Virgin Australia bracing for $75m coronavirus impact

Virgin Australia says the coronavirus will take $50m to $75m off its full year bottom line as its pulls flights from its schedule.

Virgin CEO Paul Scurrah says the benefits of cost and efficiency measures have yet to be realised. Picture: Jeremy Piper

Higher fuel and labour costs have hit Virgin Australia’s half year result, with the airline posting a $14.5m before tax profit down from $111.9m in the previous corresponding period.

A new accounting standard was used for the results, which also saw a $99.9m after tax loss, up from $55m.

A statement to the Australian Securities Exchange said the result reflected an additional $40m in fuel costs, an increase in enterprise agreement labour of $12.5m, higher airport costs and depreciation and rental costs of $32.3m.

Virgin Australia also forecast the coronavirus would wipe $50m to $75m off full-year results, and announced a range of capacity and fleet reductions, affecting low cost partner Tigerair.

The budget carrier would have its fleet reduced from 15 to eight aircraft with the exit of seven A320 aeroplanes, as part of a move towards an all Boeing 737 fleet.

Group capacity would shrink by 3 per cent, with Tigerair pulling out of five unprofitable routes, and the cessation of Virgin Australia’s Hong Kong services.

CEO Paul Scurrah said the half year had seen the airline grow revenue and passenger numbers but they continued to transition to a lower cost base.

“The benefits of cost changes and further revenue efficiency have yet to be realised,” Mr Scurrah said.

“Today’s announcements regarding capacity reductions and simplification of our fleet and network are additional steps forward and will all help mitigate challenging market conditions and improve our financial importance.”

Performance data released by Virgin showed passenger numbers were up 2.1 per cent for the six months to December 31, 2019, and fares were up 2.6 per cent overall.

International services saw passenger numbers grow the most strongly, at 7.3 per cent, and fares increase 4.1 per cent.

Mr Scurrah said the financial highlight of the 2020 year to date, was taking back full ownership of the Velocity (frequent flyer) program.

“Velocity delivered earnings of $68.9m which was an improvement on the prior half year,” he said.

“We’ve made these changes while continuing to deliver an excellent experience for our customers. We also remained the leader in on-time performance for the six months to December 31.”

The coronavirus was having a “significant effect on the travel industry” with weaker domestic and international demand, Mr Scurrah noted.

The effect of the health epidemic on the stock market, saw Virgin Australia’s shares sink to a new low of 12 cents on Tuesday.

“We are responding to this with immediate steps to minimise the impact to the Group’s financial position,” he said.

“Today we announced a number of network and capacity changes that address markets most affected, particularly Tigerair. Our team is keeping a close eye on intakes and we’ll continue to respond accordingly as conditions evolve.”

As announced at last year’s full year results, 750 roles were being removed from the business, to deliver savings of $75m by the end of the 2020 financial year.

A review of suppliers and contracts was also continuing with the target of saving $50m.

The review is expected to take into account a number of sponsorships up for renewal such as the V8 Supercars, Queensland Ballet and Australian Chamber Orchestra.