Yesterday’s half-yearly profit report from Virgin Australia was not good news: net profit slumped to $23 million, down 56% from the previous corresponding period. But Virgin CEO John Borghetti was upbeat as he guided the investor meeting through the “highlights”.
“The genie is out of the bottle,” he told participants. “We are a more resilient business … This is a solid result despite the economic uncertainty and the strong competitive capacity growth …”
It’s easy to be dubious about such claims. After all, Virgin lifted its fares 12 months ago to cover the cost of the carbon tax. Regardless, here’s how the CEO sold the company’s results to investors today.
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Face the music
Borghetti noted that the high net profit for last year’s half did not have the impost of a carbon tax, which cost the company $24.4 million. Had the yield not been down, the company might have recovered the impact of the tax; it could not. Another reason for the net profit slide was the fact that the previous corresponding period included a $6 million bounce delivered to Virgin sales when Qantas CEO, Alan Joyce, grounded the company’s entire fleet over a dispute with the union.
The two figures add up to $30 million or so, the difference between the “underlying profit” result before tax: $61 million for the half, down 36% from the previous corresponding period’s (PCP) $96.1 million result.
Explain the detail
Then comes a business transformation cost of $36 million, more than three times as much as the PCP’s $10.5 million. This was mostly the cost associated with introducing the new online booking system, Sabre, which involved training 4,400 staff and backfilling their positions while they learned the new system.
A generous dollop of relief from the taxation department saved the result from disaster – introducing an employee share scheme which delivered a nearly $20 million saving in income tax for the period; it is a one-off benefit that could not have come at a better time.
Diss your rivals
Virgin’s competitor – Qantas – has flooded the market with more capacity than demand for it, and Virgin has been forced to increase its capacity to follow suit, but Borghetti balked at the suggestion that this was the real reason for the profit slump.
“There is a defensive capacity strategy and a strategic one. All our capacity growth has been strategic. But our competitor has a defensive strategy,” he said.
Jetstar (owned by Qantas) grew its capacity on the Sydney Melbourne route by 57%, for example, compared to Virgin’s 3% and Qantas by 11%, according to a graph in Borghetti’s presentation. “The domestic market is growing is about 3% to 4%,” he said. “Even when you see this capacity flood, our yield has performed better than others in our market.”
Back to the good news
There was more good news. Revenue from both international and domestic businesses increased, with the international business improving its pre-tax profits (EBIT) from $32.2 million to $35.4 million. The impact of the carbon tax fell on EBIT for the domestic business, down to $49.3 million from $87 million.
Virgin aims to achieve $60 million in cost savings for the 2012-13 year. “This is a sustainable, year on year, cost benefit, which is better than we expected and we are confident we can reach the targets on the chart. “
Encouragingly, passenger numbers reached 10 million for the first time.
Add a lot more good news
Borghetti promised that the Sabre booking and ticketing “global distribution system” would deliver the “cream on the cake”. Already there has been a five-fold increase in bookings via the system. “Booking through GDS channels typically have a 10% yield premium on average prices.”
The loyalty program has increased by half a million to 3.5 million, far exceeding the view of some analysts, Borghetti reminded the room, that it had reached capacity when it was at 1.5 million members.
The two acquisitions that are currently subject to regulatory approval, SkyWest and Tiger, would make Virgin “the lowest-cost operator in every sector of the market”.
Virgin staff have won various prestigious awards for service, and in further improvements, wide-body planes were introduced on the routes from the east coast to Perth.
The company flies to 400 international destinations. “I remember when everyone was saying there was no way we could compete internationally,” Borghetti again reminded the room how wrong the experts could be.
He pointed to the entry of Singapore Airlines as a shareholder, raising $102 million, used to pay down debt and leave the company with cash of $430 million and capacity to borrow.
Borghetti provided no profit guidance for the year.
This article first appeared on LeadingCompany.