Virgin Australia is reducing capacity and making fleet changes in the wake of a 78% drop in underlying pre-tax profits and a half-yearly loss of USD$58 million.
Losses continue for Virgin Australia
The airline announced its financial results for the first half of the 2019/20 financial year in Sydney yesterday, Wednesday 26 February. High fuel prices, employment expenses, airport charges, rental costs and depreciation were all contributing factors.
The result continues a series of financial losses for Virgin Australia. Yesterday’s announcement was almost twice the loss posted in the previous corresponding period. Virgin Australia’s CEO, Paul Scurrah, used yesterday’s announcement as an opportunity to announce a raft of changes to capacity, fleets, and routes. Mr. Scurrah said;
“Today, we’ve made some important fleet and network changes that will help us improve our financial performance and respond to market conditions.
“There’s no doubt we are operating in a tough market, and we need to make sure our capacity deployment is disciplined to ensure our routes are profitable for our business.”
To that end, Virgin Australia is making the following changes;
- 3% reduction of the Group’s overall network capacity in 2H20;
- 3% reduction in Group domestic capacity in 2H20;
- Short-term capacity reductions for Virgin Australia on the Tasman in Q4;
- The accelerated exit of an additional seven Airbus A320 aircraft from Tigerair Australia;
- Tigerair Australia to move to an all Boeing 737 fleet creating cost efficiencies; and
- Tigerair Australia to exit five loss-making routes by May 2020.
Tigerair Australia in the firing line
Although there will be some reductions in services across the Tasman later in 2020, it is Virgin Australia’s struggling low-cost offspring, Tiger Air, that is in the firing line.
Virgin Australia doesn’t provide profit or loss information for its subsidiary business units such as Tigerair Australia. But they did say Tigerair Australia flew 2.2 million passengers in the first half of this financial year. Revenue was a shade over USD$200 million, with earnings before interest and tax of USD$1.31 million.
Virgin Australia infamously took possession of the remaining shares in Tigerair Australia for just AUD$1 in 2014. At the time there were big plans for growth at the low-cost carrier. But Tigerair Australia has never gained traction with the flying public and has been a continuing albatross around Virgin Australia’s neck.
Aircraft going back to lessors
Tigerair Australia saw service and capacity reductions in the second half of 2019 as part of Mr. Scurrah’s cost review at Virgin Australia. Yesterday, he sharpened the axe again and brought it down hard on Tigerair Australia.
The low-cost carrier will send seven of theirA320s back to lessors. This is on top of the two A320s previously flagged to be returned. This fleet downsizing will account for much of the predicted 3% decline in domestic and overall network capacity. This will leave Tigerair Australia with just eight A320s in its fleet.
Tigerair Australia will close bases in Brisbane and Sydney, retaining only Melbourne.
Routes facing the ax
Mr. Scurrah yesterday said he would send two Boeing 737-800s across from Virgin Australia to offset the fleet reduction. There is a short to medium-term strategy to send all the A320s back to lessors in an effort to simplify fleets across Virgin Australia’s business units.
In addition to the fleet reduction, five routes are being axed at the end of April 2020, including;
- Melbourne-Coffs Harbour
- Sydney-Coffs Harbour
- Hobart-Gold Coast
The decision will see Tigerair Australia exit the popular holiday spot of Coffs Harbour altogether. Tigerair Australia was the only airline flying Melbourne-Coffs Harbour and Gold Coast-Hobart direct. Given the lack of competition, it is interesting that the airline couldn’t make those two routes work.
Ending these routes will see Tigerair Australia down to flying just a handful of routes, including the busy trunk routes of Sydney-Melbourne, Sydney-Brisbane, and Sydney-Gold Coast.
Results are not a surprise
The financial results announced yesterday were not a surprise. Virgin Australia has been struggling for some time and the current problems buffetting the aviation industry suggests the struggling will continue for a while yet.
Tigerair Australia has been a drain on Virgin Australia’s profits and resources for some time now. Why Virgin Australia persists with the airline is a mystery to some. But Paul Scurrah publicly said last year that he was committed to Tigerair Australia and that it had a place in the wider Virgin Australia group of businesses.
However, as yesterday’s announcement suggests, it may be a case of a death by a thousand cuts rather than one clean and final sweep for Tigerair Australia.