Virgin Blue to Clip its Wings
From todays Australian:
Virgin to clip wings
By Steve Creedy
May 19, 2005
From:
VIRGIN Blue has called a halt to Asian expansion plans as it seeks to lift the profitability of its Australian operations in the face of higher oil prices and a renewed onslaught from rivals Qantas and Jetstar.
After a year in which it almost doubled capacity, Virgin will increase its fleet by just two aircraft in 2005-06 and attempt to further its reach in the corporate and government markets.
The airline admitted yesterday it was "behind the eight ball", as it sought to improve domestic yields and control costs after a 13.2 per cent fall in annual profit.
The carrier has disbanded a team examining Asian expansion opportunities and will focus on repositioning itself as a "new world airline", offering a viable domestic alternative to Qantas. "We're just saying that, if you're going to target Qantas and Jetstar's going to try to eat your lunch, you've got to take some of Qantas's dinner," Virgin chief executive Brett Godfrey said.
Mr Godfrey predicted another tough year as the challenges of 2004-05, particularly fuel prices and yield erosion, carried forward.
He said fuel rises had taken $70 million from Virgin's bottom line in 2004-05 and was set to take a similar amount in the coming year, if prices remained at current levels.
The airline was attempting to form a long-term view of where fuel prices were heading, but had no immediate plans to boost its hedging.
Other worries included mooted increases in airport charges averaging about 13 per cent and increased difficulties in stimulating the market, as double-digit traffic rises fell to between 7-9 per cent in 2005-06.
"If you look at where we are this year, quite frankly we start behind the eight ball," Mr Godfrey said. "We'll certainly be trying to improve all our results and measures, but we're not going to be making any predictions today about what next year will be, other than to say we remain very cautious because of the so-called uncontrollables."
Virgin shares fell 1c to $1.65.
The lower result saw the share price of new majority shareholder Patrick Corp fall 9 cents to close at $5.19.
Virgin's net profit for the year ending March 31 fell from $159 million to $138 million in the wake of fuel price rises and increased competition from Qantas and low-cost subsidiary Jetsar. The figure was in the higher end of revised expectations prompted by the airline's January profit warning.
Yields fell 5.6 per cent and the revenue load factor dropped 4.9 percentage points to 77.7 per cent, as the airline battled to cope with a massive 40 per cent increase in capacity.
The falls came despite a 22 per cent surge in revenue to $1.67 billion, as passenger numbers climbed 27 per cent to 12.8 million.
The airline will attempt to further reduce costs through union negotiations and merging its engineering business with a unit owned by major shareholder Patrick Corp.
Mr Godfrey said a fall in unit costs from 8.2 per cent to 7.49c per available seat kilometre in 2004-2005 was a good sign for his carrier. "What it says is we have our non-fuel costs under control," he said.
Virgin said it did not lose market share as result of Jetstar's arrival, but it believed the new airline downgraded the public perception of its services.
It is promoting improved offerings such as lounges, more flexible fares, priority boarding, self-service kiosks and a live television service, due to be introduced from the third quarter, to boost its appeal to higher-yield customers.
It is also revamping or replacing its limited reservation system so that it can better connect with corporate and government customers as well as overseas airlines.
A recent report estimated it was winning just 0.43 per cent of government business.
"On a $3300 million account that's somewhere around $1.25 million dollars that we've picked up overall and that's clearly inadequate," he said.
Mr Godfrey said New Zealand-based subsidiary Pacific Blue contributed up to 8 per cent of total revenues and had exceeded expectations to make a small profit.