Virgin Australia Issues Profit Warning – Trouble Ahead?

Virgin Australia has issued a profit warning and told investors that they may be down $100 million AUD this year. The airline is believed to be in a weaker economic position and is planning on several cuts to drive profitability. This story was originally broken by Flight Global.

Virgin Australia plane
Photo Courtesy Virgin Australia

Virgin Australia is the second biggest domestic and international airline in Australia, with routes across the country and reaching to USA and Asia with 99 aircraft.

What are the details?

Virgin Australia, the rival to Qantas in the Australian aviation duopoly has issued a warning to its investors that they believe their profit will be way down this quarter. How far? By about $100 million AUD.

This will mean that their expected profit of $64.4 million AUD is going to be totally wiped out and they might just get away with negative -$35 million AUD for the financial year.

Virgin Australia has said that the domestic market has toughened up in Australia (possibly due to the recent election and lack of economic growth outside of big businesses) plus fluctuating fuel prices (Australia buys all its fuel overseas).

“…at least $100 million down on the [2018 financial year] comparative result of A$64.4 million, reflecting the uncertainty of revenue trading conditions in the domestic market and inclusive of annual fuel and foreign exchange headwinds in excess of A$160 million.” – Statement from the May report.

Additionally, the double holiday of Easter and Anzac day (effectively opening up two to three weeks of holidays) at the end of April has cut into their business revenue.

To try and ‘cut the wagon off at the pass’ and increase their profitability, Virgin is planning some additional cuts.

Virgin Australia
Virgin Australia needs to cut costs fast. Photo: Wikimedia

What cuts are they making?

Virgin Australia has decided to review its network and see what they can reduce. It is unlikely that they would cut any routes (as routes are a complicated and expensive thing to set up) but reduce the capacity across the network.

“While we have continued to grow revenue, this announcement shows that our business needs to become more resilient to challenges such as weaker demand, high fuel prices, and the foreign exchange environment,” says chief executive Paul Scurrah.

They additionally deferred the delivery of Boeing MAX aircraft that were expected this year, in a move that will not only save the airline money but also boost public support.

Virgin Australia
Virgin Australia 737-800. Source: Virgin Australia

Will this work?

Naturally, a plane costs money whether it’s sitting in a hanger or flying in the sky. But by moving the aircraft onto different routes (placing more capacity on Sydney to Melbourne, and less on Sydney to Cairns, for example) will mean more profit at the cost of market share.

Additionally, shorter routes mean less accommodation for flight and cabin crew (they don’t need hotels if they return to their home port) and less fuel.

The CEO of Virgin Australia, Paul Scurrah, is also looking at the Virgin awards program to see if they can sell off 35% to generate revenue or buy out other partners to consolidate costs.

It will be a tricky few months for the new CEO as he strives to help the airline return to profitability; we hope that he and the airline find their way.

What do you think? Let us know in the comments!