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Virgin Australia Holdings Limited (ASX: VAH) reports Financial Results for Half Year Ended 31 December 2012

26/02/2013

Achieved $61.0 million Underlying Profit Before Tax, a solid result in a difficult operating and economic environment

Financial Summary

  • Statutory Profit After Tax of $23.0 million
  • Underlying Profit Before Tax of $61.0 million
  • Revenue growth of 5.4% on H1 FY12, building on 18.0% growth achieved on H1 FY11
  • Outperformed the market on Group Yield growth
  • Highest number of passengers in any half, up around 200K on H1 FY12 to over 10 million for the first time
  • Strong cost control, even with major product and service enhancements – underlying CASK (excl. fuel) reduced by 1.5%
  • Strengthened balance sheet with good liquidity, including existing debt pay-down of $151 million and free cash balance of $430 million

Operational Highlights: Game Change Program

Significant progress on Game Change Program, next phase on track:

  • Strong progress on multi-faceted plan for profitable growth: acquisition plans for Skywest Airlines and Tiger Airways announced, Sabre system successfully launched and already delivering benefits
  • Singapore Airlines strategic investment completed, demonstrating confidence in Virgin Australia strategy
  • Business efficiency project delivered sustainable efficiency gains of $25 million in H1 FY13, on track to deliver over $60 million for FY13
  • Velocity Frequent Flyer membership of 3.5 million, up by around 500K on H1 FY12
  • Interline and codeshare revenue increased 56.1% on H1 FY12 – expected to improve further in H2 FY13 with the successful introduction of the Sabre system in January 2013
  • Virgin Australia recognised as Domestic Airline of the Year for 2012 at the recent Roy Morgan Customer Satisfaction Awards

Virgin Australia Holdings Limited (ASX: VAH) today reported a statutory Net Profit After Tax of $23.0 million and an underlying Profit Before Tax of $61.0 million. This represents a decline of $35.1 million on the first half of Financial Year 2012, which was a high comparative period as a result of the Qantas industrial issues (the direct impact of which was approximately $6 million) and the absence of the Carbon Tax ($24.4 million).

Virgin Australia Chief Executive Officer John Borghetti said: “The Group has delivered a solid result in a difficult operating and economic environment, reflecting the significant progress we have made in diversifying our revenue base and improving cost control, while continuing to enhance the customer experience.

“The Game Change Program strategy has driven improved revenue performance, with revenue growth of 5.4 per cent on the first half of Financial Year 2012, building on the strong growth of 18.0 per cent that we achieved on the first half of Financial Year 2011. This revenue growth was also achieved in the context of the highest domestic market capacity increase since the launch of Jetstar in 2004.

“We have continued to grow our corporate and government revenue and maintained the new norm in which more than 20 per cent of our domestic revenue comes from this higher yielding market.

“Our innovative global alliance strategy continues to go from strength to strength, with a significant increase in interline and codeshare revenue, up 56.1 per cent on the first half of Financial Year 2012 . We are also seeing the benefits of this strategy on our Velocity Frequent Flyer program. Membership has increased by 15.5 per cent on the first half of Financial Year 2012 and points earned on airline partners have increased by 113.1 per cent.

“We have made a number of enhancements to our product, network and loyalty program. These enhancements, combined with the skill and dedication of our outstanding people, have seen us take the leading position in customer satisfaction. It was announced last week that Virgin Australia achieved Domestic Airline of the Year for 2012 at the Roy Morgan Customer Satisfaction Awards, which are based on the world’s largest ongoing independent single-source survey.

“Over the half, we have maintained our strong focus on positioning the company for profitable growth. We have outlined a multi-faceted plan that includes expansion in the high-growth regional and budget markets through the proposed acquisition of Skywest Airlines and the proposed acquisition of 60 per cent of Tiger Australia. If approved, the Virgin Australia Group will have the lowest cost-base in the full-service, budget and regional markets.

“Today’s financial results clearly demonstrate that our current strategy gives us the flexibility required to remain profitable in challenging conditions while continuing to position us for future growth”, Mr Borghetti said.

Financial and Operating Performance

“Considering the aggressive competition and challenging economic environment, Virgin Australia has delivered a solid financial performance for the first half of the 2013 Financial Year, illustrating the success and resilience of our new operating model.

“We attracted the highest number of passengers ever in a six month period, carrying over 10 million for the first time.

“Revenue increased by 5.4 per cent on the first half of the 2012 Financial Year, building on the strong growth of 18.0 per cent that we achieved on the first half of Financial Year 2011.

“Interline and codeshare revenue contributed to a large part of this growth, as did our expanding regional operations, which accounted for 22.9 per cent of total revenue growth. We are very pleased with the increasing take up of Business Class, with passenger traffic in the Business Class cabin growing by 91.6 per cent compared to the first half of Financial Year 2012.

“As foreshadowed, Virgin Australia outperformed the market on Group Yield growth. Group Yield was down 1.0 per cent, reflecting the aggressive capacity and pricing environment and a strong comparative period.

“The turnaround of the international business continues to progress well, supported by our alliance partner strategy. For the first half of Financial Year 2013, international revenue increased by 7.9 per cent.

“We have delivered a strong performance on cost, demonstrating our commitment to maintaining our cost advantage and our flexibility to withstand challenging operating conditions. Underlying CASK (excluding fuel) reduced by 1.5 per cent, in the context of significant product and service enhancements.

“The business was also impacted by the introduction of the carbon tax, the cost of which we were unable to recover due to aggressive competition in the market. The cost of the tax for the first half of Financial Year 2013 was $24.4 million.

“We have made significant progress on our three-year business efficiency program designed to ensure we have a sustainable cost advantage now and in the future. Over the half, the project has delivered sustainable efficiency gains of $25 million and we are on track to deliver over $60 million by the end of the financial year.

“Our current tiered hedging policy has been successful in providing short term certainty in a volatile environment. The remainder of Financial Year 2013 operating fuel requirements are 87 per cent hedged at a worst-case hedge rate of Brent AUD108 per barrel inclusive of option premium.

“We recorded capacity growth of 8.9 per cent across our domestic network, 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 growth of our regional ATR-72 turboprop network and the commencement of services on routes which previously lacked competition.

“In the second half of the 2013 Financial Year, we expect domestic capacity to grow between 5 and 7 per cent, inclusive of the new routes that we announced today.

“We are also pleased to remain the leading major brand in On Time Performance , having achieved 83.9 per cent for the first half of the 2013 Financial Year, which includes all of our regional operations. The fleet of ATR-72 turboprop aircraft delivered a strong On Time Performance improvement for the half, increasing to 84.5 per cent and surpassing our major competitor by 6.5 points. Performance was particularly good on the important Capital Connect routes between Sydney and Canberra, where our lead extended to 9.0 points”, Mr Borghetti said.

Capital Management

“As stated previously, the Group has been focused on strengthening our balance sheet.

“Over the half, we have repaid existing debt of $151 million, we have limited new borrowings and we have maintained good liquidity, with $430 million of unrestricted cash at the end of December 2012.

“In light of the continuing uncertain economic and competitive 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 and we will look to pay a dividend when appropriate”, Mr Borghetti said.

The Next Phase of the Game Change Program: On Track

“We are now six months into the second phase of our Game Change Program, which is about capitalising on our competitive advantages and driving new growth opportunities for the business, while retaining the flexibility to adapt to the changing market. I am pleased to report that we are on track on all key measures that we have set.

“As outlined in the Financial and Operating Performance, we have made significant progress on our three-year business efficiency program, which puts us on track to deliver a run rate of $200 million per annum by the end of Financial Year 2015. Business efficiency will continue to be an important focus for the organisation going forward, as part of our commitment to ensure we have a sustainable cost advantage as we grow.

“Velocity Frequent Flyer membership has now grown to over 3.5 million, an increase of around 500,000 members from the end of December 2011. The member base is highly engaged, with a number of new earn partners added in the hotel and online retail sectors and rewards redemption continuing to grow strongly with a 47.8 per cent increase in points redeemed. We expect this to continue to grow, supported by additional reward redemption opportunities and access to reward seats. The full commencement of reciprocal earn and burn programs with our partner airlines is driving substantial growth in points earned on airline partners, up 113.1 per cent on the first half of Financial Year 2012.

“A key component of the second phase of the Game Change Program involves improving our access to global markets in order to drive further revenue growth. As reported in our Financial Performance, this half we delivered 56.1 per cent growth in interline and codeshare revenue as a result of the continued development and strengthening of our alliances.

“Our new Sabre booking and check-in system will be key to driving future revenue growth. As a result of the new system, travel agents around the world now have far greater visibility of Virgin Australia, enabling them to book our flights with more ease using a system that aligns with global standards.
“In fact, we are already seeing the benefits of the system, with our proportion of bookings through the Global Distribution System (GDS) increasing five-fold since its launch in mid-January. It is also important to note that bookings though GDS channels typically have a 10 per cent yield premium to average bookings.

“The Sabre system will accelerate our growth in the corporate, government and high yield markets. With the stabilisation of load factors following the change in our business model and further growth in higher yield markets, we anticipate improved RASK performance going forward.
“Finally, over the half we have continued to invest in our key differentiator: maintaining an engaged and motivated team of people and putting the customer at the centre of everything we do.

“Our recognition at the recent Roy Morgan Customer Satisfaction Awards as Domestic Airline of the Year demonstrates the fantastic work that our team are doing every day in going above and beyond to ensure our customers have the best possible travel experience.

“The importance that our team plays in the success of our airline cannot be overstated and I would like to thank each and every one of them for their tireless efforts and for their dedication to Virgin Australia.

Virgin Australia Group Growth Plan

“We are very pleased to have received ACCC clearance for our proposed acquisition of Skywest Airlines (ASX: SXR, LSE: SKYW). Pending the approval of the Foreign Investment Review Board, Skywest shareholders and the final sanction of the Singapore High Court, we anticipate completing the acquisition by the end of April 2013.

“This acquisition will enable us to accelerate our expansion in the high growth fly-in-fly-out (FIFO) and regional markets, increasing competition in these important segments and bringing new benefits to customers. It will also be very positive for business and tourism, particularly for regional Australia, as we will invest to support the growth of Skywest.

“We have also recently received approval from the shareholders of Tiger Airways Holdings Limited (SGX: TGR) for our proposal to acquire 60 per cent of Tiger Australia. The ACCC is currently reviewing submissions relating to the proposed joint venture and has said that it proposes to announce its findings on 14 March 2013. Subject to all necessary approvals being obtained, we anticipate that this transaction will be completed by the end of April 2013.
“We strongly believe the proposed acquisition will increase competition in the market to the benefit of Australian consumers. By partnering with Tiger Airways, we can use our expertise to leverage Tiger Australia’s low cost base and build a competitive and sustainable budget carrier. We are committed to maintaining the Tiger Australia business model and brand, and we look forward to growing the Tiger Airways business.

Outlook

Consistent with the guidance provided at our Annual General Meeting on 20 November 2012, while we currently expect an improved underlying Profit Before Tax in Financial Year 2013 compared to Financial Year 2012 (excluding the impact of the proposed Skywest Airlines acquisition and Tiger Australia joint venture), the uncertainty in economic conditions and the competitive environment precludes us from providing a profit guidance for the year.

ENDS

1Underlying Profit / (Loss) Before Tax (PBT) is a non-statutory measure used by Management and VAH’s Board. Refer to slide 4 of the presentation for a reconciliation of Statutory and underlying PBT
2BITRE figures show that the first half of Financial Year 2013 has seen the highest domestic capacity increase by the market in eight years with 10.8% industry growth – there was 17.5% growth in the first half of Financial Year 2005, when Jetstar commenced.
3Interline and codeshare customers on Virgin Australia’s domestic and international short-haul network in H1 FY13 compared to the prior corresponding period.
4The Roy Morgan Annual Customer Satisfaction Awards are based on the world's largest ongoing independent single source survey, which includes the opinions of 50,000 Australian consumers and 22,000 business decision makers annually
5Transcontinental Perth was the only domestic route on which Virgin Australia operated Business Class in the first half of Financial Year 2012, therefore this is the only route for which we can provide comparative figures.
6Transcontinental Perth was the only domestic route on which Virgin Australia operated Business Class in the first half of Financial Year 2012, therefore this is the only route for which we can provide comparative figures.
7Group Yield is based on Passenger Revenue, which includes earned revenue and ancillary revenue such as baggage and change fees
Underlying CASK is defined on page 7 of this media release.
8As at 25 February 2013
9On Time Performance is defined as on time departures (a flight departing the gate at the scheduled departure port within 15 minutes of the scheduled departure time). On Time Performance for the first half of Financial Year 2013 for all Virgin Australia branded operations was 83.9%, while On Time Performance for Qantas branded operations was at 81.4% (this includes Qantas and QantasLink, it does not include Jetstar).
10Interline and codeshare customers on Virgin Australia’s domestic and international short-haul network in H1 FY13 compared to the prior corresponding period.
11Revenue Load Factor means RPKs as a percentage of ASKs. International and Total Network Revenue Load Factor metrics include Virgin Australia and International Alliance Partner ASK and RPK data on our revenue-share routes with International Alliance Partners Air New Zealand and Delta Air Lines.
12Underlying CASK is defined on page 7 of this media release.