Virgin Australia chief executive John Borghetti says low fares may not be enough to stimulate travel as persistently soft demand due to worries about the economy and overseas turmoil dampen consumer confidence and keep people from travelling.
While Virgin’s domestic operations managed a big lift in financial performance in 2015/16, with underlying earnings before interest and tax (EBIT) swelling by some 45 per cent compared with the prior year, yield improving 3.4 per cent and revenue per available seat kilometre (RASK) up 4.7 per cent, it was hardly a demand-led recovery.
Rather, it was the growth in Virgin’s share of corporate and government travel – which represented 30 per cent of its total domestic revenue in the three-month period to June 30 2016 – strategic capacity reductions with a focus on regional and mining-dominated routes, and cost reduction efforts that supported the improvement in its domestic network.
The numbers were also pleasing at Virgin’s low-cost unit Tigerair Australia, which posted a full-year underlying EBIT profit a year ahead of what had been previously forecast – highlighting the pace of its turnaround since being acquired in 2014 – as capacity growth was matched by an increase in passenger numbers, leading to an improvement in yields.
Borghetti said the resources downturn and uncertainty around the economy had led to general weakness in consumer demand for air travel in recent times.
“The environment continues to be challenging and we are not seeing any changes to what we have experienced in the last six months or so,” Borghetti told reporters on Friday.
Asked if the soft demand for air travel would result in lower fares, Borghetti noted there had already been some price stimulation efforts in the market, highlighted by recent $900 return fares to New York.
“That’s pretty damn low so the fares are low now,” Borghetti said.
“But you know there comes a point where lowering fares doesn’t actually necessarily generate more traffic. If people are not wanting to spend, they don’t spend.
“Of course the moment fares do go down yield does get impacted.
“The big thing is we are here to create competition and we have created competition. One of the reasons why airfares are so competitive is because we brought that competition – just think back to five years ago and where fares were then.”
Although Virgin’s international network posted another an underlying EBIT loss in 2015/16, Borghetti said he was encouraged by the improvement from the prior year, which indicated previously announced initiatives such as the transferring of some Bali flights to Tigerair, changes in Virgin’s short-haul international network and the reconfiguration of its Boeing 777-300ER business class cabins were having a positive impact. The narrowing loss was achieved despite the $19 million impact of the Bali ash cloud disruptions in the first half of 2015/16.
Virgin said its efforts to reduce costs through fleet reductions – the company is going from eight fleet types to five over the next three years through the withdrawal of aircraft such as all 18 Embraer E190s and some ATR turboprops, as well as the transition of Tigerair from an all-Airbus A320 operator to the Boeing 737 – were on track.
And its cost reduction program – dubbed Better Business – would leave it in a “better position to achieve its goals and deliver long-term growth and shareholder value”.
While the company declined to offer specific earnings guidance for the current year, Borghetti said the airline group was on “firm footing for future years”.
“The group is delivering consistent improvement in underlying financial performance,” he said.
“The group has positive momentum and we expect this to continue in the year ahead.
“The trajectories on all the key business metrics are positive.”
Virgin Australia shares closed Friday’s Australian session up half a cent to 24.5 cents.