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Virgin Australia Holdings Limited (ASX:VAH) reports Financial Results for Full Year Ended 30 June 2012

28/08/2012

Underlying Profit Before Tax $82.5 million as strategy achieves key goals

Financial Highlights

  • Statutory Profit After Tax of $22.8 million, an improvement of $90.6 million on FY11
  • Underlying Profit Before Tax of $82.5 million, an improvement of $149.1 million on FY11
  • Total Revenue increased 19.8% to $3.9 billion
  • Yield growth in domestic of 12.2%, with 12.0% growth across the Group
  • Good liquidity, with $480.1 million of unrestricted cash, and $802.6 million total cash balance
  • International network EBIT of $35.4 million, a 58.0% improvement on FY11
  • Maintained tight control on costs, with underlying CASK1 growth (excl. fuel) of 4.5%, despite product enhancements

Operational Highlights: Game Change Program

Major elements of the Game Change Program now in place:

  • Achieved target of 20% of domestic revenue from Corporate and Government market, one year ahead of schedule
  • Realigned majority of fleet, with commencement of regional ATR-72 turboprop operations and domestic Business Class
  • Global network established and feeding strong interline and codeshare revenue growth of 158% on FY112
  • Service excellence and product enhancements recognised globally through international awards including Skytrax World Airline Awards, Airline Strategy Awards and Passenger Choice Awards
  • Strong growth of Velocity Frequent Flyer from 2.5 million in FY11 to 3.2 million in FY12
  • 113% increase in high-yield fares3, driven by corporate penetration and changes to fare class structure, network and product offering

Next Phase of Growth for the Game Change Program

  • Implement business efficiency project – deliver productivity gains of $400 million over 3 years
  • Build a transformational loyalty business – achieve over 5 million members by end FY15
  • Improve access to global markets – increase interline and codeshare revenue by around $150 million per annum by end FY15
  • Further enhance customer experience through innovation in-flight and on-the-ground – continue to introduce new product and service initiatives
  • Continue to develop our people and maintain service excellence – our key differentiator

Virgin Australia group of airlines (Virgin Australia Holdings Limited – ASX: VAH) today reported a statutory Net Profit After Tax of $22.8 million, an improvement of $90.6 million on the prior corresponding period. The company reported an underlying Profit Before Tax4 of $82.5 million, which is an improvement of $149.1 million on Financial Year 2011.

Virgin Australia group of airlines Chief Executive Officer John Borghetti said: “The Group’s improved financial performance throughout the year demonstrates that the Game Change Program strategy is delivering positive results despite the challenging external environment and high fuel prices.

“This is reflected in our strong yield growth, with 12.2 per cent across our domestic operations and 12.0 per cent across the Group, notwithstanding strong price competition and total market capacity growth.

“Our progress in attracting higher yielding corporate and government customers has been a key driver of our improved profitability. This segment now makes up 20 per cent of our domestic revenue and, encouragingly, over the last three months we have averaged above this level.

“Importantly, reaching the 20 per cent target is a tipping point which we believe effectively creates a new competitive norm.

“We have also benefited from increased interline and codeshare revenue from our international alliances, up 158 per cent on the prior corresponding period5, and the strong revenue performance of our regional ATR-72 turboprop operations.

“As a result, we have now diversified our revenue sources and we are in a good position to respond to changes in market conditions and drive further growth.

“Our performance this financial year is a credit to the tireless dedication of our people and the drive they have to make a real difference for our customers. It is also pleasing to see continued improvement in our already strong staff engagement scores this year.

“Since the implementation of our Game Change Program strategy, Virgin Australia has received recognition worldwide, including being voted Best Airline and Best Airline Staff Service in the Australia Pacific at the prestigious international Skytrax World Airline Awards and being ranked 12th in the world, up 20 places from 2011.

“Over a very short period we have repositioned Virgin Australia as a genuine competitor on all key customer measures, including product, network and loyalty programs, while maintaining our service and cost advantages. This has enabled us to turn around the financial performance of the airline in a difficult and highly competitive environment.

“Today’s results confirm we have changed the competitive landscape in Australian aviation and we are now ready for the next phase of our development”, Mr Borghetti said.

Financial and Operating Performance

“Our financial performance for the 2012 Financial Year validates our strategy to diversify our revenue base and drive yield growth.

“The Group has seen yield growth of 12.0 per cent, significantly outperforming the market. This has largely been driven by strong take-up of our new Business Class and Flexi Fares, which has seen high-yield fare revenue increase by 113 per cent.

“Following the implementation of Business Class across our trans-continental services on September 28 2011 and across our domestic network on January 18 2012, we carried double the number of Business Class customers compared to Premium Economy customers in the prior corresponding period6.

“Key to our profitability has been our commitment to maintaining our cost advantage. Even with our comprehensive program of product and brand enhancements (including establishment costs), the launch of Business Class across our domestic network and the introduction of a new catering model, we have achieved underlying CASK7 growth (excluding fuel) of 4.5 per cent.

“The new tiered hedging policy we introduced late in the 2011 Financial Year has positioned us well to operate in a continuing high fuel cost environment. The policy has provided us with a large degree of certainty in the short term, while maintaining optionality in the longer term. Costs relating to ineffective cash flow hedges and non-designated derivatives were partially affected by a temporary fuel price decline on 30 June 2012. The values of such hedges have recovered by a subsequent rise in fuel price since 30 June 2012 year end.

“Our capacity plan during the year was focused on yield and margin improvement opportunities on strategic markets as opposed to an overall Group market share goal. This strategy will continue.
“We maintained capacity growth across our domestic network of 9.6 per cent in Financial Year 2012 in line with guidance.

“This growth was driven by the replacement of Boeing 737-800s with Airbus A330-200s on transcontinental routes, strategic increases to frequencies on key corporate sectors, the launch of our regional ATR-72 turboprop network and the commencement of services on routes which previously lacked competition.

“In line with our stated aim of pursuing yield and margin improvement rather than overall market share, we expect capacity growth to be 8 – 9 per cent in the first half of the 2013 Financial Year.

“We are also pleased to have achieved an average Departure On Time Performance for the 2012 Financial Year of 82.7 per cent – an improvement of 2.8 points on the 2011 Financial Year. This includes all of our regional operations and ATR-72 turboprop services”, Mr Borghetti said.

Capital Management

“The Group has remained focused on cash generation and building up our cash reserves throughout the 2012 Financial Year.

“We have achieved a strong cash position, with the total balance for the 2012 Financial Year totalling $802.6 million up $71.3 million from the 2011 Financial Year balance of $731.3 million.

“Our commitment to maintaining a solid balance of free cash has produced an unrestricted cash balance of $480.1 million, up $105.4 million from our 2011 Financial Year balance of $374.7 million.

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

Fleet

“Over the 2012 Financial Year we have made significant progress on the realignment of our fleet; with the exit of our last Embraer 170 aircraft and the replacement of the majority of our Boeing 737-700 aircraft with Boeing 737-800 aircraft. We also launched ATR-72 turboprop operations and introduced new Airbus A330 aircraft.

“This has seen us reduce the average age of our fleet of aircraft from 4.9 years at the end of Financial Year 2011 to 4.2 years at the end of Financial Year 2012. This provides a substantial competitive advantage for our airline as it enables us to maintain a tight control on costs through improved fuel efficiency and reduced maintenance expenses, while also enhancing the customer experience through superior product and improved reliability.

“Going forward, we are focused on ensuring Virgin Australia has the appropriate mix of narrow-body and wide-body aircraft to equip us for future growth. In line with this, last month we announced an agreement with Boeing to order 23 fuel-efficient Boeing 737 MAX 8 aircraft, which will enter the fleet from 2019.

“We continue to review our wide-body requirements for beyond 2017 within a highly disciplined program of capital management”, Mr Borghetti said.

Network and Alliances

“Over the past year, we have completed the implementation of all key alliances and made further enhancements to our network in line with the Game Change Program strategy.

“I am pleased to report that our turnaround strategy for the international network has been successful, with our international network profitable at the EBIT level for the past two years.

“Our Etihad Airways alliance continues to deliver value in terms of domestic feed and international connectivity. Our combined offering of 24 services per week to Abu Dhabi opens up one-stop connections to Europe, the United Kingdom and the Middle East.

“The Air New Zealand alliance was launched in July 2011 and has driven strong passenger growth on our trans-Tasman services. We have worked closely with Air New Zealand to encourage tourism across the Tasman by increasing flights during the New Zealand ski season and by launching the first international service from the Sunshine Coast to Auckland. The alliance will also provide more capacity and an improved product offering between Auckland and Perth from September this year when Air New Zealand’s Boeing 777 aircraft commences operating the route.

“The Delta Air Lines alliance commenced in November 2011 and together we now offer three services per day between Australia and the United States, as well as an expanded network in North America of over 250 destinations. We have adjusted schedules to offer more choice of flight times and have moved our arrivals into Delta’s dedicated T5 terminal at Los Angeles airport to reduce connection times.

“We have moved quickly to implement the Singapore Airlines alliance following regulatory approval in December 2011. Singapore Airlines began codesharing on our domestic services in February and we launched codeshare on their international services in March, enabling customers to book and travel on flights from Australia to Singapore, Shanghai, Beijing, Johannesburg and Capetown. Since March, we have expanded to additional destinations in Asia and will continue to add further destinations throughout the year.

“Following on from the first half of the 2012 Financial Year, we have continued to forge niche alliances to cover other key international leisure and business destinations. In July we added eight important cities to our network in the United States, including Washington DC, Boston and Chicago, by commencing codeshare on Virgin America services. We also commenced codeshare on Virgin Atlantic’s services between Sydney and Hong Kong in April 2012.

“Our expanded global network has enabled us to significantly grow our share of international traffic connecting onto our network, with interline and codeshare revenue up more than 158 per cent compared to the prior corresponding period8.

“Domestically, we have focused on providing improved frequencies on key corporate routes and expanding our regional operations. During the Financial Year we launched ATR-72 turboprop services to Emerald, Gladstone and Port Macquarie, and this month we added Embraer 190 services to Mt Isa in Queensland. Furthermore, in recognition of the increasing importance of Darwin as a business hub and gateway to Australia from Asia, we commenced flights between Sydney and Darwin in April 2012.

“In May 2012 we received final approval from the ACCC for our expanded alliance with Skywest Airlines. The alliance enables us to jointly contract with corporate customers, offering them an integrated travel solution including scheduled and charter services to regional, domestic and international destinations”, Mr Borghetti said.

Product and Brand

“During the 2012 Financial Year we have made significant progress in our goal to create a seamless, first-rate experience for customers, both in the air and on the ground. A key part of this has been updating the look and feel of our product in line with the new Virgin Australia identity and introducing a range of new service initiatives designed to enhance the end-to-end customer experience.

“In January 2012 we launched Business Class across the majority of our domestic network, giving Australian travellers a choice in Business Class for the first time in over a decade. The feedback on this service has been outstanding. We have also launched new Airbus A330-200 aircraft and ATR-72 turboprop aircraft.

“Our Embraer 190 fleet will be fitted with a dedicated Business Class cabin by early 2013. This will complete our domestic fleet reconfiguration program.

“We commenced the cabin interior refurbishment of our international fleet of five Boeing 777-300ER aircraft, which will be complete by the end of the year. Significant progress has also been made on our aircraft repainting program, with over 50 per cent of our fleet of 102 aircraft now in the new livery.

“A major component of our product overhaul has been the upgrade of our airport lounges. In Financial Year 2012 we delivered new lounges in Brisbane, Mackay and the Gold Coast and enhanced the lounges in Perth and Adelaide. Later this calendar year, we will launch our flagship lounge at Sydney Domestic Airport and in 2013 we will launch new lounges in Canberra and Hobart.

“Given we have grown both our alliance and domestic business ahead of expectations, we are accelerating the pace of infrastructure upgrades. This includes enhancements at Sydney Airport’s Domestic terminal (T2) which will see us extend our dedicated pier from 9 to 14 gates (including 4 wide-body aircraft gates), enabling us to make further improvements to our On Time Performance in Sydney.

“Later this calendar year we will commence implementation of a leading Wi-Fi system developed by Lufthansa Systems, which will enable customers to stream video and audio directly to their own personal electronic devices”, Mr Borghetti said.

Sabre Reservations System

“The new Sabre reservations system that we announced last year will be key to driving future growth.

“The system, which we plan to implement in early 2013, will see our domestic and international products available via all distribution channels internationally, therefore expanding our reach and providing new opportunities for revenue growth. It will also enable us to move all of our airlines onto a single reservation system and single designator code. This means travel agents around the world will be able to book Virgin Australia flights with greater ease using a system that aligns with global standards.

“It will also enable us to improve interaction within our internal systems and with those of our alliance partners, therefore enhancing our ability to provide seamless domestic and international travel experiences for our customers”, Mr Borghetti said

Velocity Frequent Flyer

“Early in the 2012 Financial Year we re-launched the Velocity Frequent Flyer program, with the aim of creating a program that recognises and rewards Virgin Australia’s most valuable frequent flyers, providing a solid foundation for future growth.

“Velocity now offers a global network of over 600 services internationally, simplified earn and burn structures, innovative rewards and a Platinum tier for our most frequent flyers. We have also been adding new partners to the program over the year including Westfield Online and Foxtel, enabling members to earn Points with over 350 different partners.

“Since the relaunch, membership has grown to 3.2 million, up from 2.5 million at the end of June 2011. This represents an annual growth rate of 24 per cent.

“We believe there is significant opportunity for growth and have appointed a CEO for Velocity Frequent Flyer, Neil Thompson. Neil joined the organisation this month, bringing a wealth of experience in loyalty and direct marketing programs and will transform Velocity from a frequent flyer program to a broad-based loyalty program in its own right”, Mr Borghetti said.

The next phase of the Game Change Program: Game On

“At the beginning of Financial Year 2011 we announced a three-year strategy, the Game Change Program, to reposition the business for a more stable financial future.

“We are now almost a year ahead of schedule on the strategy, having achieved the majority of our goals. Today’s result gives us the confidence to reach for the next phase of the Game Change Program – it is now ‘Game On’.

“The Game On phase of the Game Change Program will ensure a sustainable future for Virgin Australia by enabling us to capitalise on our competitive advantages and drive new growth opportunities for the business, while retaining the flexibility and agility to adapt to the changing market.

“In this phase, we will introduce further innovative product and service enhancements to establish a superior position in customer experience. We will continue to develop our customer research to ensure we anticipate the changing needs of the market in this regard.

“One of the most important growth opportunities going forward will be Velocity Frequent Flyer and the potential to create a major broad-based loyalty program. This will see the program achieve over 5 million members within the next three years.

“A critical part of the Game On phase will be ensuring that the airline remains efficient and nimble as it grows. To this end, we will be implementing a three-year business efficiency project aimed at delivering productivity gains of around $400 million, with a run rate of $200 million per annum by the end of Financial Year 2015. This project will be structured to ensure we have a sustainable cost advantage in the future.

“In this phase we will also be concentrating on improving our access to global markets in order to drive further revenue growth. We estimate this work will enable us to capture an additional $150 million per annum in interline and codeshare revenue by the end of Financial Year 2015.

“Maintaining and enhancing our service excellence will remain a focus for the business, as it is our key differentiator in the airline industry.

“Finally and most importantly, over the past two years our airline has undergone an enormous amount of change in order to reposition the business for a stable financial future. The level of transformation that has been achieved in such a short period of time is extraordinary, especially considering the unprecedented external challenges that we have faced. It is thanks to our people, and their unwavering determination to deliver on our strategy and to go above and beyond, that we have been able to achieve this transformation. Today’s results are a credit to their outstanding efforts and I would like to express my sincere gratitude for their dedication and hard work”, Mr Borghetti said.

Outlook

“Virgin Australia has delivered an improved result for the 2012 Financial Year, notwithstanding higher fuel prices. Given the uncertain economic environment we are unable to provide clear 2013 Financial Year guidance at this stage. With the Game Change Program largely embedded, we are confident we have established a sound platform from which we can respond to changing market conditions”, Mr Borghetti said.


1Underlying CASK is defined on page 9 of this media release.
2Interline and codeshare customers on Virgin Australia’s domestic and international short-haul network in FY12 compared to the prior corresponding period.
3High yield fares include Business Class, Premium Economy and Flexi fares.
4Underlying Profit/(Loss) Before Tax (PBT) is a non-statutory measure used by Management and VAH’s Board. A reconciliation to Statutory PBT is included on page 3 of the Virgin Australia FY12 Full Year Results presentation.
5Interline and codeshare customers on Virgin Australia’s domestic and international short-haul network in FY12 compared to the prior corresponding period.
6Compares number of Business Class passengers carried between October 2011 and June 2012, to Premium Economy passengers carried in the prior corresponding period.
7Underlying CASK is defined on page 9 of this media release.
8Interline and codeshare customers on Virgin Australia’s domestic and international short-haul network in FY12 compared to the prior corresponding period.