Virgin profit stuck on tarmac amid price war
Virgin is locked in battle with Qantas and Jetstar for a bigger chunk of the domestic airline market. Photo: Bloomberg
John Borghetti's description of the current battle between Qantas and Virgin Australia as David versus Goliath is apt.
In the past eight months the decision to flood the domestic airline market with extra capacity – which prompted a fierce reaction from Qantas - has created one of the most dramatic airline price wars since 2004 when Qantas launched Jetstar.
But Borghetti sees it as part of an endgame to reposition Virgin by diversifying its revenue base and improving efficiencies. This included becoming a full-service carrier, going after the lucrative corporate and government client market and forming global alliances. It also included improving its Sydney to Perth route, which is where most of the capacity went.
The strategy includes buying regional airline Skywest in Perth for $100 million and taking a 60 per cent stake in Tiger, a deal which is awaiting ACCC approval.
“In the last eight months what has become clear is we have withstood the strongest competition … 18 months ago we would have been saying we are making a loss.”
Virgin reported a net profit of $23 million for the six months to December 31, which was less than half the previous corresponding period's $51.8 million profit. Revenue was up 5.4 per cent to $2.1 billion.
Part of the fall in profit was attributed to a $24 million carbon tax impact, costs associated with the business transformation and the fact that in the previous corresponding half Virgin benefited from industrial action at Qantas, including the controversial grounding.
Last week Qantas reported that its domestic Qantas airline business fell from $328 million to $218 million, wiping more than $100 million in profit, from the excess capacity and price war with Virgin and Tiger. Its chief executive Alan Joyce put a line in the sand of 65 per cent market share for Qantas and Jetstar and confirmed the airline would put between 5 and 7 per cent more capacity into the market in the second half, suggesting the price war is far from over.
Today Borghetti said Virgin was committed to increasing domestic capacity at a similar amount, including introducing double daily weekday flights on A330 services between Brisbane and Perth.
“If there is one slide that indicates the airline's resilience it is the capacity slide,” he said.
The slide shows that in the past six months Virgin increased capacity by 3 per cent on the Sydney to Melbourne route, compared with 57 per cent for Jetstar and 11 per cent for Qantas.
“When you see this sort of capacity flood, you can see it has had an impact on yield but our yield has performed better than market.”
But the market isn't convinced. Investors pushed Virgin's share price 4.6 per cent lower to 41.5 cents a share as it questioned where the battle with Qantas might end.