Thurs "Sydney Morning Herald"
Virgin flying into headwind
By Scott Rochfort
November 18, 2004
Virgin Blue has warned that it faces a year of uncertainty, despite the airline rebounding from its humiliating August profit warning to post a first-half net profit just shy of last year's.
Three months after warning its pre-tax profits were down 22 per cent on the year, Virgin beat most expectations yesterday by reporting a 2 per cent dip in net profits to $63 million for the six months to September 30.
Beating consensus analyst forecasts of a $58 million result, Virgin credited the further reduction in its operating costs for what its chief executive Brett Godfrey said was a "fair result".
Thanks to the strengthening dollar and the volumes of scale from its much larger fleet, Virgin said its costs had dropped from 7.73c to 7.26c per available seat kilometre (ASK) on the year.
But in light of plans by Qantas and its offshoots Jetstar and QantasLink to increase the size of their fleets, Mr Godfrey warned Virgin could still face further pricing pressure in the months ahead after already reporting a 12 per cent dip in yields on the year.
"Yield pressures are expected to continue," he said. "We do not believe that for the full year yields will recover to [2003-04] levels."
Mr Godfrey, however, confirmed the airline had managed to bump up its higher-yielding "fully flexible" fares.
Virgin shares, after rising 21 per cent in the three weeks before the result, rose 6c to $2.09 in the lead-up to yesterday's profit announcement on hopes of a much improved outlook for the airline. But they quickly slumped to $1.90 before recovering again to close 2c lower at $2.01, after the airline also warned its fuel bill would increase $100 million for the full year.
While noting Virgin's cost base was well below that of Jetstar's, Mr Godfrey said rising fuel costs would bump up operating costs for the second half.
But in one major heartening sign for investors, Mr Godfrey said there were signs Virgin was starting to "soak up" the additional 58 per cent capacity it put in the market in the year to September 30, with load factors heading back above 80 per cent in October.
In light of criticisms Virgin had expanded its fleet too fast for demand to catch up, Mr Godfrey said it was a result of the airline wanting to "fortify ourselves in the market as the country's second carrier".
In a bid to capture a higher proportion of feeder traffic from international airlines flying into Australia, Mr Godfrey said Virgin was upgrading - and even considering replacing - its Open Skies IT system so it could "interline" with the systems of other airlines. It is estimated that 15 per cent of Qantas's domestic traffic comes from inbound feeder traffic. At present, Virgin's only code-share agreements are with United and Virgin Atlantic.
Virgin also said its New Zealand-based Pacific Blue airline had made a small profit for the half.
Mr Godfrey declined to discuss any plans by Virgin to enter the Asian market or establish a frequent flyer scheme.
Virgin spokesman David Huttner said rumours about Virgin making a possible takeover bid for the regional airline Rex were "baseless".
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Thurs "The Australian"
Costs put pressure on Virgin
Steve Creedy, Aviation
November 18, 2004
VIRGIN Blue faces a clouded second half as it battles volatile fuel prices, rising charges by monopoly airport and navigation providers and an uncertain revenue growth caused by tough domestic competition.
The airline foreshadowed a rise in some fares as it undertakes an across-the-board review aimed at reversing a sharp 12 per cent fall in yields in the six months to September 30.
The warnings came as the airline posted a $63 million net profit after tax for the six months to September 30, down 2 per cent, despite a 28 per cent increase in revenue from $617 million to $787 million.
The big drop in yields stemmed from a 58 per cent boost in capacity as the carrier brought in planes to shore up its 33 per cent market share against increased competition from Qantas's low-cost offshoot, Jetstar.
The increase in capacity also saw load factors fall 7.3 percentage points to 77 per cent.
"Yield pressures are expected to continue," chief executive Brett Godfrey said. "We do not believe that for the full year yields will recover to financial year 2004 levels."
Overall, the Virgin chief described the profit as "a fair result, a good result in many ways" in the wake of a 22 per cent fall in pre-tax profit for the first four months of the half.
"That's been achieved despite a material increase in fuel, a material increase in capacity in the market from ourselves, Qantas and Jetstar, and also in an environment where yields have declined materially," he said. "On that basis we're pretty happy on where we were."
Analysts, many of whom had predicted a bigger fall in profits, welcomed the result. "Virgin Blue has weathered a difficult period remarkably well," said the Centre for Asia Pacific Aviation's Peter Harbison. "As long as the economy remains strong, as indicators suggest it will, Virgin should be well equipped to handle the future."
Yesterday's results included a 17 per cent reduction in unit costs to 7.26c per available seat kilometre as Virgin benefited from the strengthening dollar, scale and productivity gains.
The airline's cash position improved markedly to a record $520 million as passenger numbers for the half rose 39per cent to 6.2 million. The debt to equity ratio improved from 82 per cent at September 30 last year to 63 per cent.
Other good news came from international unit Pacific Blue and the airline's Blue Room lounges, all of which edged into the black.
About 35 per cent of Virgin's costs are in US dollars and the airline has hedged its currency exposure to cover a fall in the Australian dollar for the rest of the financial year.
However, it is not well hedged and estimates that continuing record fuel costs will add almost $100 million to the full-year bottom line, despite the introduction of fuel surcharges.
Mr Godfrey said airport charges had also risen from 5 per cent of costs in 2001 to 15.1 per cent today and were costing the airline an additional $150 million. He renewed calls for the federal Government to step in and re-regulate airport charges in the wake of average 115 per cent increases over the past 18 months.
Virgin has completed its initial domestic expansion and is in a consolidation phase, with net growth of just two aircraft planned next year, but continues to look at opportunities overseas.
Mr Godfrey refused to comment on the airline's plans for Asia, but CAPA said an impending deal in Macau could see the carrier gain access to the huge Chinese market.
Virgin has been talking to Air Macau about providing services to bring Chinese gamblers to the resort city.
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