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VBA Financial Result for Full Year Ended 30 June 2011

30/06/2011
Operational Highlights 
  • FY11 Game Change Program milestones achieved, on track for material benefits in FY12
  • Re-launched the airline, with major product changes and new unified brand
  • Developed global virtual network: Etihad Airways, Air New Zealand, Delta Air Lines and Singapore Airlines (subject to regulatory approval)
  • Restructured operations to drive cost benefits: fleet optimisation, exit from loss-making routes and schedule changes
  • Growth in corporate and government revenues of 29% year on year
 Financial Highlights
  • Net Result before Tax (excluding hedging ineffectiveness) was a loss of $66.6 million, within the guidance of a loss of between $30m and $80m
  • Total Revenue increased 9.7% to $3.27 billion, on prior corresponding period
  • Strong cash balance of $731 million, with an additional $70 million sale & leaseback transaction post the closing date
  • Strong cost performance with underlying CASK growth (excl. fuel) below inflation
  • International network profitable, EBIT of $22.4 million
Virgin Australia group of airlines (Virgin Blue Holdings Limited (ASX: VBA) and its controlled entities) today reported a Net Result After Tax of $67.8 million loss. The Net Result before Tax (excluding ineffective hedges) of ($66.6m) is within the guidance of ($30m) to ($80m) announced to the market on 23 March 2011. This result includes $36m in unrealised foreign exchange loss due to the rising Australian Dollar.
Virgin Australia group of airlines Chief Executive Officer John Borghetti said: “Financial Year 2011 was a year of enormous challenge and significant change as we began repositioning the company to ensure a more stable financial future. Today’s financial results reflect the impact of an unprecedented series of external events and reinforce the importance of our Game Change Program strategy to increase our share of the more resilient corporate and government markets.
“Despite the tough operating conditions, we kept our focus on repositioning the airline. Thanks to the outstanding dedication and efforts of our staff and management, over the past 12 months we have redesigned the in-flight and ground guest experience, secured a single strong global brand for the entire Group, established a global network with little additional capital expenditure through alliances and integrated our airline operations to drive efficiencies.” 
“Our Game Change Program is already delivering results, with an increase in Virgin Australia’s corporate and government market revenues of 29% year on year. We expect to see further gains in the 2012 Financial Year as we complete the roll-out of our new product offering”, Mr Borghetti said.
 

Challenges and Changes during the 2011 Financial Year

“Over the past 12 months, Virgin Australia has been affected by an extraordinary series of natural disasters in our key markets, including the Queensland floods and cyclone, earthquakes in Christchurch and the eruption of Chilean and Indonesian volcanos. Additionally, the Navitaire system failure in October 2010 disrupted operations. These events had a material impact on revenues, with over 50% of Virgin Australia’s domestic operations to/from or within Queensland and our Pacific Blue operation based in Christchurch, New Zealand.
“This also coincided with a spike in fuel prices which directly impacted our operating costs and was only partially recovered through fuel surcharges. Going forward, the combination of fuel surcharges, more active hedging policies and a continued strong cost focus will ensure that Virgin Australia is well placed to operate in a high fuel cost environment.
“That being said, the 2011 financial year, in particular the second half of the year, has been one of major transformation for Virgin Australia and we remain firmly on track with our strategy. We have relaunched our product, secured one unified brand, created a global network and today we have announced the re-launch of Virgin Australia’s frequent flyer program, Velocity.
“The feedback on these changes from corporate, government and leisure guests has been overwhelmingly positive. 
“Our progress in repositioning the airline has already seen us make significant gains in the high-yield corporate and government business market. This important segment now makes up 13% of our total revenue, up from 10% in the 2010 Financial Year. Much of this growth came through in the second half of the year following the introduction of some of our Game Change Program initiatives. The growth is continuing with further gains recorded for July this year.
“The benefits from our network review in 2010 are also starting to flow through. We have exited non-profitable routes and made changes to flight schedules to boost margins”.
Mr Borghetti said that the company continued to maintain a tight control on costs, delivered through a combination of network review, fleet realignment and operational integration initiatives. Despite product enhancements and restructuring costs, underlying CASK growth excluding fuel was under CPI for the financial year.
“The Group’s closing cash position of $731 million leaves it well positioned to execute on our strategy into Financial Year 2012 and beyond. A sale and leaseback transaction post the closing date has contributed an additional $70 million to our cash position. Furthermore, all aircraft deliveries scheduled up to the end of calendar year 2012 have committed funding”, Mr Borghetti said.
 
Industrial Relations and Employee Engagement
“We have also put significant work into strengthening our execution capabilities within the business, with a skilled management team in place and a focus on maintaining engaged, motivated employees. This is demonstrated by our recent annual engagement survey which shows a greater level of engagement of our staff this year.
“We want to ensure our staff are rewarded fairly for their hard work and dedication and we have recently reached an agreement with our international long haul pilots and cabin crew that reflects this philosophy. The agreements achieve improvements in terms and conditions whilst maintaining operational flexibility and the ability to deliver a competitive and sustainable long haul international operation.
“Over the year we have confirmed our commitment to keeping as many jobs in Australia as possible and we have conducted reviews of our off-shore commercial operations. Following on from our announcements this year that we will create more than 300 new jobs by building a maintenance hangar at Sydney airport and that we are developing a cadet pilot training programme, today I am pleased to confirm that we will be creating more jobs in Australia. We have made the decision to move up to 100 full time and part time Guest Contact Centre positions from an off-shore, outsourced provider to our in-house operation in Brisbane.
“With our reputation for excellent service and value and the key product, network and service changes that we introduced over the 2011 Financial Year, we will provide strong competition in the Australian domestic market going forward. The focus for the 2012 Financial Year will be on consolidating those changes and driving increased yields and corporate market share”, Mr Borghetti said.
 
Operating Performance
“Despite the effect of one-off events, natural disasters and challenging trading conditions within the leisure market, Virgin Australia increased revenue by in excess of 9% against a capacity increase of 5% for Financial Year 2011 compared to the prior corresponding period.
“We are already seeing material yield improvements as a result of the introduction of our new fare structure and the increase in corporate and government guests.
“In the 2011 Financial Year we adopted a prudent approach to capacity, demonstrated by the fact that we have maintained capacity growth across our domestic of just 5%. We will continue this approach moving forward, with 4 – 6% capacity growth planned over the next six months, which includes growth of the A330 operation that commenced services in May this year. We have processes in place to monitor market demand on a day-to-day basis and maintain maximum flexibility, with the ability to retire aircraft and bring forward new aircraft as necessary.
The Group has delivered a strong closing cash position of $731 million, with a sale and leaseback transaction post the closing date contributing to its cash position by an additional $70 million, leaving the Group well positioned to execute its strategy into Financial Year 2012 and beyond.
 
Network, Fleet and Alliances
“In 2010, we conducted a network-wide review in order to maximise the performance of our routes both domestically and internationally. This ultimately resulted in the decision to consolidate our long-haul international network to two strategic hubs in Abu Dhabi and Los Angeles, exit from our least profitable routes, embark on an international alliance strategy and expand our regional presence in Australia through our partnership with Skywest”, Mr Borghetti said.
“Internationally, the company withdrew its V Australia Boeing 777 aircraft from the unprofitable Johannesburg route to focus on the Trans Pacific Los Angeles route and to service its new Abu Dhabi route that acts as a gateway to Europe, Africa and the Middle East. These two routes enable us to service two of the most important outbound and inbound markets for Australia supported by our strategic alliances with Etihad Airways and Delta Air Lines.
 
“During the course of the year we have improved our schedule across the Trans Pacific, increasing services between Melbourne and Los Angeles to three per week, increasing services between Brisbane and Los Angeles to four per week and retiming all our Trans Pacific services to arrive into Los Angeles in the morning, enabling same day onward connections and enhancing our appeal to the corporate traveller.
“We also exited from the New Zealand domestic market, enabling us to boost our trans-Tasman capacity and to increase our Pacific Blue services to popular destinations in South East Asia and the Pacific Islands. Additionally, we have seen improved performance on our Phuket and Fiji services as a result of the change from the Boeing 777 to the Boeing 737 aircraft.
“Within Australia, we implemented changes to our domestic network in early 2011, withdrawing from underperforming routes and adjusting frequency and timing to better match customer demand while at the same time improving our aircraft utilisation. The addition of the Airbus 330 to our domestic fleet and the replacement of Embraer 170s with ATR 72-500 and 72-600 turboprop aircraft will also enhance our ability to align fit-for-purpose aircraft to each market.
“The ATR aircraft will commence new services from Brisbane to Gladstone and Brisbane to Port Macquarie and add extra services between Canberra and Sydney from October 2011. We have also expanded our existing codeshare relationship with Skywest Airlines, resulting in the addition of six new destinations to Virgin Australia’s domestic network in December 2010. 
“Over the past 12 months, we have established a global network through alliances with Etihad Airways, Air New Zealand, Delta Air Lines and Singapore Airlines[1]”, Mr Borghetti said.
“These are four of the best airlines in the world and together they provide access to over 400 destinations worldwide[2] and cover Australia’s key aviation markets: North America, Europe, Asia and New Zealand. Through reciprocal codeshare, frequent flyer recognition and lounge access with each of our alliance partners, Virgin Australia will be able to offer guests a first-rate travel experience that spans the globe.
“Our domestic business is already seeing benefits from these new alliances; with interline and codeshare traffic onto the Virgin Australia domestic network significantly increasing year on year. The Etihad Airways alliance was launched during the financial year and has been a key contributor to this improved performance. Further growth opportunities exist as our alliances with Air New Zealand, Delta Air Lines and Singapore Airlines come online during the course of Financial Year 2012. 
“The Air New Zealand alliance was launched in July, offering full reciprocal codeshare across the Tasman and on connecting domestic sectors in New Zealand and Australia as well as frequent flyer recognition and lounge access. The alliance will transform our trans-Tasman route into a profitable operation and offer significant benefits to our Guests. Velocity members now have around three times the number of Tasman services to earn and redeem points on and our corporate travellers will have access to Air New Zealand’s wide-body business class product on key routes.
“The Delta Air Lines alliance received regulatory approval from the Department of Transportation in June and we expect to launch the alliance by the end of the year. Under the alliance Virgin Australia and Delta will codeshare on each other’s services to Los Angeles and beyond, giving Virgin Australia guests access to over 250 destinations across the United States, Canada and Mexico with full frequent flyer and lounge reciprocity across both networks.
“Our alliance with Singapore Airlines is currently awaiting approval from the ACCC and the Competition Commission of Singapore. We are expecting a decision on this important alliance by the end of the year. In the meantime, Singapore Airlines has commenced interlining on Virgin Australia’s domestic network, enabling Singapore Airlines Guests to connect to and from our network with a single ticket. Each airline is also offering reciprocal lounge access to eligible frequent flyer member guests.
“Finally I am pleased to announce that we have reached agreement with Virgin Atlantic to codeshare on their services to Hong Kong from early 2012.
“Now with over 400 destinations worldwide, we have a strong global network which will provide us with around 26% share of the capacity in and out of Australia by July 2012”, Mr Borghetti said.
 
Product and Brand
“Over the 2011 Financial Year, Virgin Australia has implemented an extensive program of work to create a seamless, first-rate experience for Guests. An integral part of repositioning the Virgin Australia brand has been redesigning our product in the air and on the ground”, Mr Borghetti said.
“We assembled a team of expert advisers to work closely with our team to overhaul the entire travel experience, staff uniforms, airport lounges and the look and feel of the aircraft. We have implemented the majority of these changes in just one year, focusing on the areas that helped us provide a quality product that is unrivalled in its market.
“We are well advanced with the re-brand and re-design of the Virgin Australia domestic fleet, with the entire fleet of Boeing 737-800s expected to be fitted with the new Business and Economy Class by the end of 2011. With our new frequent flyer program announced today, the next major milestone will be the roll out of the Virgin Australia brand to our international V Australia and Pacific Blue services, which we plan to commence in January 2012.
“Following the opening of our architect-designed Melbourne and Brisbane airport lounges, we will be introducing new lounges in the Gold Coast and Mackay.
“We will unveil further product and service initiatives as we move into the 2012 financial year, as part of our strategy to become Australia’s airline of choice”, Mr Borghetti said.
 
New Velocity Frequent Flyer Program
“One of the key milestones in our Game Change Program is the relaunch of our Velocity Frequent Flyer program and I’m very pleased to announce that today we are introducing the first stage of our new program to the market, ahead of schedule”.
Mr Borghetti said the first stage was about delivering a program that recognises Virgin Australia’s most valuable frequent flyers and provides them with excellent rewards.
“Velocity will offer a global network of over 600 services internationally[3], simplified earn and burn structures, innovative rewards for loyalty such as complimentary lounge passes and parental leave options, and importantly, a new Platinum tier to provide unique benefits to our most frequent flyers.
Mr Borghetti said the launch of the new Velocity program was a key milestone in Virgin Australia’s strategy to become the airline of choice in Australia.
 
Outlook
We expect an improvement in underlying financial performance in Financial Year 2012, despite the uncertain economic environment. However, we are unable to provide specific guidance for the coming year at this stage.
“There are early indications of improving earnings in Financial Year 2012, with positive trading results in July and continued strengthening in the government and corporate markets.
 “We are confident we have the right strategy to manage our response to changes in future market conditions and to ensure a stable and successful future for Virgin Australia”, Mr Borghetti said.
 
ENDS
 
FINANCIAL AND OPERATING PERFORMANCE SUMMARY
The summary financial results for the financial year ended 30 June 2011 are as follows:

Period ended 30 June 2011
2011 ($ million)
2010 ($ million)
Total Revenue
3,271
2,982
Operating Expenses
3,289
2,904
EBIT*
(18)
78
Net profit before tax *
(67)
22

 

Operating Statistics
2011
2010
Yield  – Group
10.00
10.06c
Underlying CASK (exc fuel, ineffectiveness & unrealised foreign exchange losses)
6.33
6.18
Available Seat Kilometres
37.1bn
34.0bn
Revenue Passenger Kilometre
29.6bn
26.9bn
Passenger Load Factor %
79.7%
79.8%

* (excludes – ineffective cash flow hedges and non designated derivatives).
OPERATING PERFORMANCE – GROUP
Total revenue increased 9.7% to $3,271 million. Revenue Passenger Kilometres (RPKs) were 29.6 billion, up 10.0% on the prior year. The passenger load factor decreased marginally 0.1pts to 79.7%.
Yields were affected by the revenue losses associated with the natural disasters during the year.
Underlying CASK growth (excluding fuel) at 2.4% was below inflation even accounting for the costs of product repositioning during the year.
Reported Net Loss after Tax was $67.8 million. This result includes $36 million in unrealised foreign exchange losses due to the rising Australian dollar.
Domestic:
EBIT loss (excluding Ineffective cash flow hedges and non designated derivatives) for the Domestic business was $40.8 million, down on $103 million EBIT profit in the prior year.
International:
EBIT (excluding Ineffective cash flow hedges and non designated derivatives) for the International business was a profit of $22.4 million, up on $25.2 million loss in the prior year reflecting a significant improvement in performance through network restructure despite a challenging operating environment and high fuel price.
Balance Sheet and Cash Flow:
Despite the challenging operating environment, the Group has maintained a strong cash position of $731 million, with an additional $70 million sale and leaseback transaction post the closing date.
Operating cash inflows remained positive during the year, while net investment outflows in aircraft were slightly higher in this period.
 


[1] Subject to regulatory approval
[2] Unique codeshare and interline destinations
[3] Number of destinations on which Velocity members can earn and burn frequent flyer points with Velocity airline partners