Virgin Blue Confirms Positive 2010 Results in Line with Forecast

Virgin Blue Confirms Positive 2010 Results in Line with Forecast

Well placed to extend reach in key markets and capture growth opportunities

‘Game Change’ strategy includes network upgrades, domestic wide-body services, increased capacity on critical routes and strategic alliances

Etihad Airways alliance adds multiple destinations across Europe, Middle East, Africa, Asia, New Zealand and Americas giving Virgin Blue Group a truly global network.

Results Highlights

·Statutory Net Profit before tax $34.3 million

·Total Revenue increased 13.1% to $2.98 billion

·Short Haul underlying EBIT $127.6 million

·Long Haul $26.9 million improvement in underlying EBIT

·Operating cash flow $369.2 million

·Cash balance $815 million, up from $476 million

·Group underlying CASK (excluding fuel) down 4.9%

Thursday, 26 August 2010: Virgin Blue Holdings Limited (ASX: VBA) today reported Net Profit Before Tax of $34.3 million. Underlying earnings for the Group were $87.2 million before interest and tax and the Underlying Net Profit Before Tax was $31.0 million, in line with the revised guidance of $20-40 million announced to the market in May 2010.

Virgin Blue Chief Executive Officer and Managing Director, John Borghetti, said the result was in line with expectations and was influenced by the deterioration in the operating environment for all carriers during the fourth quarter.

“Achieving a $34 million net profit before tax in the current environment demonstrates that Virgin Blue’s domestic business has the capability to ride through market and economic volatility, and remain well-positioned to extend its reach in key markets.” Mr Borghetti said.

The profit result was delivered largely by the company’s strong Australian domestic short haul business achieving a 2.7% increase in RASK (Revenue per Available Seat Kilometre) together with its ongoing focus on improving efficiency which produced a third consecutive annual reduction in Group underlying CASK excluding fuel (Cost per Available Seat Kilometre). CASK (excluding fuel) for FY08 was 6.80 cents; for FY09 was 6.53 cents and for FY10 was 6.21 cents.

“Our short haul business made a credible underlying EBIT of $20 million in the second half of the year. In addition our long haul business has seen improvements, particularly into the US,” Mr Borghetti said.

“The increases in RASK and the continuing reduction in CASK form a strong basis for the development of our go-forward business platform. This has already seen the announcement of the first phase of our network review to maximise the benefits from improvement in the travel market.

“In addition to the network changes announced last week, we have two additional and very significant announcements in relation to our network. Firstly, in the second phase of our network review, Virgin Blue will be adding two wide-body A330-200 aircraft which will dramatically enhance both our leisure, corporate and government offering between the East Coast and Western Australia.” (Please see the separate release on this matter.)

“Secondly, in keeping with our strategy to build bilateral alliances in specific regions, we can today announce an alliance with Etihad Airways.”

“The first step of this alliance will see Virgin Blue codeshare from V Australia to all Etihad Airways codeshares in October 2010, providing multiple destinations to the UK, Middle East and Europe. The agreement will also involve reciprocal frequent flyer programs where members can earn and redeem points on both carriers, and enjoy reciprocal lounge access. Together with our proposed alliances with Delta Air Lines and Air New Zealand, the Virgin Blue network will seamlessly extend its reach to many more overseas destinations, with little capital expenditure.” (Please see the separate release on this matter.)

“Our game changing program will not only ensure Virgin Blue remains a robust and highly regarded competitor in the leisure sector but will provide the backbone of our plans to take advantage of structural changes in the highly contestable corporate and government market.”

“In the corporate and government market, travel managers are placing a much greater emphasis on deriving value from their investment in travel. This a fundamental change in the purchasing dynamic and we are well-placed to attack the dominant player in this market, just as we did in the leisure market 10 years ago,” Mr Borghetti said.

TRADING UPDATE

Financial and operating performance

The summary financial results for the financial year ended 30 June 2010 are as follows:

* (excludes – ineffective cash flow hedges and non designated derivatives, V Australia start up costs and profit/loss on disposal of property plant and equipment)

OPERATING PERFORMANCE – GROUP

Reported Net Profit before Tax was $34.3 million. Underlying EBIT for the Group was $87.2 million.

Total revenue increased 13.1% to $2,982 million. Revenue Passenger Kilometres (RPKs) were 26.9 billion, up 23.4% on the prior year. The passenger load factor increased marginally 0.7pts to 79.8%.

Yields for domestic and long haul operations increased by 2.9% and 4.8% respectively but the weighted average Group yield, fell 7.1% to 10.06 cents, reflecting a 14 percentage point increase in long haul flying.

While operating expenses were $2,895 million, up 10.5% on the prior year, against a 22.3% increase in production as measured by Available Seat Kilometres (ASKs), and underlying CASK (excluding fuel) fell by 4.9%.

·Fuel costs increased $33.2 million, or 4.4%, reflecting the 22.3% increase in ASKs and an 18.3% decrease in the average price paid for jet fuel, as well as continuing efficiency savings through the fuel management program.

·Commissions and marketing costs were up 6.8% to $195.3 million; due to increased marketing spend in the more competitive environment during the year and raising the profile of V Australia during its first year of operation.

·Aircraft ownership costs (lease costs and depreciation) increased 20.8% to $392.6 million, consistent with the increase in the fleet from 81 to 87 aircraft during the year and the first full-year operation of the B777 fleet.

·Labour and staff related costs increased 7.5% to $639.8 million compared to the 23.4% increase in production, reflecting ongoing cost saving and efficiency initiatives.

·Net financing costs decreased 12.0% to $56.2 million in the year, reflecting lower interest costs and an increase in cash balances.

Short Haul: Solid $127.6m underlying EBIT in challenging and volatile market

Underlying EBIT for the Short Haul business was $127.6 million, up from $62.8 million in the prior year.

Total short haul revenue increased 4.3% to $2,697 million. The revenue load factor increased marginally to 79.8%, up 0.6pts. With 14 new routes launched in the year, 5 in the domestic market and 9 internationally, Virgin Blue’s network footprint increased significantly, positioning the company well for the future.

Short haul yield remained broadly consistent with the prior year, in a highly competitive market place and against a 5.7% increase in capacity.

Active yield management helped increase domestic yield 2.9%, while taking into account the increased stage length and competition in the New Zealand Domestic market international short haul yield declined by 13.3%. In response, phase one of the network review terminated under-performing routes including direct Adelaide – Hobart and Brisbane – Launceston flights and the domestic New Zealand operation, which generated significant losses from inception.

Cost management during the year, and a reduction in fuel prices, was very effective in delivering a reduction in underlying CASK of 2.7% with further savings targeted for FY2011.

A Strategic Initiatives Office has been established to oversee the strategic change management program in FY11 and onward.

Long Haul: $26.9 million improvement in underlying EBIT; yield, load factors up

V Australia delivered an underlying EBIT loss of $42.8 million for the reporting period, reflecting a significant improvement in performance in contrast to many long haul carriers globally. Total revenues were $324.3 million for the period and overall load factor for the same period was a solid 80.3%, demonstrating the extremely positive market response to V Australia’s product and service offering. Yield improved 4.8% over the prior period.

The outlook for V Australia is encouraging following the network review, with aircraft redeployed to higher yielding long haul routes. In addition, the second phase of the network review will involve V Australia withdrawing from Fiji, South Africa and Phuket; routes which are not profitable and which, strategically, don’t integrate well into or service our domestic network.

The strategy to develop a comprehensive virtual global network is progressing well. The proposed Delta Air Lines joint venture will allow us to strengthen our competitive offering and to collaborate on future routes, product planning, code sharing and frequent flyer benefits. In addition, it enables us to extend our network without incurring large capital expenditure. It will open up more than 200 new destinations in the US for our network, making the airline more competitive for both the leisure and corporate markets.

Under the alliance with Etihad Airways, Virgin Blue Group customers will be able to access Etihad’s network of 65 destinations. All Virgin Blue services will be available to Etihad customers, opening up 45 destinations.

Balance Sheet and Cash Flow

During the reporting period Virgin Blue continued its focus on capital management to improve liquidity and strengthen the balance sheet. Improved operating cash flow, lower net investment in aircraft and the equity raising during the year saw the cash balance at year-end increase $340 million to $814.7 million.

Net cash flow from operating activities was $369.2 million, significantly higher than the $101 million recorded in the prior year, reflecting the stronger operating performance of the business.

Capital expenditure in the year was $550.8 million primarily comprising aircraft investment. The fleet grew by 8 aircraft, including seven narrow bodies and one wide body B777-300ER. Three of the 7 narrow body aircraft purchased were later refinanced via a sale and leaseback agreement. Two leased B737s were returned in the year on expiry of their lease terms.

Dividend

Given the Group’s continued focus on capital management, for investment and growth, the Board has determined not to pay a Final Dividend. Subject to the improvement in the trading outlook continuing, a full review of the dividend policy will be undertaken during the coming year.

Outlook

Since the appointment of John Borghetti as Managing Director and CEO in May 2010, Virgin Blue has developed a go-forward strategy. This strategy will focus on improving the value of our core domestic business; withdrawing from loss-making routes; lessening our reliance on the leisure market by improving our market share of the corporate and government markets and improving yield and revenue while retaining our focus on costs.

To achieve this, a new organisational structure has been implemented, network and yield management capabilities have been enhanced and the Group has commenced redeveloping the product offering. Management has been strengthened and restructured to clearly define accountability and to drive increased efficiency and growth in yield and revenue. Our focus on costs and development of alliance relationships will also contribute to the delivery of our strategy.

Despite poor market conditions through to the third quarter, the Asia-Pacific region led the first signs of recovery in the fourth quarter. However, conditions continue to be volatile and competitive activity continues to put downward pressure on yields. The soft growth seen at the end of the fiscal year, at this stage, is not sufficient to suggest a consistent across the board improvement in market conditions.

Mr Borghetti said that with the first and subsequent phases of the network strategy, the Group would be in a strong position to manage capacity increases and ensure RPKs are closely aligned with passenger load factors, maximising yield growth potential in a highly competitive market place.

“If market conditions continue to be volatile, and the early signs of recovery seen at the end of fiscal year 2010 do not result in a consistent and sustainable upward trend, we do have flexibility to adjust capacity through lease returns and rescheduling of aircraft deliveries.”

“The 2010 financial result demonstrates our business is robust and well positioned to fully exploit the benefits to be delivered by the new strategy as the operating environment improves.”

“This new strategy will allow us to preserve our strong market position in the most profitable segments of the leisure sector while taking advantage of structural change in the contestable domestic corporate and government market to increase Virgin Blue's current share during fiscal years 2011 and 2012,” Mr Borghetti said.