Virgin Australia Runs Into Turbulence A Second Time

By Glenn Dyer | More Articles by Glenn Dyer

Virgin Australia (VAH) yesterday presented investors with the bill for its aggressive expansion plan and marketing blitz and it wasn’t pretty – a loss for the year to June 30 of possibly $110 million against a profit for 2011-12 of $23 million.

It was the airline’s second downgrade in the last three months – no wonder there have been stories of executives being told to cut spending on even the most mundane of things like coffee, and the airline cut its maintenance budget, leading to the sacking of some maintenance engineers in Melbourne last week by contractor Thiess.

Yes, the airline trotted out the carbon tax as one of the factors – but the acquisition of West Australian regional airline, brought in a loss maker, and we have yet to see figures on the cost of buying control of smaller rival, Tigerair Australia.

And Virgin seems to be having problems with its new reservation system, after problems with the one it replaced hurt profit in previous years.

The loss and market reaction – a 4.4% fall in the share price to 43.5c (down 2c) – will no doubt be taken in by the airline’s big shareholders Air NZ, Singapore Air and Etihad and could see one of them using it as an excuse to try for control.

VAH 1Y – A rickety ride

In issuing the second downgrade yesterday, three weeks before it was due to report the full year results, Australia’s second largest airline said it expects to post a loss after tax of between $95 million and $110 million for the year to June. That includes a pre-tax loss of between $5 million and $10 million for Skywest, which it acquired earlier this year.

There was no word on the cost of Virgin’s toe to toe marketing war with Qantas in the domestic market which is the core of its earnings. Qantas is due to report its full year earnings in the next 10 days.

Virgin said restructuring costs would total about $100 million for the year, which includes $36 million it had announced in the first half.

The costs relate to a the Sabre booking and check-in system, the purchase of a controlling stake in Tigerair Australia and the takeover of West Australian airline Skywest.

Virgin said it had taken longer to finalise its revenue recognition during the June half year due to the introduction of the new Sabre reservation system.

"In the 2013 financial year, we accelerated the execution of our major restructuring program, which is critical to our success going forward," Virgin Australia chief executive John Borghetti said in a statement. "Although today’s update is disappointing and notwithstanding a challenging environment, we have made significant progress on the execution of our ‘game change program’."

Mr Borghetti said the airline now had the right platform in the Australian market to generate sustainable earnings benefits.

The airline estimated the total cost of the federal carbon tax would be between $45 million and $50 million for the year. Virgin said it had been unable to recover the cost of the tax due to the weak economic environment and tough competition.

Excluding one-off restructuring costs and the Skywest loss, Virgin expects to post a pre-tax loss of between $30 million and $50 million for the year to June. That figure includes the cost of the carbon tax.

Mr Borghetti said the latest guidance was ‘‘disappointing’’ but he highlighted the ‘‘significant progress’’ the airline had made in reinventing itself as an upmarket airline.

‘‘Our strategic investments in Tigerair Australia and Skywest, coupled with the optimisation of Sabre and the transformation of the Virgin Australia brand and network sees us well positioned for the future," he said.

It seems that the next year will be all about cost cutting, containment and trying to make the ambitious expansion plans at home and offshore deliver higher revenues and especially earnings.

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About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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