Virgin Australia chief executive John Borghetti says market conditions are uncertain for the year ahead as the potential impact from global factors leaves him cautions about predicting what rest of calendar 2019 will hold for the airline.
While the Australian market was in robust health, external events from the price of oil to geopolitical tensions and the upcoming federal election meant trying to gauge the outlook with any degree of confidence was a difficult task.
As a consequence, Virgin Australia declined to offer specific profit guidance for the rest of the 2018/19 financial year when it reported a return to the black for the first half on Wednesday.
Rather, Australia’s second largest airline group guided the market to expect revenue growth of at least seven per cent for the three months to March 31 2019, compared with he prior corresponding period.
Borghetti said Virgin Australia would, for now, monitor the economic environment and provide a market update as and when necessary.
“It’s certainly uncertain market conditions that we are facing in this financial year and calendar year so I think the best guidance we can give now is for the quarter which is about the revenue,” Borghetti told reporters on Wednesday.
“It’s very easy to point to many things.”
Notwithstanding the potential impact events offshore may have, the Virgin Australia domestic business had a good first half, posting a double-digit increase in revenue, underlying earnings before interest and tax (EBIT) and expanding its margins.
The Virgin Australia domestic business generated about two-thirds of the company’s total revenue in the half. When its low-cost carrier unit Tigerair Australia’s contribution is included, that figure rises above 70 per cent.
As such, the health of the domestic market is a key factor in Virgin Australia’s financial performance and on that front the story was a positive, albeit uncertain one.
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“There is a fair degree of uncertainty. That said, we have to remember that we are in a very, very good position here,” Borghetti said.
“Domestically, Australia is actually in pretty good shape.”
Virgin Australia chief financial officer Geoff Smith said the airline’s domestic business achieved record EBIT, the highest load factor in seven years at 81.7 per cent and the highest EBIT margins since the first half of 2011/12.
This was despite a $43 million hit from higher fuel prices during the 2018/19 first half.
Smith said the domestic network was befitting from stable market conditions and finding opportunities to expand into new markets.
“The leisure sector is yielding strong outcomes based on good consumer confidence,” Smith told reporters on Wednesday.
“We have also successfully targeted demand on certain routes by launching new Perth-Hobart services and a seasonal Perth-Gold Coast service, which has underscored our earnings for the half.”
“Moving forward we will continue to offer our guests the best value for money and customer experience when they fly with us and identify growth opportunities to build on the strong momentum of the domestic business.”
Tigerair Australia posted flat revenue growth and a slightly narrower underlying EBIT loss of $8.3 million in the 2018/19 first half.
The LCC also cut capacity, measured by available seat kilometres (ASK), by 11.5 per cent and carried nine per cent fewer passengers as it flew only 15 aircraft, compared with 17 aircraft in the prior corresponding half, and tweaked its network in response to market conditions.
“The business removed underperforming routes from its network and redeployed the aircraft to capture revenue opportunities in new and existing markets,” Smith said.
“This enabled Tiger to better match capacity with demand which has led to a capacity reduction.”
Smith said the airline also booked some accelerated depreciation costs associated with the transition from an Airbus A320 to Boeing 737-800 operator.
“It is important to note that these are short-term costs incurred as the business transforms its fleet to a single 737 platform,” Smith said.
“The business is focused on optimising this process and giving consideration to the rational exit of aircraft.”
Virgin Australia’s three-year Better Business program was on track to achieve its targeted $400 million in annualised net free cash flow savings by the time its conclusion on June 30 2019.
From July 1 2019, the airline is embarking on what it has described as Better Business 2, which will target $300 million in savings and also run for three years.
While Better Business 1 was mostly focused on fleet changes and costs, Smith said Better Business 2 would also include measures on the revenue side of the ledger.
“Whilst Better Business 1 was largely about cost, we are looking now into territories like new revenue initiatives, new operating models and indeed our firm focus is still on cost and fleet associated with that,” Smith said.
Borghetti said Virgin Australia was due to receive its first Boeing 737 MAX 8 in November 2019.
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