Borghetti leaves on a high as Virgin flies into the black

It has taken Virgin Australia 10 years to reinvent itself as a full service premium airline – and one that makes a respectable profit.

On the eve of the departure of the architect of Virgin’s long remaking, John Borghetti, the airline has finally shown the makings of a company that can deliver a solid and hopefully sustainable return.

In the six months to December 2018 it demonstrated it can balance capacity, which has grown 3 per cent inside the Virgin domestic brand, and fares, which have risen across its domestic services in what can only be described as a fairly rational market.

Happy at last: At the end of his tenure, Virgin Australia CEO John Borghetti delivers a big profit jump.Credit: Louise Kennerley

This allowed Virgin to manage the headwinds of higher fuel costs and foreign exchange challenges and produce its strongest-ever revenue.

Borghetti had to start from the ground up to re-engineer Virgin, a process that has required mammoth investment and resulted in years of losses.

The violent market share war between Virgin and Qantas in the middle of the process didn’t help.

Had Virgin been a company with a broad base of shareholders, this would never have been possible.

It needed the support of its small group of large shareholders (all of which own airlines) to wear the losses and support Virgin with capital. Managing the differing needs and agendas of Virgin’s shareholders has been one of the great challenges.

Borghetti’s job would probably have been easier had Virgin been taken private by these investors.

His newly announced replacement, Paul Scurrah, has the job of further enhancing the returns regardless of the ownership structure. Shareholders will be looking to him to turn around the unprofitable international division and the low-cost Tigerair brand, both of which have weighed on group earnings.

More broadly, the shareholders (which include Singapore Airlines, Etihad, Richard Branson’s Virgin Group and Chinese groups HNA and Nashan) want to extract dividends now, instead of investing further. For these shareholders, some of which have financial troubles, it’s payback time.

But despite the solid underlying earnings of $112 million – up 37 per cent – on the previous corresponding half, Virgin punches below its market share weight.

It will be Scurrah’s job to improve this.

He will inherit a strong revenue position in the March quarter, one which Borghetti says is up at least 7 per cent. He will also take on a relatively new fleet of planes that won’t require too much replacement in the short to medium term.

Borghetti has sufficient forward bookings data to feel comfortable giving short-term revenue guidance, but he says there is not enough visibility around the uncertain geo-political environment to make a forecast beyond that.

How the China-US trade war pans out plays into oil prices, movements that have a marked impact on all airlines.

Domestically, the election fever can affect consumer confidence for a limited period. But Borghetti believes that Australia is generally in pretty good economic shape.

Operationally, Virgin has been dealing with turbulence on the trans-Tasman route as a result of its divorce from former partner Air New Zealand, which then teamed up with Qantas.

But this is the nature of the airline industry. These types of external changes are not uncommon and can affect the earnings dynamics of particular routes.

Sustainability of earnings will depend on further lowering the cost base. To that end Virgin has announced a second Better Business program aimed at taking out $300 million of annualised costs. It will kick in at the start of the 2020 financial year.

Other than further fleet simplification and new revenue measures there was limited information provided on what this would involve.

Despite Borghetti’s much improved swan song result, it was rival Qantas that felt the collateral gain on Wednesday. Its share price jumped more than 3 per cent as investors took the view that a stronger airline operating environment that delivered an improved result for Virgin would also be good for Qantas.

This must certainly have irritated Borghetti. He and Qantas boss Alan Joyce have been fierce and public rivals over many years.