Virgin Australia in profit as domestic airfares surge

Virgin Australia's decision to limit the number of flights in the domestic market at a time of weak demand and its ability to pick up more business traffic has paid off.

The carrier charged an average of 9.1 per cent more for its mainline domestic fares and 12 per cent more for fares at low-cost arm Tigerair Australia in the first half, helping to drive an eight-fold rise in first-half underlying profit to $81.5 million.

Virgin chief executive John Borghetti said the airline had nearly met its target of 30 per cent of domestic revenue from ...
Virgin chief executive John Borghetti said the airline had nearly met its target of 30 per cent of domestic revenue from the corporate market. Photo: Daniel Munoz

Both Virgin and rival Qantas have kept seating capacity at relatively flat levels since May 2014, when the pair ended a financially damaging capacity war that left both airlines in the red.

Virgin chief executive John Borghetti said an increased mix of business and government travellers had boosted average fares for Virgin in the first half, while Tigerair had benefited from product improvements at Melbourne Airport and its better on-time performance than rival Jetstar.

Virgin CEO John Borghetti and Financial Officer Geoff Smith brioef media on the half-year result.
Virgin CEO John Borghetti and Financial Officer Geoff Smith brioef media on the half-year result. Photo: Daniel Munoz

"Certainly capacity growth has been slower," he said. "But we have to be careful to not jump to the conclusion that airfares are going through the roof. When we started this journey five years ago [to take Virgin upmarket] we said we'd bring competition and airfares would go down. Fares today are cheaper than they were five years ago."

Weaker consumer confidence

However, Mr Borghetti said weak consumer confidence combined with Virgin picking up more corporate and government traffic, meant passengers were booking their flights a closer to the date of travel.

That, in turn, affected the timing of the airline's cashflows, with Virgin reporting a $133 million cash outflow in the first half.

"I've seen this many times [over my career]," said Mr Borghetti, who earlier worked more than 30 years at rival Qantas Airways

Virgin Australia's Velocity frequent flyer program has long offered a membership pause for a six-month period for those ...
Virgin Australia's Velocity frequent flyer program has long offered a membership pause for a six-month period for those expecting a new addition to their families. Following the pause, members continue at their old level of silver, gold or platinum for another 12 months. Photo: Glenn Hunt

"Typically speaking whenever sentiment is low, people don't commit as early. It is typical human behaviour in anything." 

Virgin also benefited from a lower oil price during the half, although the majority of the gains were eroded by a weaker Australian dollar which pushed up the cost of its US dollar debt and supplies.

Overall, the airline reported a $33.5 million net gain from the lower oil price. Its fuel is hedged at an average price of $77 a barrel in the second half and it has little exposure to any participation in the downside at a time when the spot price of oil has fallen to $43 a barrel in Australian dollar terms.

In its domestic division, Virgin reported underlying earnings before interest and tax (EBIT) of $130 million in its domestic division, up from $69.7 million a year earlier, driven by its ability to boost fares rather than filling more seats.

Virgin's revenue per available seat kilometre rose 7.1 per cent in the domestic market, which is far higher than the 1.5 per cent rise Credit Suisse expects from rival Qantas Domestic.

Mr Borghetti said Virgin was already "knocking on the door" of a target of 30 per cent of domestic revenue from the corporate and government market by the end of financial year 2017.

Jets for sale

On Thursday, Virgin disclosed plans to dispose of five of its 18 Embraer E190 jets by September, with the flying to be covered by increased use of its Boeing 737 fleet in a move that will help cut costs.

Chief financial officer Geoff Smith said the airline did not expect any new owned aircraft deliveries in the second half.

Virgin's international division, which took a $19.2 million EBIT hit from volcanic activity in Bali during the first half, remained loss-making. Virgin's international underlying EBIT loss was $30.8 million, which was better than the $39.5 million loss a year earlier.

Low-cost arm Tigerair Australia reported a major turnaround, swinging to underlying EBIT of $13.9 million in July-December from a $24.8 million loss in the year-earlier period.

On a bottom-line basis, the airline swung to a $62.5 million first-half profit from the year-earlier $47.8 million loss.

Virgin had already revealed its half-year results figure last week as part of a December-quarter market update. Deutsche Bank analyst Cameron McDonald last week said the $81.5 million underlying profit figure was below his expectation of $85.8 million, while Citi analyst Anthony Moulder had expected an even higher $95.5 million.