Virgin Australia swings to first-half loss as domestic demand weighs

Virgin’s CEO says the airline is not losing market share to Qantas, as it touts a pending Wi-Fi deal and China plans.

(Photographer: Liam Kidston)

Virgin Australia chief executive John Borghetti says the airline is confident it is not losing market share to rival Qantas despite soft trading conditions that he blamed on a sense of “uncertainty and conservatism” among local business and leisure travellers.

“There is a sense of uncertainty, there is a sense of conservatism . . . in consumer sentiment,” Mr Borghetti told the media this morning after Virgin (VAH) swung to a loss in the first half, weighed down by restructuring charges and subdued domestic travel conditions.

“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.’’

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

“We are planning a big announcement on that very shortly. 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 in late February.

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

The release of Virgin’s lacklustre half-year result this morning, which saw its shares fall 1.5 per cent to 19 cents, came as the group detailed plans for its first direct flights into Hong Kong as part of a broader plan to target the Chinese market

In the six months to December 31, the nation’s second largest carrier declared a loss of $21.5 million, as against a profit of $62.5m last year.

Its underlying earnings — which strip out one-off items — slumped 48 per cent to $42.3m.

Group revenue edged down from $2.7bn to $2.63bn after the airline cut its domestic capacity, with its domestic sectors flown decreased 4.7 per cent on the prior corresponding period.

In contrast, it witnessed improvement in its international arm, which swung to an underlying profit of $0.8m.

The international division could receive a boost later this year, with confirmation today of plans for direct Virgin-branded flights from Australia to Hong Kong to begin from mid-2017.

The prospect was spruiked last year by the company as it welcomed China’s HNA Aviation onto its substantial shareholder list.

In its update, Virgin said plans for a codeshare deal with HNA, Hong Kong Airlines and HK Express have been submitted to the Australian Competition and Consumer Commission for approval.

Authorisation would see direct HK flights begin around the middle of this year, with onward connections to be provided by HK Airlines.

Codeshare agreements would also result in the four airlines co-operating on each other’s domestic networks in China and Australia.

Direct flights are planned between Australia and mainland China, although a timeline was not provided.

Chief executive John Borghetti told The Australian last year Beijing would be a likely candidate after Hong Kong.

“This new alliance will be a game changer for travel between Australia and China, providing significantly more competition and choice for travellers,” he said today.

“The alliance will accelerate and support our access to the Chinese market, which is Australia’s fastest growing and most valuable inbound travel market.”

Virgin did not reveal the departure ports in Australia for the direct flights, noting schedule and pricing would be revealed in “coming months”.

Meanwhile, Mr Borghetti was cautious on the outlook for its local operations, noting the first half had been challenging.

“Notwithstanding continued subdued trading conditions in the domestic market, the group has strengthened its liquidity and cash position and is ahead of schedule in the implementation of the Better Business program,” chief executive John Borghetti said.

“This work is enabling the group to increase resilience against external trading conditions, which continued to be challenging during the first half of the 2017 financial year.”

Mr Borghetti said the group would continue to make debt reduction a focus, while looking to return to growth with innovations to the customer experience.

“We will also broaden our international network by launching flights from Australia to Hong Kong and commencing flights between Melbourne and Los Angeles as previously announced,” he said.

The company’s local discount airline Tiger Australia was seen booking an underlying pre-tax profit of $6.2m, a reduction of more than 50 per cent on the prior year as a key measure of airline profitability — RASK — declined 5.4 per cent.

Tiger Australia has been impacted by a decision to back away from the Bali route it entered in March last year following regulatory issues, although given the decision came this month, no impact was reflected in Tiger’s results this half.

The group added the cost of the withdrawal would not have a “material impact” on its overall results in the second-half.

Virgin did not declare a dividend and declined to offer guidance given “uncertainty” in market conditions.

As of 11.46am (AEDT), Virgin shares were down 1.3 per cent, hovering above a record low of 19 cents, against a flat broader market.