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Virgin Atlantic confident of prospects despite big FY2009/10 loss

6th August, 2010

Having made a substantial profit of GBP60 million in 2008/09, one that put rival British Airways firmly in the shade, Virgin Atlantic had to report a loss of GBP132 million in 2009/10 – a loss equivalent to BA's, allowing for their comparative size. For the 12 months ended Feb-2010, Virgin reported an operating loss of GBP132 million, compared with a profit of GBP60 million the previous year as revenues fell by 8.6% to GBP2,537 million. This, despite airline operating costs reducing by 8%. The results were not directly influenced by cabin crew strikes at BA, which commenced in Apr-2010 but they could have been influenced indirectly, for example by passengers switching bookings in anticipation of a strike. If that was the case, the result is worse than it first appears.

On the positive side, Virgin Holidays made a profit of GBP24 million, demonstrating that strength remains in the upmarket long-haul vacation segment that Virgin has attempted to corner. In addition, Virgin has improved its cash position to GBP450 million.

Since then, in 1Q2010, there has been a resurgence of cargo loads (+36% to GBP52 million) as well as business and leisure customers in its Upper Class cabin as the airline began to benefit from the uncertainty caused by the BA strikes. In fact business-class market share increased by 5% with 15% more Upper Class passengers. Total airline revenue grew by 10% to GBP513 million. A new business route to Accra, Ghana, had a strong start with 77% load factor. In that quarter, airline passenger growth was 10% and passenger load factor increased by five percentage points to 82%.

With a new brand identity, Virgin is confident the worst is behind it but declines to be as bullish about the future as BA. Part of the reason is it will take an estimated GBP30 million hit from the Apr-2010 Icelandic ash cloud disruptions and associated compensation in its next P&L filing to Feb-2011. Many of Virgin’s routes are trans-Atlantic and at the disproportionate mercy of another eruption.

Capacity reductions followed by fleet reshaping, with A330-300s filling in for B787s

Virgin Atlantic has been regrouping following BA’s credit-crunch-influenced decision to turn its focus to building market share in the upmarket leisure segment, where Virgin is traditionally strong. But that strength is a double-edged sword – Virgin’s reliance on premium passengers is even greater than that of BA and it was forced to axe some of its passenger services like the manicure service. Moreover, Virgin opted to reduce capacity over the last European winter by 7%, in reaction to a "bleak" outlook for the airline industry.

In Jan-2010 it entered into a contract to purchase six A330-300 aircraft from Airbus and to lease another four from AerCap, as part of fleet renewal plans. Deliveries are scheduled for 2011 and 2012. The 10 aircraft, which will increase capacity while it awaits the delivery of 15 B787s, are worth approximately USD2.1 billion and will improve services between the UK, Africa, Asia, North America and the Caribbean. The airline, forever at the cutting edge, will introduce what it calls “revolutionary onboard cabin innovations” including USB ports and a new in-flight entertainment and internet system from Panasonic.

A little more quietly, Virgin cancelled an order for six Airbus A340-600s, while bringing in the 10 A330s, the first twin-engined aircraft ever operated by the company. Virgin's fleet had an average age of 8.6 years as of Mar-2010.

Merger, alliance sought, but prefer independence. Who will buy Singapore Airlines' unhappy holding?

Virgin remains unaligned and increasingly looks exposed as competing airlines consolidate in alliances or merge completely. Singapore Airlines and its parent, Temasek, appear to be reluctant part-owners but unable to sell their 49% share, raising the prospect they might ultimately offer to buy out Virgin Group’s 51% share to enable SIA to fly from Europe to North America (an oft-stated desire) by proxy.

The carrier’s President, Sir Richard Branson, announced in May-2010 that Virgin is considering the option to merge with another carrier but only if the airline is unable to remain independent. Virgin is one of several airlines to have weighed up the benefits of buying bmi (or British Midland International as it is now marketed) from Lufthansa.

To expand American services

For now, Virgin is content it is helping combat the effect of the recession in the UK, for example by creating an extra 300 jobs at a call centre in Swansea, South Wales. It is increasing frequency on its Chicago route and hiring cabin crew for a new service between Manchester and Las Vegas. Virgin is more "British" than BA in that it supports Manchester and Glasgow airports for long-haul services as well as its two main London bases at Heathrow and Gatwick, giving it a broader coverage of direct flights from the whole of the UK than its fierce rival. From Glasgow it runs a seasonal service to Orlando and from Manchester it flies also to Orlando, Barbados in addition to the Las Vegas flight, which belatedly replaced one by bmi that had mainly carried Virgin Holidays customers.

Its principal bases remain Heathrow (19 routes) and Gatwick (11 routes), almost all to the Caribbean.

Other airlines in the group are Virgin America (25%); Virgin Blue/Polynesian Blue/V Australia; AirAsia X (16%); and Air Nigeria (previously Nigerian Eagle Airlines and Virgin Nigeria) with 49%, a holding which is on the market. 

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