VIRGIN BLUE Profit result for Half year ended 31 December 201023/02/2011
Underlying profit IN LINE WITH GUIDANCE
·Investment in Game Change Program on track for material benefits in FY12
·Etihad Airways and Air New Zealand alliances approved
·Skywest codeshare agreement to build WA regional network
·Well advanced on fleet optimisation program
·Exited loss-making routes and changed schedules for profit maximisation
·Further branding, product, fleet and network initiatives imminent
·Statutory Net Profit Before Tax was $37 million
·Underlying Net Profit Before Tax $72 million
·Total Revenue increased 11.8% to $1.69 billion, on prior comparative period
·Cash Balance $772 million
·Yields improvement in both short haul and long haul
Wednesday, 23 February 2011: Virgin Blue Holdings Limited (ASX: VBA) today reported an Underlying Net Profit Before Tax of $72 million, in line with the guidance of $70-75 million announced to the market on 25 January 2011. The Company reported a Net Profit After Tax of $24 million which was also in line with previous guidance.
Virgin Blue Chief Executive Officer and Managing Director John Borghetti said: “Today’s results demonstrate that the core Virgin Blue business is sound. This is a very solid result considering the impact of a number of significant one-off factors, including the Navitaire IT system outage, restructuring costs and unusually severe environmental events in Australia and New Zealand.
“That being said, we have seen yield improvements in both short and long haul, with long haul in particular seeing a strong increase. With a $17 million improvement in its operating position during the first half, our long haul business is on track for reaching close to breakeven by year end. This follows the cancellation of non-profitable routes, changes to current schedules aimed at profit maximisation and the beginning of the benefits flow through from our international alliance strategy.
“In the meantime we have made solid progress on our strategy to build our share of high-yield corporate and government business, already accessing a number of major corporate accounts.
“Given the adversity we have faced, to have achieved these outcomes reflects the outstanding efforts and focus of our employees over the last half.
“We also continue to maintain a tight control on costs and have finished the half year in a strong capital position, with a considerable cash balance of $772 million. Funding is also secured for 90% of all aircraft deliveries scheduled up to the end of FY12.”
Mr Borghetti said the operating environment, in particular the lack of growth in consumer discretionary spending and continuing uncertainty in the economic outlook, validated Virgin Blue’s strategy to reposition the Group to capture a larger share of corporate flyers while maintaining a strong presence in the leisure market.
“We have continued to invest in our Game Change Program, adding the management skills necessary to take the Group to the next level. In addition, we have gained approvals for our alliances with Etihad and Air New Zealand to enhance our international network and announced a strategic alliance with Skywest covering a codeshare and wet lease turboprop agreement”, Mr Borghetti said.
“Today I’m also very pleased to confirm that our widebody Airbus 330s will start flying in May with our new business class product. The new uniforms launched this morning are the first visible signs of the repositioning of the company.
“Despite the fact that many of our business-focused changes are planned for later this year, our reputation for excellent service and our strong value proposition are already seeing us make inroads into the corporate market. This is demonstrated by the recent corporate account wins, such as the AFL, NBN and Tenix, and our increased share of government travel.
“Our Game Change Program is on track and we are now more confident than ever this is the right direction for the future. We believe we are well positioned to begin leveraging the benefits of this strategy from FY12”, Mr Borghetti said.
“Virgin Blue Group has posted an Underlying Profit Before Tax of $72 million driven by increased revenue and improved yields across both the short haul and long haul segments,” Mr. Borghetti said.
“Recent gains in the Corporate and Government markets have helped to push our yields higher, and despite tough conditions within the leisure market, Virgin Blue increased revenue by 12 percent. This is particularly pleasing given our repositioning program has not yet commenced.
“Our strong focus on cost has remained within the business, with total underlying Group CASK showing a decrease of 0.4% over the first half last year despite significant one-off costs to the business.”
Improved trading conditions in the short haul market earlier in the period have been offset by weaker demand in November and December, overall resulting in an underlying EBIT of $102 million.
“In the short-haul market, a complete network review has re-focused the business onto key higher yielding markets, such as transcontinental routes. This has resulted in a yield improvement of one percent in a tough operating environment,” Mr. Borghetti said.
“We have continued to increase the scope of our partnership with Skywest in the burgeoning regional and fly-in/fly-out markets in West Australia, and are also expanding this partnership to operations of Virgin Blue-branded ATR turboprop aircraft in key regional markets in Eastern Australia where we believe there are untapped opportunities.”
The long haul business has improved its profitability during this six month period with a focus on the Trans-Pacific market and a continuing strong increase in premium passengers on V Australia.
“V Australia received delivery of a fifth Boeing 777 aircraft in this period and continued to grow revenue with an increase in capacity of almost 50 percent. A complete network review has resulted in improvements in both yield and load, and, importantly, our long haul business is on track to reach close to breakeven at the EBIT level for the full financial year,” Mr Borghetti said.
The complete outage of Virgin Blue’s Navitaire/Accenture hosted reservations, check-in and related operating systems in September 2010 resulted in a severe interruption to the Virgin Blue business.
As reported on 11 October 2010, the outage had an estimated pre-tax profit impact of $15-20 million. This includes loss of revenue, as well as direct costs incurred from our commitment to looking after our guests, such as accommodation, food, beverage and taxi vouchers.
“Prior to the outage the Group had seen an improvement in general trading conditions when compared to the corresponding period last year”, Mr Borghetti said.
“We are having constructive discussions with Navitaire on the matter of compensation. We have early agreement on some key principles and we are currently working through some of the relevant details. Both parties hope to reach a satisfactory conclusion in the relatively near future.
“We are also in the process of strengthening our business continuity processes with a company-wide system review underway.
Network and Fleet
Network and Fleet Review
Previous network review announcements of the exit from New Zealand domestic, the boosting of Pacific Blue trans-Tasman capacity and the increased Pacific Blue services to South East Asia and the Pacific Islands have been implemented during this six month period.
“Virgin Blue Group has made significant progress on implementing the recommendations from our network review, which is about getting the right aircraft on the right routes at the right times, in order to maximise profitability,” said Mr Borghetti.
“We are already seeing very positive results from exiting unprofitable routes such as the New Zealand domestic market and we expect to see benefit from our recent exit of Johannesburg during the second half. Our review of scheduling is also producing results, with the switch to Los Angeles morning arrivals having a positive impact on yields and loads.
“Within Australia, a network review and an increase in aircraft efficiencies have benefited the short haul business. We have also seen positive results on some of our short haul international routes where we have re-aligned from Boeing 777 to Boeing 737 operations.
“With the introduction of the Airbus 330 and ATR turboprop aircraft our domestic fleet will continue to better align fit-for-purpose aircraft to each market.”
Significantly, Virgin Blue will tomorrow become the first Australian carrier to operate to the Middle East in 20 years, with V Australia’s inaugural flight from Sydney to Abu Dhabi. The new V Australia Abu Dhabi service is a key part of the partnership between Virgin Blue and Etihad Airways which will open up one-stop flights to major destinations across Europe, the United Kingdom, Africa and the Middle East.
The alliance establishes an international hub for V Australia in the Middle East at a time when IATA is forecasting the Middle East as the top region for international passenger demand growth in the world.
Last December, an alliance with Air New Zealand was given approval which will cover all trans-Tasman and domestic sectors in Australia and New Zealand which form a connecting journey.
“Both the Etihad and Air New Zealand alliances will provide benefits to our guests by opening up destinations across the globe, offering more frequencies and providing greater fare value and competition in these markets. These alliances are the initial steps in Virgin Blue’s strategy of building international coverage to benefit both the corporate and leisure traveller”, Mr. Borghetti said.
In regional Australia, an expanded codeshare alliance with Skywest taking in an additional six destinations commenced operation in December.
Product and Brand
“A major part of our Game Change Program is the product enhancements that we are driving in the air and on the ground. I’m pleased to report that these changes are on track, with full implementation by the end of the year.
“From May, you will see our first two new Airbus 330 aircraft providing a double daily business class and superior economy class service between Sydney and Perth. Transcontinental travellers can look forward to high comfort seating, ultra modern interior, seatback entertainment screens, a very high quality food range and convenient schedules. With our competitive pricing strategy, we believe this will be a compelling proposition for corporate travellers, whether they travel in business or economy class.
“Today I can also reveal that we will be launching a direct lounge entry and car valet for premium passengers at Sydney domestic airport, providing the only direct premium lounge access and kerbside valet in the market.
“We’re also well advanced with our rebranding which will represent the new direction in which the Virgin Blue Group is headed. One element of this, the stylish new uniforms for Virgin Blue ground, flight and cabin crew created by Australian designer and winner of Project Runway Julie Grbec, was revealed this morning,” Mr. Borghetti said
The outlook for the second half of the year is expected to be challenging.
Further strengthening is expected in the business sector, both domestic and international, where confidence is returning and leading the economic recovery.
However, in the domestic leisure market, flat consumer confidence, forecast industry capacity growth and flow-on impacts from the recent weather events will impact domestic demand.
Rebuilding Queensland tourism after the recent floods and cyclone Yasi will take some time. Virgin Blue has been on the front foot working with the Queensland tourism industry in a concerted effort to promote tourism in Queensland and will continue with a coordinated campaign to help boost its home state. With over 50% of Virgin Blue flights being within, and in and out of Queensland the impact of the floods and cyclone Yasi is expected to be of the order $40 million and $10 million respectively.
Domestic capacity growth remains under review and the Group retains the flexibility to reduce capacity below the full year forecast of 6-8% if required.
During the second half we expect to see good solid momentum emerging on international alliances.
The industry is also facing the challenge of rising fuel prices. The Group is addressing this through fuel surcharges, fare increases and fuel hedging strategies.
Mr Borghetti commented: “The current industry outlook underscores the importance of our Game Change Program as the right strategy to manage our response to changes in future market conditions and ensure a stable and solid future for the Virgin Blue Group.
“As we roll out the program, our efforts will be directed toward optimising our domestic network, building an international network of airline partners and diversifying our revenue base by increasing our share of the corporate market.
“We are on track to significantly strengthen our position in both leisure and corporate markets in FY12,” Mr Borghetti said.
FINANCIAL AND OPERATING PERFORMANCE SUMMARY
The summary financial results for the financial year ended 30 June 2010 are as follows:
Period ended 31 December
2010 ($ million)
2009 ($ million)
Net profit before tax
Yield – Group
CASK (exc fuel) – Group Underlying*
Available Seat Kilometres
Revenue Passenger Kilometre
Passenger Load Factor %
* (excludes – ineffective cash flow hedges and non designated derivatives and non-recurring reservation system outage costs.
RECONCILIATION OF UNDERLYING PBT TO STATUTORY NPBT
Period ended 31 December
Net Finance Costs
Net Finance Costs
OPERATING PERFORMANCE – GROUP
Reported Net Profit before Tax was $37 million. Underlying EBIT for the Group was $97 million.
Total revenue increased 11.8% to $1,695 million. Revenue Passenger Kilometres (RPKs) were 15.1 billion, up 14.4% on the prior year. The passenger load factor decreased marginally 0.6pts to 80.3%.
Yields for short and long haul operations increased by 1.0% and 15.0% respectively but the weighted average Group yield, fell 2.5% to 11.23 cents.
Operating expenses were $1,617 million, up 14.6% on the prior year, against a 14.0% increase in production as measured by Available Seat Kilometres (ASKs), and underlying CASK (total) decreased by 0.4%.
Underlying EBIT for the Short Haul business was $102 million, only marginally down on $103 million in the prior year.
Total short haul revenue increased 7.9% to $1,489 million. The revenue load factor decreased to 78.9%, down 1.4pts.
Short haul yield increased 1.0% on the prior year, in a highly competitive market place and against a 7.9% increase in capacity.
Active yield management helped increase domestic yield 0.6% and the international short haul also increased by 1.0%.
V Australia delivered an underlying EBIT loss of $7 million for the reporting period, reflecting a significant improvement in performance. Total revenues were $230 million for the period and overall revenue load factor for the same period was a solid 88.8% - up 7.7 points on the prior year demonstrating the extremely positive market response to V Australia’s product and service offering. Yield improved 15.0% over the prior period.
Balance Sheet and Cash Flow
Operating cash inflows were down on the prior year, while net investment outflows in aircraft were greater in this period due to significant proceeds being reported on disposal of aircraft in the prior year. The prior year also reported significant cash inflows from financing due to the equity raising. The net effect was that cash decreased by $42 million to $772 million from that reported at 30 June 2010.
Capital expenditure in the period was $292 million primarily comprising aircraft investment. The owned fleet grew by 3 aircraft – two Boeing 737-800s and one Boeing 777-300ER. A further two Boeing 737-800s were delivered under operating lease while three Boeing 737-800s were returned in the period on expiry of their lease terms.
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