Virgin Australia steps up fare fight

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This was published 11 years ago

Virgin Australia steps up fare fight

By Matt O'Sullivan

Update Virgin Australia has refused to back away from its increasingly bitter battle with Qantas for lucrative corporate travellers after posting a $23 million full-year profit and unveiling plans to expand capacity in the domestic market by as much as 9 per cent over the coming months.

Days after Qantas slumped to a $244 million full-year loss, Australia’s second-largest airline said a key factor in its return to profitability from a $68 million loss previously had been its ability to snare more corporate and business flyers. Virgin’s revenue rose 20 per cent to $3.9 billion.

Virgin Australia returns to profit.

Virgin Australia returns to profit.

The airline’s plans to boost capacity by 8 to 9 per cent in the domestic market in the first half of the new financial year threaten to force fares down further, crimping earnings for both Qantas and Virgin in a market from which they make the bulk of their money.

Virgin shares fell as much as 2 cents, or 4.2 per cent, in early trading to 46 cents, as the full-year results fell short of analysts’ estimates of a $47 million profit. Qantas shares were up about 1.1 per cent.

'Aggressive discounting'

Virgin's chief executive, John Borghetti, said today that discounting of fares for corporates was the most aggressive it had been in decades.

‘‘I have been around a long time ... 40 years, and I haven’t seen discounting to this level since way before Ansett stopped flying,’’ he said.

'‘There is a lot of aggressive competition but frankly we were expecting it and we will be as competitive as we can be to ensure we hold our position. We do have a cost advantage on our side.’’

Virgin also announced today that it will target productivity gains of $400 million over the next three years. Mr Borghetti said he would not resort to ‘‘slash and burn’’ tactics such as redundancies but would achieve the targets by improvements in aspects such as reducing aircraft fuel burn.

Qantas announced last week that it will boost capacity by as much as 11 per cent in the first half, in an effort to protect its 65 per cent share of the domestic market.

No guidance

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Like its arch rival, Virgin has also declined to give earnings guidance for the new financial year because of an ‘‘uncertain economic environment.’’

Although Virgin posted a profit for the full-year, it swung to a $29 million loss in the second half as both it and Qantas stepped up their efforts to grab more of the business travel market.

Virgin reported an underlying profit before tax of $82.5 million for the year to June, more than reversing a loss of $66.6 million a year earlier.

The chief executive, John Borghetti, said attracting corporate and government flyers had been key to its profitability, and the segment now made up 20 per cent of its domestic revenue.

‘‘Importantly, reaching the 20 per cent target is a tipping point which we believe effectively creates a new competitive norm,’’ he said.

Fatter yields

I haven’t seen discounting to this level since way before Ansett stopped flying.

Virgin had boosted yields - or returns from fares - by 12.2 per cent from its core domestic operations, and by 12 per cent across the group, which includes international flights to Los Angeles and Abu Dhabi.

‘‘Our capacity plan during the year was focused on yield and margin improvement opportunities on strategic markets as opposed to an overall group market share goal. This strategy will continue,’’ Mr Borghetti said.

Virgin boosted capacity in its domestic network by 9.6 per cent for the year to June, which was largely due to it replacing Boeing 737-800 aircraft with larger Airbus A330-300s, increasing flight frequencies on key corporate routes such as Sydney-Melbourne, and the launch of its regional ATR-72 turbo-prop network.

Virgin’s international operations, which rely heavily on alliances with other airlines, posted a pre-tax profit of $35.4 million for the year, compared with $22.4 million previously.

Sir Richard Branson’s Virgin Group, Air New Zealand and Etihad have cornerstone stakes in Virgin.

Virgin did not pay a dividend.

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Virgin shares have easily outperformed Qantas stock in 2012, rising 68 per cent while Qantas has dropped 19 per cent, before today. Those movements compare with a 7.1 per cent advance for the overall ASX200 benchmark share index.

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