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Virgin Blue defiant, AirAsia contrarian, Cathay cautiously optimistic

16-Jun-2008
  • Virgin Blue’s cutbacks less than anticipated
  • Commits to current strategy
  • Targets $50 million in cost cuts;
  • AirAsia will “not hold back our growth plans” - Tony Fernandes;
  • Cathay Pacific expands at fastest pace in May-08 since SARS catch-up.
  • Cathay “cautiously optimistic” in lead-up to Summer peak

Virgin Blue issued a defiant update on Friday in response to soaring fuel prices, declaring:

“Board and management reaffirmed their commitment to the airline's New World Carrier strategy as the right strategy in a period which will see a dramatic shakeout in the global aviation industry along with shifts in business and consumer sentiment;

“[Virgin Blue would be] continuing development of product initiatives under its New World Carrier strategy;

“The company has determined it will not exit nor reduce service frequency on Trans-Tasman, Pacific Islands and domestic New Zealand routes operated by its Pacific Blue subsidiary;

Boeing 737 services operated by Polynesian Blue, Virgin Blue’s joint venture airline with the Government of Samoa will not be affected”.

The timing of the release was also significant, coming several hours before the market close (unlike previous profit warnings), and the shares soared around 10%, off all-time lows.

The scale of the cutbacks was less than anticipated. Virgin Blue is removing four B737s from the Australian domestic market in the Jul-Sep-08 period (resulting in a 6% reduction in planned capacity growth), while a further 2% of domestic capacity are to be redeployed, with two loss-making routes to be suspended. Virgin Blue will raise fares by AUD5 across just over half of its network and is targeting AUD50 million in cost savings, as fuel now represents 35% of the carrier’s total costs. Nonetheless, residual plans would still include the carrier adding almost 10% capacity over the next year, well above projected traffic growth rates.

For AirAsia, fuel now accounts for 50% of total costs, but the Malaysian LCC is also taking a typically defiant stance. CEO, Tony Fernandes, stated he was taking a contrarian view, confirming the airline would “not hold back our growth plans”. Mr Fernandes stated, “if I cut my routes, where is my growth going to come from?”, adding the airline is still profitable and will be launching more services to India and Singapore by the end of 2008.

Meanwhile, Cathay Pacific expanded faster in May-08 than in any month since the mid-2004 post-SARS catch-up.

Cathay Pacific Airways passenger capacity growth: Jan-98 to May-08
Note: from Jan-07 Cathay pacific reported combined traffic with Dragonair
Source: Centre for Asia Pacific Aviation, AAPA & Cathay Pacific

The airline expanded capacity (ASKs) by a stunning 16% in the month and RPKs more than matched the increase, leading to a 2.3 ppts increase in passenger load factor to 77.4%. However, Cathay does not record the impact of this on its yields.

Cathay Pacific Airways passenger capacity growth (including Dragonair): Jan-98 to May-08
Source: Centre for Asia Pacific Aviation and Cathay Pacific

Cathay Pacific added it is “cautiously optimistic” about passenger demand heading into the Summer peak season”.


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