Macquarie, Deutsche analysts approve Virgin’s cost cuts

Virgin Australia’s plan to cut jobs and rationalise aircraft will put the airline on the right path, analysts say.

Virgin will rationalise its aircraft numbers.

Virgin Australia’s ambitious plan to slash costs by reducing jobs and rationalising its aircraft numbers will put the cash-strapped airline on the path to improved profits, according to analysts.

The airline on Wednesday unveiled long-awaited plans to raise more than $1 billion in capital as it kicked-off a three-year program to rebalance its cost-base through workforce reductions and the sale of underused aircraft.

Analysts at Macquarie were positive on Virgin’s proposed changes, saying that the Australian domestic airline market would benefit from the carrier’s plans to get rid of as many as six of its 14 ATR turboprop aircraft and its remaining Embraer E190 fleet.

After its fleet reductions Virgin will be left with a mix of Boeing 737 and 777s, Airbus A320 and A330s and a handful of ATR ­turboprops.

“This suggests Virgin’s approach to capacity is rational. Virgin’s decision to phase-out E190s which operate domestically including SYD-MEL should lead to capacity reductions which may favourably impact domestic load factors and yields,” said the Macquarie analysts.

Centre for Asia Pacific Aviation boss Peter Harbison said Virgin’s moves to rationalise its fleet would greatly assist in the airline’s plans to reset its cost base and would play a critical role in regaining its competitive edge.

“On balance this is not the best outcome for Qantas; infighting on the Virgin board and an undercapitalised competitor was much more digestible. The smaller carrier should now regain some of the stability in 2013 that concerned Qantas enough to provoke it to seek government subsidy,” he said.

The announcement saw shares in Virgin fall more than 12 per cent on Wednesday, but analysts remain optimistically cautious that the airline will be in a much better position if the promised $300 million in projected savings become a reality.

“While this is not a licence to squander — indeed the wakeup call is there for Virgin to start cutting its unit costs, with Qantas breathing down its neck — there are grounds for comfort in that the pressure on quarterly results should give way to achieving a solid long-term outcome,” Mr Harbison said.

Virgin is expecting to incur restructuring costs of as much as $250m as well as non-cash balance sheet impairments of up to $200m over its three-year cost-cutting program.

Deutsche Bank analyst Cameron McDonald said the overall benefits of the program would trickle down from the 2017 financial year with a 48.6 per cent bump in previously forecast profits before tax to $93m. By the end of the 2018 financial year, Mr McDonald expects Virgin to post a $143.3m profit before tax versus the $97.4m he had previously forecast.