Emrers made much more sense especially the fact that many sectors can best utilise these fuel efficient lower capacity jets. Skywest was also an excellent acquisition and gave them the ability to set up VARA. The issue was and is that demand is dramatically down especially in the West, with the result that there is less demand thus less fleet required. Obviously on Canberra-Sydney and Canberra-Melbourne (*to a lesser extent), its all about frequency and jet like experiences for the passenger. However in this situation, I applaud Borghetti for making the hard decisions. This means he will be able to standardise his Domestic fleet to an all Boeing 737-800 series aircraft, keeping just a few ATR’s for the strategically important Regional routes like Canberra and maximising the utilisation across both Virgin and Tiger with one set of maintenance. For International the move to upgrade the 777’s is an excellent move. I suspect though we may see a move to an all Airbus A350 operation replacing the A330’s and 777’s in the not too distant future, thus giving him the ability to grab some really competitive positioning like Sydney-Perth-London, or even potentially Melbourne-Athens-Frankfurt (taking the Qantas unused rights (think about the fact that we have the second largest Greek population in any city in the worlds after Athens (bigger than even Thessaloniki). What a great entrance into Europe.
Andrew
says:To be fair the E170/190s were a Godfrey decision. When Borghetti arrived they were already in service. The ATRs on the other hand, they never should of got the 72-500s and waited for 72-600s.
Martin
says:I would like to see the long suffering mum-and-dad shareholders of Virgin Australia receive a dividend.
Russell Jensen
says:and today they said they will axe the sydney to mackay flight early next year.
Mick
says:They’ve been restructuring for 5 years now. What a joke.
Matt
says:Too bad they are getting rid of the newest ATR-600’s in the fleet.
Richo
says:If people actually read the article and understood what was being said, they would realise this Statutory Net Loss is primarily due to restricting costs associated with accelerated depreciation charges and asset write downs, the same sort of thing as Qantas did 2 years ago.
This is coming about primarily through the decommissioning of the Embraer fleet and the associated charges. This will lead to a more simpler and efficient fleet in the years to come.
These are not as such “Cash Losses” hence they have the approval of analysts and backers.
Richo
says:Sorry, that was meant to say RESTRUCTURING costs
Grant
says:Adrian, the A330 and B777 are not the problem. I can’t think of another airline that doesn’t make money out of these types. Clearly Virgin has another kind of problem. I believe there’s simply too much of a low cost, roll with the punches mentality that is incompatible with the airline they want to become. Virgin need to start doing things the right way, the first time around, and cut out the band aid approach to everything. They could start by paying for the best, most experienced management (at all levels) and build an entirely new culture.
Vivian H
says:I dont see restructuring of CEO and management pay and bonuses!!!
The Tigerair 737 move is a “bean-counter’ only decision, sadly. I feel that the 737 operation will only save on leasing costs, as most are clapped out aircraft, with a new paintjob and some new cloth inside….. passengers will start to notice the “tighter” squeeze, especially for the Perth and Bali flights!!
They should have expanded the airbus operation and negotiated a better deal for a large swath of Airbuses rather than waste time, money and risk the quality of the operation by replacing modern Airbuses with old 737’s; Not too mention that Tigerair (and Virgin) are losing crew due to the standard ill treatment by management.
How can low cost carriers in countries with currency many times devalued than the Oz dollar, ramp up their operations in less time than it takes JB and his board of merry men to do the same? I fear that the reason that Air New-Zealand left……. and if your a shareholder, you should too!
There is nothing worse than an airline constantly restructuring and blowing cash and watering down your shares. SELL SELL SELL.
Kim
says:Further to Grant’s comment, I think the other kind of problem is Mr Borghetti – Virgin hasn’t made a profit under his watch. Chopping and changing doesn’t bode well for the long term, and I wonder why investor/paartner airlines tolerate his management style.
Vannus
says:If Virgin didn’t have the financial input of MILLIONS’ of $$$$, from their owners’, Air New Zealnd (soon to be less influence, as has seen ‘the writing on the wall’), Etihad, Singapore Airlines, & a Chinese Company, they’d be a dead duck.
And yet they needed EXTRA approx $238 million $$$$, from their shareholders’!
WHY?
Are they haemorrhaging SO much money? WTF is Borghetti, & the Board, doing wrong?
I remember when they first started, & Branson said:
‘We won’t have a frequent flyer scheme’. They started one!
‘We won!t have Airport Lounges’. They built them!
‘We won’t have Business Class’. They outfitted their aircraft with it!
All to chase after the National Carrier, QANTAS., as Virgin ‘greedy’, & wanted a ‘slice of pie’ of riches’ it perceived Qantas was getting!
So look where it’s got you, Virgin.
Making loss after loss, year after year.
Interesting that QF turned around in 12 months’, to make just on ONE BILLION $$$$ Profit, to 31 Dec 2015. Their FY 2015/2016 figures’ will be released by end of this month.
Watch this space, to see how well THEY do!
Mr Stu
says:5 years of restructuring has amounted to shifting the deck chairs on the Titanic. Yet another example of JB being blinded by his fanatical obsession to needle QF. It seems he’s determined to try and hurt them how they hurt him when they overlooked him for the QF CEO role. What he doesn’t seem to understand is that QF doesn’t give 2 metric hoots about what VA is doing.
It’s a pity; I’ve seen a lot of good friends walk away from VA with a very bad taste in their mouths.