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VAH Financial Result for Half Year Ended 31 December 2011

23/02/2012

Financial Highlights

  • Statutory Net Profit After Tax of $51.8 million, a 118% improvement
  • Underlying Net Profit Before Tax' of $96.1 million, a 34% improvement, despite continuing high fuel prices
  • Total Revenue increased 18% to $2.0 billion
  • Strong yield growth in domestic business of 13.7%, with 11.5% growth across the Group
  • Significant improvement in liquidity, with $506 million of unrestricted cash, and $851 million total cash balance 
  • International network EBIT of $35 million, a 39% improvement
  • Maintained tight control on costs, with underlying CASK2 growth (excl. fuel) of 4.7%

Operational Highlights

Key drivers in place for future revenue growth:

  • Game Change Program milestones achieved ahead of schedule, delivering results earlier than expected
  • 121% increase in high-yield fares, driven by improvements in fare class structure, network and product offering
  • Comprehensive international network established ahead of schedule
  • ATR regional operations launched with higher than expected seat factors and yields
  • Growth in corporate and government revenues of 81%
  • Proposed new structure to achieve ongoing compliance with ANA and enable future growth
  • Sabre IT system to be implemented in Q4 calendar year 2012

Virgin Australia group of airlines (Virgin Australia Holdings Limited (ASX: VAH) and its controlled entities) today reported a statutory Net Profit After Tax of $51.8 million, an improvement of 118% on the prior corresponding period. The company reported an underlying Net Profit Before Tax1 of $96.1 million, which is a 34.4% improvement.

Virgin Australia group of airlines Chief Executive Officer John Borghetti said: “Today’s financial results demonstrate that our strategy to reposition the business is having a material impact on the company’s financial position ahead of schedule.

“We have made significant progress in diversifying our revenue sources, with an 81% increase in corporate and government revenue, an increase of more than 100% in interline and codeshare revenue on our domestic network and with strong performance from our recently launched regional turboprop operations. Furthermore, with the changes to our fare structures in May 2011 and the improvement of our network and product offering, we have achieved strong yield growth of 13.7% in the domestic business and 11.5% growth across the Group.

“While we have continued to see high fuel prices and an uncertain economic environment, the Game Change Program strategy has helped us to improve earnings stability and achieve growth during this half.

“Key to this success has been the ability of our team to embrace and drive the program of change and innovation. Their commitment to becoming the airline of choice in Australia is evident in increasing customer satisfaction levels.

“I would like to thank our people for the important role they continue to play in changing the competitive landscape in Australian air travel, bringing superior service and true competition to all sectors of the domestic market”, Mr Borghetti said.

Financial and Operating Performance

“Over the past six months, the business has been focused on diversifying the revenue base and driving yield growth in order to build a more stable financial future.

“We have made significant progress in this area particularly in the high-yield corporate and government market. This important segment now makes up close to 17% of our total revenue, up from 13% in the 2011 Financial Year. The airline also secured 35 new accounts during this period and maintained every one of our previous accounts, the vast majority of which were renewed with increased spend. This produced corporate and government revenue growth of 81% on the prior corresponding period.

“We continue to see yield improvement following the restructure of our fares in May 2011 and the enhancement of our product and network, with high-yield fare revenue increasing by 121%, due in large part to the popular take-up of the new Flexi Fares.

“Furthermore, during the first six months of operating our Airbus A330 “Coast To Coast” service between Sydney and Perth, we carried triple the number of Business Class guests compared to sales of Premium Economy in the prior corresponding period. Following the implementation of Business Class across our domestic network on January 18 2012, early indications are very positive and we will provide an update on our progress at the Full Year results.

“Key to our ability to produce higher margins has been our commitment to maintaining a tight control on costs. Even with our investment in product and brand enhancements (including establishment costs), we have contained costs, with underlying CASK growth (excluding fuel) of 4.7% for the half. Consequently we saw a 10% improvement in underlying operating margins during the half.

“We also introduced a new tiered hedging policy which provides us certainty in the short term and enables us to manage medium term risk, which has helped us to manage in the continuing high fuel cost environment.

“In line with previously stated guidance of 4 – 6% domestic capacity growth for the first half of Financial Year 2012, we have maintained capacity growth across our domestic network of 5.3%. We have focused capacity increases on high-yield routes such as the Sydney-Melbourne-Brisbane triangle, the trans-continental routes between Perth and the East Coast and key regional centres in Western Australia, Queensland and New South Wales. Mr Borghetti said the airline would continue to maximise flexibility in capacity management.

“On Time Performance is also a strong focus for our team and we are pleased that the Bureau of Infrastructure, Transport and Regional Economics (BITRE) figures show that, at 82.8%, we have achieved the best on time performance among the major carriers for the first half of Financial Year 2012.

While our January performance was affected by a number of factors, including the introduction of our new Business Class catering, we are now back on track in February and we remain committed to maintaining the industry-leading position over the long term”, Mr Borghetti said.

Capital Management

“While we have made significant progress in repositioning the business, we have also been focused on cash generation and building up our cash reserves.
“The Group has harnessed strong operating cashflows to achieve a very solid cash position this half, with a total cash balance of $851 million and an unrestricted cash balance of $506 million, a significant improvement since the end of the 2011 Financial Year.

“We are focussed on maintaining a strong unrestricted cash balance into the future while improving our balance sheet efficiency.

“In light of the uncertain economic environment and the need to support our current and future strategic initiatives, we will not declare an interim dividend. We will continue to review our dividend policy having regard to the ongoing cash requirements of the company”, Mr Borghetti said.

Network, Fleet and Alliances

“The company is continuing to benefit from the roll out of our network and alliance strategy.

“Internationally, our Abu Dhabi service continues to develop well in line with expectations as awareness grows of its seamless onwards connections to Europe with alliance partner Etihad Airways.

“The Air New Zealand alliance was launched in July 2011 and has driven strong growth in passenger numbers on our trans-Tasman services, despite a challenging environment. We expect to see further growth in response to our newly aligned schedule and the operation of the first trans-Tasman aircraft in Virgin Australia livery next month.

“Our operations to the United States have been enhanced by the launch of our alliance with Delta Air Lines in late 2011. The joint venture has allowed us to offer three trans-Pacific services per day, improve our connection times and expand our network with access to 250 destinations across North America. We are also now able to leverage Delta’s distribution strength in the United States to draw passengers onto our international and domestic services.

“We received final regulatory approval for the Singapore Airlines alliance in December, and moved quickly to launch frequent flyer program cooperation and announce new international and domestic services to Darwin. Singapore Airlines began codesharing on our domestic services this month and we look forward to launching codeshare on their international services across Asia and beyond in the next few months.

“Our Boeing 737 services to the Pacific Islands and South East Asia are also performing well. We have added further frequencies on these routes, including extra services to Indonesia and Vanuatu.

“We will continue to forge niche alliances to cover other key international leisure and business destinations. In October we began codesharing with Hawaiian Airlines to Hawaii and next month we will begin codesharing with Virgin Atlantic to Hong Kong, extending our international network to cover 19 out of the 20 most popular international destinations from Australia.

“Furthermore, our expanded global network has enabled us to significantly grow our share of international traffic connecting onto our short-haul international and domestic network, with interline and codeshare traffic up more than 100% compared to the prior corresponding period.

“Domestically, we have focussed on shifting capacity to strategically important corporate and leisure routes where there has been strong demand and strong yields. For example, Adelaide and Darwin are both strong performing markets where we have recently announced capacity increases.

“Our new ATR 72 turboprop aircraft have enabled us to grow our regional network, with the launch of new services to Emerald, Gladstone and Port Macquarie. These services have been very popular and are already among our best performing regional routes. There are currently four ATR aircraft operating on our network and the fleet will grow to 12 by the end of the 2013 financial year. This will enable us to build frequencies on existing markets and to continue to expand our regional footprint through the launch of new routes.

“We recently received interim approval from the ACCC to expand our alliance with regional airline Skywest. This alliance will allow us to offer an integrated schedule and charter operation in response to growing demand from the resource industry”, Mr Borghetti said.

People, Product and Brand

“Over the past six months we have made significant progress on our goal to create a seamless, first-rate experience for Guests, both in the air and on the ground.

“Key to this progress is our people, and we have invested significantly over the half in staff training, as well as growing our frontline workforce. For example, over the past 12 months, over 1,800 of our Cabin Crew have completed an intensive “Elevate” development program, designed to take our service levels to even greater heights in line with the new brand and Business Class offering.

“We maintained our commitment to building jobs in Australia, creating around 500 new roles in areas such as Cabin and Technical Crew, Ground Operations and Engineering, to support our growing operations. Over 66% of our airframe maintenance is performed here in Australia and, across our entire fleet for Financial Year 2012, half of our heavy maintenance will be performed here in Australia. We will also be growing our maintenance work here, with our first new wide-body aircraft hangar to be built at Sydney Airport by mid 2014. This facility is expected to generate more than 300 jobs.

“By the end of this Financial Year, we will have selected our first group of cadets for our new Pilot Cadet Program, helping develop the next generation of Australian pilots.

“We believe that our people are our greatest asset and they are a key driver of our customer satisfaction. Guests continually tell us that it is our people and the pride they take in delivering excellent service that differentiates Virgin Australia in the market.

“On January 18, 2012 we commenced our Business Class offering across our Boeing 737-800 fleet and the feedback from Guests on these services has been excellent. These positive indications, along with the fact that forward bookings are tracking ahead of our expectations, demonstrate the market is readily embracing our move to bring competition back to the domestic business class market for the first time in a decade.

“Today we have announced a new Business Class product for our Embraer 190 services, in a 2-1 configuration. This will provide premium Guests with space and privacy on services to important business destinations such as between Canberra and Sydney.

“We’re also very pleased to announce today that from April, Business Class Guests on-board our Boeing 737 and Embraer fleets will experience a new era of inflight entertainment with our offering of Samsung Galaxy tablets loaded with television shows, movies and audio.

“Virgin Australia will be introducing a state-of-the-art in-flight entertainment system on our Boeing 737 aircraft that uses Wi-Fi technology to deliver content to Guests’ own hand-held devices by the end of 2012.

“On the ground, we continue to roll out our new lounges to locations across the country. We recently launched a new lounge in the growing regional hub Mackay and will soon be launching a lounge in the Gold Coast and one in Darwin next year, as well as enhancing our lounges in Sydney, Adelaide and Perth.
“To improve the experience of Guests at Sydney and Melbourne domestic airports, we will be expanding and refreshing terminals over the next 18 months, including building additional aerobridges at both airports for our wide-body Airbus A330 aircraft.

“We have also announced today that from next month, Guests at Brisbane Domestic Airport can be greeted kerbside at our new dedicated Premium Valet car park and check in for their flight at a dedicated desk. This will soon be followed by a dedicated Premium Valet car park at Melbourne Domestic Airport, later this year. The next major milestone will be the refit of our international long-haul Boeing 777 aircraft with new designer interiors, the first of which will be completed before the end of Financial Year 2012.

“Finally, over the last half, we have seen impressive growth in our Velocity Frequent Flyer program, following its relaunch last August. Membership is now close to 3 million, up from 2.5 million at the end of June 2011, which is an average of 1,700 new members signing up each day. Our recent status match program was very successful, with many thousands of new members now regularly flying with us as a result of the promotion.

“We will continue our strategy to create strong partnerships that add value for our Members, adding important partners such as Singapore Airlines, Westfield Online, Foxtel, Lumo Energy and Secure Sentinel over the half.

“Going forward, the Velocity Frequent Flyer program will continue to be an important focus of the business as it is a key driver of future earnings”, Mr Borghetti said.

Future Growth Enablers

1. New Structure for International Business
“Over the past 12 months, our foreign ownership levels have been sitting close to the 49% cap and therefore we have been exploring options to ensure we do not breach this.

“Today we have announced a new proposal that will allow us to achieve ongoing compliance with the Air Navigation Act (ANA), while also greatly improving the growth prospects of our airline and the value of the business for our shareholders.
“It involves creating a new unlisted entity Virgin Australia International Holdings Pty Ltd (VAIH) which will hold VAH’s international airlines, facilitating overseas institutional investment in the domestic business”, Mr Borghetti said.

2. New Reservation System
“Many of the Game Change Program initiatives completed so far have been centred around repositioning the business to ensure it is on the right course. Now that these foundations have been laid, our key strategic focus is on enabling the growth of the business.

“The new Sabre IT reservation system will act as one of the key enablers. In order to drive growth, we need to enhance our ability to provide seamless domestic and international travel experiences for our Guests across our global network and enhance our global distribution capability.

“This Program will bring that capability to our business: by enabling us to integrate the airlines with one system and one designator code, improve customer recognition and experience, provide integrated seamless travel with our alliance partners and access a more efficient industry standard Global Distribution System (GDS) process. Sabre will facilitate enhanced interactions with Travel Management Companies and travel agencies worldwide.

“We aim to commence implementation of the Sabre systems across our business in the final quarter of the current calendar year”, Mr Borghetti said.

Outlook

“Virgin Australia has delivered a strong underlying result for the first half of the year. We expect an improvement in underlying performance for the full year in comparison with Financial Year 2011.

“The consistent yield improvement we have seen year-to-date, has continued into January. However we are unable to provide specific guidance at this stage, due to the uncertain economic environment”, Mr Borghetti said.

Financial and Operating Performance Summary

 

The summary financial results for the six months ended 31 December 2011 are as follows:


Period ended 31 Dec

2011 ($ million)

2010 ($ million)

% movement

Total Revenue

2,006.4

1,695.0

18.4%

Underlying EBIT 7

127.5

96.7

31.9%

Underlying net profit before tax8

96.1

71.5

34.4%

Statutory net profit after tax

51.8

23.8

117.6%

 

Operating Statistics

2011

2010

% movement

Underlying CASK (excl. fuel)9

6.86

6.56

4.7%

Available Seat Kilometres

19.9bn

18.7bn

6.8%

Revenue Passenger Kilometre

16.0bn

15.1bn

6.2%

Passenger Load Factor %

81.0%

80.3%

0.7 pts

 

Operating Performance Group

Total revenue increased 18% to $2,006.4 million. Revenue Passenger Kilometres (RPKs) were 16.0 billion, up 6.2% on the prior period comparative. The passenger load factor increased marginally 0.7pts to 81.0%.

Yield growth of 11.5% on the prior comparative period along with consistent performance over the entire half, attributable to benefits associated with Game Change Program strategic repositioning.

Underlying CASK9 growth of 4.7% but includes the product costs of repositioning (including significant product enhancements) which have delivered higher revenue yields.

Underlying Net Profit Before Tax8 for the Group of $96.1 million, representing a 34.4% increase on the prior comparative period result. Statutory Net profit after tax for the Group was $51.8 million, being a 117.6% increase on year to date 31 December 2010. This improved result has been delivered in a continuing high fuel cost operating environment.

This statutory net profit after tax result includes significant items of $10.5 million relating to the write-down of assets (including Navitaire) associated with the strategic repositioning of the business and asset write downs and loss on sale of $9.3 million.

Domestic

Underlying EBIT7 for the Domestic business was $92.4 million, an increase of $21.0 million on $71.4 million EBIT in the prior comparative period despite higher unit fuel costs.
This performance was driven by strong consistent revenue growth associated with product launches associated with the Group’s strategic repositioning, with domestic yield growing 13.7% on the prior comparative period.

International

Underlying EBIT7 for the International business was a profit of $35.1 million, an increase of $9.8 million on a $25.3 million profit for the prior year comparative period. This performance reflects the benefits of network restructure undertaken along with virtual international network benefits being derived.

Balance Sheet and Cash Flow

The Group has strengthened its cash position, posting a closing cash position of $851.4 million compared to $731.3 million in June 2011 and $772.3 million in December 2010. The Group posted closing free cash as at 31 December 2011 of $506.0 million which is an improvement of 35% and 26% on June 2011 and December 2010 respectively.

Strong net operating cash inflows of $232.3 million were delivered for the period, driven by strong revenue performance. Net investment outflows were $206.9 million, being a positive variance to last year, primarily relating to the sale and leaseback of aeronautical assets and a lower level of property, plant and equipment purchased during the period.

Hedging Strategy

Virgin Australia introduced a new tiered hedging policy in May 2011 which provides us certainty in the short term and enables the company to manage medium term risk. Virgin Australia also hedges directly in Australian denominated Jet fuel, ensuring additional certainty and efficiency.

ASIC Guidance

In December 2011 ASIC issued Regulatory Guide 230. To comply with this Guide, Virgin Australia is required to make a clear statement about whether information disclosed in documents other than the financial report has been audited or reviewed in accordance with Australian Auditing Standards.

In line with previous years, the Media Release is not audited or reviewed. Notwithstanding this, the Media Release contains disclosures which are extracted or derived from the Interim Financial Report for the half-year ended 31 December 2011 which has been reviewed by the Group’s Independent Auditor and can be located on the ASX website. We note that the following non-IFRS financial measures have not been audited or reviewed by the Group’s Independent Auditor (underlying NPAT, underlying EBIT).
 


 7Underlying EBIT is a non-statutory measure used by Management and VAH’s board as a primary measure to assess financial performance of VAH and individual segments, it excludes Ineffective cashflow hedges and non-designated derivatives, significant items and asset write downs and loss on sale. Underlying EBIT for 2010 includes the add back of $18.2m in costs relating to the Navitaire outage
8Underlying Net Profit Before Tax (PBT) is a non-statutory measure used by Management and VAH’s board as a primary measure to assess financial performance of VAH and individual segments, it excludes ineffective cashflow hedges and non-designated derivatives, includes significant

9Underlying CASK represents Statutory PBT less revenue, fuel, asset write downs, loss on sale and restructuring costs divide by network ASKs