VA expects a loss for financial year 2018-19

[Melburnian1]

This has not long been posted by Virgin Australia Holdings:

https://www.asx.com.au/asxpdf/20190517/pdf/445551wf9w3wqr.pdf

Note that a number of factors are blamed.

I previously highlighted that passenger numbers at Australian airports (domestically) are growing only slowly if at all. International has been better, but is also slowing. This confirms that yields per available seat are not satisfactory despite VA keeping a pretty tight rein on capacity.

 

[jakeseven7]

Wide spread coverage:

Virgin Australia announces flight cuts after warning of sharp loss

The airline's share price copped a beating on Friday after it announced an expected loss in fiscal 2019 due to weaker demand and fluctuating fuel prices.

www.smh.com.au

Virgin takes a $100 million nosedive

Virgin Australia (ASX: VHA) has announced an expected loss of $35.6 million at the end of FY19 this morning.

www.businessnewsaus.com.au

This is starting to look a little worrying for VA, and its' customers. I'm significantly 'invested' via Velocity in VA but starting to get fidgety about their plans or lack thereof to sharpen up the business.

Two ways I read this -

1) Is it the new CEO doing a big 'wipe the slate clean' of all the Borghetti disasters to start fresh and build up?

2) Or are there more structural issues with the business that is just not allowing it to be successful??

Last 3 years: Over 1 billion lost.... what are they really going to do? Surely network reductions and destination cuts won't reverse all that??

 

[AustraliaPoochie]

Just throwing good money after bad, ie, losses, and more losses and more.

 

[Bagpuss]

It will be interesting what they do with the owned fleet. If they are reducing capacity it would make logical sense to sell one or two 737's and if conditions improve to lease replacement aircraft.
One of the issues with capacity is they mainly transitioned to a near all 737-800 fleet (the two 737-700's VH-VBY and VH-VBZ are owned). It would have have made sense to have had more 700 series.

 

[azza_1992]

Genuine question, would a 737-700 all that much cheaper to operate though? I can't imagine the costs scaling proportionally with the number of seats. You've still got two pilots, baggage handlers, maybe one less cabin crew, and the empty metal still weighs 90% as much.

If low yields due to flooding thin markets is their main problem, they could just as easily make "virtual" 737-700s by blocking off the B and E middle seats of a 737-800, without having to commit to two aircraft series.

 

[Bagpuss]

Genuine question, would a 737-700 all that much cheaper to operate though? I can't imagine the costs scaling proportionally with the number of seats. You've still got two pilots, baggage handlers, maybe one less cabin crew, and the empty metal still weighs 90% as much.

It's factored by the additional weight and fuel burn. Mainly factored by if you could fill a -700 (which has 48 less seats), it would be cheaper to operate than a -800 with 50 odd empty seats.
Have to think that a B737 could be operating 6 or 7 flights a day, it adds up pretty quickly.

Though that said, if they were to sell aircraft (within the mainline fleet) it would probably be the 2 -700's, they were due to exit the fleet years ago.

 

[Melburnian1]

It's factored by the additional weight and fuel burn. Mainly factored by if you could fill a -700 (which has 48 less seats), it would be cheaper to operate than a -800 with 50 odd empty seats.
Have to think that a B737 could be operating 6 or 7 flights a day, it adds up pretty quickly...

Bagpuss, I can't question your analysis re B737 v B738 - you may know more than me - but the overall 'global' (all flights) domestic load factors does not suggest VA is typically operating domestic flights with '50 odd empty seats.'

In 2017-18 VA's load factor (international and domestic combined) was an even 80 per cent, so that suggests a typical 35 seats vacant on a 176 seat B738. Not trying to nitpick but there's some difference between '35' and 'around 50.' Yield per available seat remains the key metric though.

One would think with the high fares charged on the 'golden triangle' peak hours flights that there'd be sky high profits that could cross subsidise other flights, but obviously not.

Is it time for VA to substantially reduce its number of deskbound managers and reduce salaries of many other office staff?

 

[Bagpuss]

Bagpuss, I can't question your analysis re B737 v B738 - you may know more than me - but the overall 'global' (all flights) domestic load factors does not suggest VA is typically operating domestic flights with '50 odd empty seats.'

Is it time for VA to substantially reduce its number of deskbound managers and reduce salaries of many other office staff?

Looking at Flightradar quickly shows where the -700's are suited. I was purely indicating that having more than 2 may have been a wiser move, such as having around 6 - 10. They do show up on the golden triangle too.

The looses tend to relate to international flights (I suspect HKG mainly atm) and Tiger. I wouldn't be overly surprised if they pulled the plug on Tiger or integrate with Scoot with SQ maybe coming back into the fold there, I also don't know why VARA have a separate management team ... maybe they will fully integrate VARA into the mainline. So in answer to your question, I think it has merit.

I'm sure there will be some "interesting" announcements in due course which may reveal some of the historical issues. Though I think some of the heavy spending (post rebrand) was around introducing "The Business" (including downtime) and WiFi.

 

[Zanzara]

Interesting times. I may be wrong but I expect a lot more cost reductions. NZ dysfunctional relationship and subsequent divorce was unplanned and probably costly to try and fix accompanied with low yields?. Virgin also really need to fix their IT. Their antique website and clunky interface with Velocity is painful. That won't be cheap to resolve either. Just my 2c...

 

[Melburnian1]

Bagpuss, within reason anything is possible in life or business, but is it realistic to suggest that at some stage VA - the whole shebang - may fail and leave Oz with the QF Group as its only major airline entity?

It always amazes me how continually lossmaking entities (VA is one, Uber is another but latter is 'younger', Alitalia, Etihad... can continue to be supported by banks and other financial institutions, even when there are continual 'promises' that the business is 'improving' but funnily the talk never turns into a sufficient return on shareholders' equity or other profit measure.

The years dull my memory but say in 1996, five years or so before its demise, I don't recall when flying on Ansett, amassing Golden Wing points or similar that Australians expected that business to fold.

 

[Saab34]

Interesting language in this article

Virgin Australia's confusing profit U-Turn mid flight

This will probably be the corporate confession season’s most controversial announcement.

www.smh.com.au

What exactly are they planning on introducing to offset regular fuel jumps, general downs turns I wonder. It appears they want to bullet proof the operation up to a higher fuel price. Quite simply that involves pulling out a lot of existing everyday cost.

I can see ALOT of cost cutting on the horizon. I think the days of the current ‘full service’ setup are numbered. Ancillary revenue is king.

-Carry on Only fares? Big in the USA now.

-Tiger closure? Could pickup some loco pax on the above move. Let’s be serious. It’s the most exposed to fuel prices and it’s never going to make any cash.

-Reduction in overnighting of the fleet.

-More contract airport staff over salaried company staff.

-Engineering outsource increase.

-The fleet will be pushed harder. Utilisation increase. Opportunity to return leased aircraft or Tiger swap outs without reducing network.

-HQ Job cuts.

 

[juddles]

And this is the airline that travelers want to jump to when they suffer a trivial problem on a Qantas flight

 

[pauly7]

Interesting language in this article

Virgin Australia's confusing profit U-Turn mid flight

This will probably be the corporate confession season’s most controversial announcement.

www.smh.com.au

What exactly are they planning on introducing to offset regular fuel jumps, general downs turns I wonder. It appears they want to bullet proof the operation up to a higher fuel price. Quite simply that involves pulling out a lot of existing everyday cost.

I can see ALOT of cost cutting on the horizon. I think the days of the current ‘full service’ setup are numbered. Ancillary revenue is king.

-Carry on Only fares? Big in the USA now.

-Tiger closure? Could pickup some loco pax on the above move. Let’s be serious. It’s the most exposed to fuel prices and it’s never going to make any cash.

-Reduction in overnighting of the fleet.

-More contract airport staff over salaried company staff.

-Engineering outsource increase.

-The fleet will be pushed harder. Utilisation increase. Opportunity to return leased aircraft or Tiger swap outs without reducing network.

-HQ Job cuts.

Interesting list on potential cost cutting I have a few questions:

- They already contract out a lot of airport staff.... Are we now talking their big hubs?

- There have been waves of redundancies at The Village and Sydney HQ already, perhaps they will shut Sydney?

- I thought VA did minimal maintenance themselves already?

- I agree, Tiger is always going to be a big distraction for them. A quick closure would focus efforts on mainline VA.


Overall though their strategic challenge is that they shot to match QF and just didn’t quite get there. Meanwhile QF had their own turnaround and are now rebounding away, carefully expanding QFi and carefully upgrading. VA have found out the hard way how tough building up VAi is without strong alliances (HKG expansion disaster, NZ Trans Tasman bleeding)

I’ll get shot for mentioning this again by the VA fan bois - and worth mentioning I fly VA a lot for work as well - but I think their achilles heel for pulling more premium pax (and by that I mean people who are prepared to pay just a little more, not necessarily J flyers ) is the fact they have a weak alliance network.

I’m not saying joining Sky or Star is the silver bullet and we know all the bridges that they’ve burned - but maybe PS can clear up some of the petty fights that JB had. I mean if AJ is now best buds with CX looking at huge codeshare deals surely PS can mend bridges with the VA hating airlines and their CEOs... at some point!

An strong alliance places much more value on VA/Velocity. It extracts those precious few extra $ from people. How many times do I hear in the office people strategising to fly QF (on BFOD policy - and succeeding) so they can get their Bali or Milan holiday points. Velocity even if it does ‘technically’ get you there with its patchwork, asterisk laden, half online/half call up alliance - it’s just not good enough.

So VA if you are reading this while you are burning the furniture, please consider (again) the advantages of being in a global alliance will bring.

 

[HS-TQE]

I’m not saying joining Sky or Star is the silver bullet and we know all the bridges that they’ve burned - but maybe PS can clear up some of the petty fights that JB had. I mean if AJ is now best buds with CX looking at huge codeshare deals surely PS can mend bridges with the VA hating airlines and their CEOs... at some point!

An strong alliance places much more value on VA/Velocity. It extracts those precious few extra $ from people. How many times do I hear in the office people strategising to fly QF (on BFOD policy - and succeeding) so they can get their Bali or Milan holiday points. Velocity even if it does ‘technically’ get you there with its patchwork, asterisk laden, half online/half call up alliance - it’s just not good enough.

So VA if you are reading this while you are burning the furniture, please consider (again) the advantages of being in a global alliance will bring.

The high costs of joining an alliance aside, airline alliances would also be on the very bottom of Scurrah's priorities considering he's in cost cutting mode as of the moment. Joining one would just add more to expenses, which goes against Scurrah's cost trimming aim.

As for Alliances, It's either SkyTeam or no alliance for VA. As long as Luxon & friends are still at NZ.
Luxon & NZ are still of the belief that VA should be only a "domestic" airline for NZ and Star in general.
The boardroom and all the other shareholders rejected Luxon's alleged demands for VA to close international entirely, leading to NZ's exit from VA entirely.

If anything, if VA are to be 'primarily' domestic airline only, the closest they are going to get would be likely to be under a DL ownership, with their only international being NZ (AKL/CHC/WLG) on 737s and LAX.

There are also a lot of alliances that VA has to untangle before they're considered for an Alliance in general. Plus there are no interested buyers on the horizon for HNA, EY or SQ's stakes in VAH. So really all three parties are just holding on a stake into VAH as a ongoing concern, despite the financial debt issues of the first two groups.

 

[pauly7]

The high costs of joining an alliance aside, airline alliances would also be on the very bottom of Scurrah's priorities considering he's in cost cutting mode as of the moment. Joining one would just add more to expenses, which goes against Scurrah's cost trimming aim.

As for Alliances, It's either SkyTeam or no alliance for VA. As long as Luxon & friends are still at NZ.
Luxon & NZ are still of the belief that VA should be only a "domestic" airline for NZ and Star in general.
The boardroom and all the other shareholders rejected Luxon's alleged demands for VA to close international entirely, leading to NZ's exit from VA entirely.

If anything, if VA are to be 'primarily' domestic airline only, the closest they are going to get would be likely to be under a DL ownership, with their only international being NZ (AKL/CHC/WLG) on 737s and LAX.

There are also a lot of alliances that VA has to untangle before they're considered for an Alliance in general. Plus there are no interested buyers on the horizon for HNA, EY or SQ's stakes in VAH. So really all three parties are just holding on a stake into VAH as a ongoing concern, despite the financial debt issues of the first two groups.

(Unfortunately) I don’t really disagree with anything you are saying....! Anything VA does with partners is going to be difficult and probably costly but the rewards could be great, eventually.

I guess my overall point is that you can’t cut your way completely to profitability and growth. Sure it is a good start to make sure you are as healthy as you can be and then able to grow but at some point they will need to invest in something to drive their business.

JB did a lot of ‘investing’ but many financial and business commentators argue he did it in complexity and the wrong areas. To the point where their cost base advantage was eroded.

I just wonder what their growth plans are and even if it’s in the medium/long term surely an alliance isn’t off the table.

 

[andrewpf]

...
(HKG expansion disaster, NZ Trans Tasman bleeding)
---

Why is the HKG expansion a "disaster"?

Latest (Feb) loadings by BITRE show they are pretty much achieving similar aircraft loadings to Qantas on the route (88% inbound / 72% outbound). It is to NZ that they are squeezed with loadings 65% - 68% while both Qantas and Air NZ are both above 80%.

 

[Saab34]

Hong Kong is 4 flights a day. It’s a drop in the ocean. USA pressures and NZ are the issue here. They need to get Brisbane to Hong Kong and a 2nd Sydney flight and it’s a solid network.

They already contract out a lot of airport staff.... Are we now talking their big hubs?

- There have been waves of redundancies at The Village and Sydney HQ already, perhaps they will shut Sydney?

- I thought VA did minimal maintenance themselves already?

- I agree, Tiger is always going to be a big distraction for them. A quick closure would focus efforts on mainline VA.

Sydney corporate office was only opened because JB lived in Sydney. PS lives in Brisbane.

Potential ops for more ramp outsourcing. A lot of ports has ramp Swissport and Service as VA Salaried. And vice versa.

Tiger needs to go. As it seems not capable of pulling any profit figure outside of single digits it’s nothing but a management distraction.

Tiger can’t cover fuel increases either. VA might be able to change its strategy to offset but what’s the point if Tiger just then wipes out these savings. Just get rid of it, mainline needs the pilots anyway.

 

[Bagpuss]

Dare I mention my theory on VA....
Tiger will most likely be shut down OR a deal with SQ to rebrand to Scoot. (Really there’s not that much difference on day to day fares between all carriers depending when you book.)
Virgin Group move their ownership to Virgin Atlantic. (Virgin Atlantic are owned by Virgin / Delta / KLM-Air France)
HNA will sell off their interest, which could be to Delta. (Noticing a pattern, yet?)
Etihad will sell of their interest, which could be to Connect Airways (which just bought flybe, which is “led by Virgin Atlantic). (Again, notice the pattern?)
There maybe some shuffle with remaining owners.
Virgin Atlantic and Virgin Australia both join SkyTeam and I suspect that there would be some financial input by SkyTeam members to save Virgin money on the setup and new integration. With this the existing SQ codeshare relationship will remain as is.
I also find it questionable on if B777’s could be sold/transitioned to Delta and VA exits this route which means it could become DL flights with daily flights between BNE, SYD, MEL and LAX. Another option could be that the flights remain VA but staff outsourced / employed in the USA (if it’s cheaper).

 

[Melburnian1]

Dare I mention my theory on VA....
Tiger will most likely be shut down OR a deal with SQ to rebrand to Scoot. (Really there’s not that much difference on day to day fares between all carriers depending when you book.)..

A very instructive suggestion. Scoot must be pretty well know in Australia by now.

 

[eastwest101]

A very instructive suggestion. Scoot must be pretty well know in Australia by now.

Pretty much universal advice was to rebrand Tiger as Scoot before Virgin brought the business years ago, as the Tiger brand was toxic. Now with the hodge podge mixed fleet and all the wrong pilot type groups Tiger has proven to be a colossal waste of time and capital.

The story of the Virgin Australia business is a Wrong fleet at the wrong time flying to the wrong places with the wrong things outsourced, too many management changes and restructures with an incompetent IT team and without a clear owner, partner and alliance and direction forward = a loss making airline

They are fortunate that Qantas are also incompetent in some areas and they have a pretty good front-line workforce in VA because those are the only two things keeping their heads above water at the moment.