Virgin Australia lands in Asia with Hong Kong flights

Virgin Australia plans to launch direct flights to Hong Kong, going head to head with Qantas and Cathay Pacific.

Virgin Australia chief executive John Borghetti. Picture: Peter Wallis

Virgin Australia is expected to be flying to two cities in Asia by the end of the year after yesterday confirming plans to launch direct flights to Hong Kong, going head to head with Qantas and Cathay Pacific on the route in the first step of its alliance with China’s HNA Aviation.

Virgin said plans for a codeshare deal with HNA, Hong Kong Airlines and HK Express had been submitted to the competition regulator with the hope of launching direct Hong Kong flights — expected to be from Melbourne — around the middle of this year, with onward connections to be provided by HK Airlines.

Direct flights are also planned between Australia and mainland China with Shanghai being the most likely candidate, but chief executive John Borghetti said such a move was dependent on securing airport slots, which was difficult in tier-one Chinese cities.

“Hong Kong is our first step into Asia. And you will see more announcements this year on further strategic moves,’’ Mr Borghetti said yesterday.

His comments came as Virgin’s international arm was the standout performer in Virgin’s previously flagged half-year statutory loss of $21.5 million, down from a profit of $62.5m last year.

Underlying earnings — which strip out one-off items — fell 48 per cent to $42.3m.

Group revenue fell from $2.7 billion to $2.63bn after the airline cut its domestic capacity, with its domestic sectors flown decreasing 4.7 per cent.

Australia’s second-biggest carrier did not give profit guidance for the full year. By contrast, Qantas is next week tipped to post a bumper half-year profit.

Virgin’s international arm swung to an underlying profit of $800,000 six months ahead of schedule and, for the first time since Mr Borghetti took the helm of Virgin, all of its divisions were profitable at the underlying EBIT level in the half.

Over the past 18 months the airlines’ free cash generation has improved by $350m, but its bottom line remains stuck in the red due to restructuring and one-off charges.

Asked how important it was for the airline to deliver a bottom-line profit, Mr Borghetti said: “I am not sure it is a psychological thing ... And it doesn’t take a year. Don’t forget it took Qantas decades before it made a profit.

“When you look at the facts, the balance sheet is stronger, we have paid down debt. For the first time the four sectors are profitable at a time when the market is flat. And our cash-generating activities are improving so dramatically.’’

Virgin shares closed steady at 20c, having more than halved in value over the past year.

Mr Borghetti said Virgin was confident it was not losing market share to Qantas despite soft trading conditions that he blamed on a sense of “uncertainty and conservatism’’ among local travellers.

“The resources sector is obviously soft. More generally, whether you are talking about the leisure or business sector, both are softer than they should be in our view,’’ he said.

“We are confident we are not losing share. If anything we are winning a little bit.

“It is not a question of share loss, it is total market.’’

The weak demand has prompted Virgin to delay the arrival of the Boeing 737 MAX in its fleet until the end of 2019, deferring $350m of planned capital expenditure to beyond the 2018-19 financial year.

Mr Borghetti also revealed that the airline was planning an announcement, expected next month, on its plans to introduce in-flight WiFi this year. It will include unveiling the name of its partner for the venture.

The airline is believed to be well advanced on the introduction of a test aircraft with WiFi.

“It is progressing exceptionally well,’’ he said.

Qantas revealed this week that it would offer its passengers free access to content from Foxtel, Netflix and Spotify on domestic flights, beginning this month.

A year ago the airline announced a deal with ViaSat to offer free WiFi on domestic flights leveraging NBN’s Sky Muster satellite service.

Additional reporting: Daniel Palmer