Virgin Australia says it expects the coronavirus to hit earnings by up to $A75m in the second half of fiscal 2020 as it moves to reduce its fleet, cut routes and consolidate services.
The airline announced the changes while revealing its first-half statutory net loss had widened to $A97.3 million from a $54.8m loss in the first half of the 2019 financial year.
The loss, which included one-off costs from Virgin’s deal to retake full control of its Velocity frequent flyer program as well as asset write-offs, translated to an underlying pre-tax profit of $A14.5m on a record first-half revenue of $3.1 billion.
Revenue was up $A46.8 million compared to the prior period, despite a soft market, but profitability fell in mainline domestic and international operations.
The cuts come as the airline group is seeing weakened demand across international and domestic markets due to the coronavirus.
It said there had been an increase in cancellations and a reduction in forward bookings, largely for leisure destinations and Tigerair routes.
Its mitigation strategy included reduced short-term reductions into significantly affected markets such as Cairns and the trans-Tasman.
The financial impact of the virus is an expected $A50m to $A75m hit to earnings in the second half.
Its move to further reduce costs will see the group further simplify its fleet with the exit of seven A320 aircraft by October. These are in addition to five aircraft — three Fokker 100s and two A320s — announced in November 2019 and make a total of 12 exits.
Two Boeing 737s will be transferred to Tigerair from Virgin Australia’s short-haul international network to bring the low-cost carrier’s fleet to eight 737-800s.
Despite the cuts, Virgin group chief executive Paul Scurrah said the low-cost carrier remained an important part of the group’s future under a profitable, simpler model needed to fulfill its potential.
“If the lines of flying are profitable and it’s playing a role for the group, it doesn’t really matter what the fleet size is,” he said.
“So we are very focussed on making sure that we get it set up as the low-cost, efficient, simple business that it is going to be and should be.
“And this accelerates that and really sets our low-cost carrier up to be a very big and important part of our future.”
The Tigerair cuts and further route and frequency changes will result in an overall three percent reduction in capacity for the 2020 financial year and 5 percent in fiscal 2021.
This includes the axing of five unprofitable Tigerair routes and the consolidation of flights on existing routes.
The axed routes are Sydney to Adelaide, Cairns and Coffs Harbour as well as Melbourne-Coffs Harbour and Hobart-Gold Coast.
The airline has also ended its Melbourne-Hong Kong services and will cease flying to the city from Sydney on March 2.
Scurrah said the first half had seen the airline grow revenue and passenger numbers along with a strong RASK (revenue per available seat kilometre) improvement.
He expected revenue to remain flat in the second half, despite the reduced capacity, due to increasing load factors and yield.
He noted the group was still in the early stages of transitioning its business to a lower cost base.
“Therefore, the benefits of cost changes and further revenue efficiency have yet to be realized,’’ he said.
“We are progressing well on our review of our suppliers and agreements, right-sizing our workforce and making changes to our fleet and network.
“Today’s announcements regarding capacity reductions and simplification of our fleet and network are additional steps forward and will all help to mitigate challenging market conditions and improve our financial performance.”
Asked whether the coronavirus had affected the timing of Virgin’s return to profitability, Scurrah reiterated comments that profitability was not an overnight proposition.
“We are focussed on getting there as soon as we possibly can,” he said. “It’s too early to say exactly when that will be, particularly with some of this uncertainty.
“But (with) the progress we’re making and seeing, and market returning to some form of normality, we can confidently say it’s going to happen.”
One area in which Virgin Australia is expanding is the airline’s forthcoming service between Brisbane and Tokyo.
The route will use one of the Airbus A330s used on the Hong Kong services while another will be used on domestic trans-continental services and as a back-up.
Scurrah said the airline had seen healthy interest in the Japan service and there had not been any drop off in forward bookings at this stage as a result of the coronavirus.
“Although it’s too early to say exactly how it will play out, we’re very confident it’s going to be operating and operating with good support,” he said.