Virgin Australia is targeting annualised savings of A$125 million ($82.2 million), having slipped into a A$97 million net loss for the half-year period ended 31 December 2019.
The net loss contrasts with a A$55 million net profit in the year-ago period, and the latest figures were subject to a more than two-fold increase in finance costs year-on-year.
Other contributing factors identified by the carrier are increased expenditure in the areas of fuel, airport and enterprise agreements, as well as higher depreciation costs and soft market conditions.
“While the half-year has seen us grow revenue and passenger numbers along with strong RASK improvement, we are still in the early stages of transitioning our business to a lower cost base,” Paul Scurrah, group chief executive and managing director says.
“Therefore the benefits of cost changes and further revenue efficiency have yet to be realised.”
Virgin is targeting A$75 million in annualised savings from a review of its workforce and organisational restructuring. This entails cutting 400 jobs by the end of March and another 350 by June. An additional A$50 million will come from reviewing existing agreements with suppliers, and key areas are fuel, accommodation and marketing services.
In the six-month period, earnings across business units were broadly steady, pushing operating revenue up by 1.5% to A$3.12 billion. On the other hand, operating expenses gained 3.7% to A$3 billion, as higher fuel and labour costs offset the decline in aircraft rental expenses.
This pushed operating profit down to A$105 million, from A$167 million last year.
Cash balance stood at A$1.1 billion at 31 December 2019, down from $1.7 billion at 30 June.
Across divisions, higher fuel costs was a consistent theme.
Revenues at Virgin’s international operations were hampered by a A$20.3 million increase in fuel costs, as well as investments in short-haul international routes. The unit posted an EBIT loss of A$48.9 million, widening from last year’s A$15.2 million loss. ASKs declined by 1.1% though RASKs gained 4.2%.
On the other hand, budget arm Tigerair Australia reported an EBIT of A$2 million, reversing A$6.6 million losses in the year-ago period, even with a A$4.3 million increase in fuel costs. ASKs gained 0.4%, while RASKs were up by 0.6%.
The better performance at Tigerair was attributed to the streamlining of its fleet to an all-Boeing one, which among other factors, helped to reduce maintenance costs. The unit will phase out a total of nine A320 aircraft by October 2020 and receive two Boeing 737s from Virgin’s short-haul network.
The group also states in an investor presentation that it is reviewing its widebody fleet, citing “significant cost savings available from next-generation aircraft”.
For the rest of the financial year, it foresees a 3% reduction in capacity across the group from January to June, “including short-term tactical capacity reduction to respond to current environment”. Further out, changes to its fleet will impact capacity in financial year 2021, equivalent to about 5%.
In its outlook, Virgin expects revenue to remain flat, alongside expectations that earnings will take a hit from the coronavirus outbreak.
“The coronavirus outbreak is having a significant effect on the travel industry and we are also seeing weaker domestic and international demand,” says Scurrah.
“We are responding to this with immediate steps to minimise impact to the group’s financial position.”
Virgin estimates a A$50-55 million impact on domestic earnings, with further impact from cancelled international inbound traffic from China. International routes are expected to take a A$10-20 million hit, with services to Hong Kong, Japan and trans-Tasman routes affected.
