Virgin Australia: 2013 Annual General Meeting Address By Chief Executive Officer John Borghetti

Thank you, Neil. Good morning ladies and gentlemen.

The 2013 financial year was certainly a difficult year for the industry.

The industry was impacted by subdued consumer sentiment and business confidence, the introduction of the carbon tax and one of the highest domestic market capacity increases since 2004, which affected industry yields.

However, 2013 was also a critical year in Virgin Australia's transformation, as we executed the third year of our five year strategy.

It is thanks to the progress that our people have achieved to date in implementing the first half of our five year strategy that we were able to transform the business in such a challenging environment.

Today I would like to outline some of our progress in this regard and touch on some of our priorities for the future.

Progress with Strategy

Before I go into our progress on our strategy, I would also like to briefly comment on the false allegations made by our major competitor that Neil referred to earlier.

As you all know, in 2010 we put in place our Game Change Program strategy. A strategy designed to position the Virgin Australia Group as the airline of choice in all market segments, enabling us to take advantage of growth opportunities and ensuring the sustainable performance of the business in the future.

The strategy, including our fleet plan, our capacity plan and our product transformation, was set well prior to our three major airline shareholders coming on board.

To say that Virgin Australia is driven by a strategy of uncompetitively low prices and irrational behaviour is offensive and absurd. The airline is run rationally with good management and a view to creating a long term sustainable and profitable business. It is our superior cost position that enables us to bring lower fares to the market. In fact, we are continuing to position Virgin Australia to grow and compete even more effectively in the Australian market for the benefit of our shareholders, our customers and all of our stakeholders. We have embraced change and competition and adapted our business to it.

When you bring competition to a monopoly, prices do go down, if this is affecting our competitor's bottom line, I am not going to apologise. Australian travellers and the Australian economy are benefiting, and ultimately, shareholders will too.

We have now completed year three of our consistent five-year strategy - a pivotal year in which we concluded the roll-out of the major transformation initiatives, including one of the most complex but essential changes, the transition to the SabreSonic reservations system.

We also changed Australia's domestic aviation market structure through the acquisition of Skywest and the acquisition of 60 per cent of Tigerair Australia, securing new growth opportunities for the Company into the future.

Any one of these initiatives in any given year would be deemed significant. The fact that we were able to complete all three, in a difficult market, is a credit to all of our team members.

The scale of this transformation is unprecedented in Virgin Australia's history and we are now well positioned to capture future growth.

There are four key reasons for this.

First, we now have the right structure to compete vigorously in all key market segments and to take advantage of the capacity growth of international carriers.

In 2010, I stood before you as the CEO of a company that had a strong presence in the Australian leisure market and with very limited international reach.

Today the company has a strong presence in every key sector of the domestic market and a network reach of more than 460 destinations across the globe.

This has been possible because of the innovative bilateral partnerships we have forged with four of the best airlines in the world. This is not only positive for Virgin Australia but also positive for Australian tourism, for the creation of jobs and for competition in Australia, benefiting consumers with more choice and lower fares.

With Air New Zealand, we have unparalleled access to Australia's number one visitor market.

With Delta Air Lines, we have access to the largest domestic aviation market in the world.

With Etihad Airways, we have access to the fastest growing aviation market in the world.

And with Singapore Airlines, we have access to the most comprehensive network across the largest aviation region, the Asia Pacific. In China alone, they fly into 10 major airports through their conveniently located Singapore hub.

And very importantly, with Etihad Airways and Singapore Airlines, we are able to provide choice for people travelling to Europe and the United Kingdom - whether they want to travel via the Middle East or Asia.

As a result of these international alliances together with the transition to the SabreSonic reservations system and continuing product improvements, we have been able to increase our penetration in the corporate travel market.

And, as a result of our strategic investments in Skywest and Tigerair Australia this year, we have reshaped the domestic aviation market in Australia and for the first time in over a decade have real competition in every key market segment.

Thanks to the progress that we have achieved with our strategy over the past three years, we have created a sustainable platform from which our business can now compete going forward.

Secondly, our group has a very competitive cost base.

Maintaining this is a critical component of the Game Change Program strategy. We recognise the significant strategic advantage and flexibility that affords us.

Despite our investment in product and service improvements, we maintained our cost advantage for the 2013 financial year, with our average Cost per Available Seat Kilometre being well below our major competitor for both the domestic and international Virgin Australia branded operations.

We have invested heavily in maintaining a low average fleet age and in driving a company-wide efficiency program to ensure we remain nimble and efficient as we grow.

We exceeded this program's target of $60 million in sustainable gains for the 2013 financial year.

And while fuel prices have remained high, we have been able to manage these costs well through the sophisticated tiered hedging program that we introduced in 2011.

Thirdly, we have continued our focus on driving yield growth by attracting more high yielding customers.

As a result of our progress in the Game Change Program strategy, our total group yields have increased 10 per cent1.

And we delivered group yield growth in the last quarter of the 2013 financial year, outperforming our major competitor.

This reflects our significant success in attracting higher-yielding customers, supporting a more stable and sustainable revenue base while ensuring we are well-positioned in the market moving forward.

Importantly, yield momentum has continued into the first quarter of the 2014 financial year.

Finally, we have received strong stakeholder support for our strategy - from global equity and debt markets.

We are the only airline in the world to have three of the world's best airlines as committed long term investors and am very pleased each of our three major shareholders have made further strategic investments in Virgin Australia over the past year.

These investments from major global airlines, Air New Zealand, Etihad Airways and Singapore Airlines, provide a very strong, stable and secure platform from which we can deliver sustainable growth for the benefit of all shareholders.

Over the past three financial years to 30 June 2013, Virgin Australia has outperformed the market and our peers on a Total Shareholder Return basis.

While we have completed our major transformation initiatives, we are only three years into our five year strategy and there is still further work to be done.

Future Priorities

Our future priorities are all aligned with further value creation for the business.

First, optimising our strategic investments in Skywest and Tigerair Australia will be a key priority over the next two years, as we create value through greater scale and synergies.

We have already made significant progress to date in this regard.

We have completed the roll out of Virgin Australia branding across the majority of Skywest's operations, including transitioning the business to the same SabreSonic system as Virgin Australia, aligning website and airline designator codes.

Work is well advanced on optimising the combined networks of the two airlines, exploring opportunities for growth and enhancing the customer proposition.

And with Tigerair Australia we are already seeing visible signs of improvement, with increased loads and customer satisfaction levels.

During the 2014 financial year we will expand the reach of Tigerair Australia, bringing stronger competition to the budget market segment in Australia.

However it will take time for the full benefits of both of these strategic investments to be realised.

Another priority for the Company is to create and maintain a strong balance sheet.

Over the past few months we have undertaken a number of initiatives in this regard, including the sale and leaseback of our Brisbane Airport hangar and the issue of Enhanced Equipment Notes in global debt markets.

The debt issue was our maiden issue in the debt capital markets and the first of its kind for an airline in the Asia-Pacific market. As part of the process, Virgin Australia's instruments received a formal rating for the first time and we now have two new stakeholder groups; debt investors and ratings agencies. Pleasingly, the issue was more than three times oversubscribed at a very competitive weighted average coupon of approximately 5.6 per cent, demonstrating the strong levels of global interest in Virgin Australia and importantly, confidence in our strategy.

This is an independent endorsement by global investor validating our strategy and our significant transformation over the past three years.

We have further initiatives underway including the Entitlement Offer announced last week, to raise capital for the business. We were very pleased to see strong support for this offer from our major shareholders and institutions, with a take-up of 98.4 per cent. The retail offer remains open until 9 December and we will update the market as appropriate over the coming weeks and upon completion.

We also announced last week that our Board intends to work with our airline shareholders for future Board representation, with appropriate protocols as we continue to deepen relationships with our partners.

As CEO, I feel fortunate. We have four of the best airlines in the world as alliance partners and three of them are major shareholders. We are currently working through the required protocols, but should each of our three airline shareholders have board representation, I believe we will have one of the strongest airline boards globally.

Each of the airlines bring a profound understanding of the dynamics of the aviation industry and each have a common goal of ensuring the success of Virgin Australia. They are some of the most highly respected businesses in the world, run by extremely professional and skilled management.

There is much more we can achieve with our partners and I look forward to developing an even stronger, more competitive force in Australian aviation which will greatly benefit Australian tourism, Australian jobs and the Australian economy.

Finally, we continue to focus on fast-tracking growth opportunities for the business.

As we have outlined this year, our new SabreSonic reservations system has significantly improved our access to global markets and increased our interline and codeshare revenue.

We will continue to expand our reach and ensure we can offer a seamless travel experience across the globe.

Velocity Frequent Flyer is also a key focus area, with its current membership of more than 3.8 million and we are currently exploring a range of initiatives to increase levels of member engagement.

Conclusion

Now I would like to conclude by stating that we will achieve our domestic capacity guidance of between 3 and 4 per cent, excluding Tigerair Australia, for the first half of the 2014 financial year.

As we have completed the major transformation of our domestic network, we are focused on maintaining the flexibility to adjust to changing market demand, while continuing to improve our yield mix by attracting more corporate traffic.

On this basis, we are not providing guidance on domestic capacity growth beyond the first half of the 2014 financial year.

And given the uncertain economic environment, we reiterate that we are unable to provide profit guidance for the 2014 financial year at this time.

Ladies and Gentlemen, I would like to thank all of our team members for their extraordinary efforts this year.

Thanks to their tireless dedication and passion for the airline, we are not only on track and have transformed our company in a very short period of time - we have transformed the Australian aviation market. Our people are what differentiate us from other companies and they have enhanced the reputation of Virgin Australia.

I owe a great deal of gratitude to each and every one of them, and am immensely proud of what we have achieved together in such a challenging environment.

I would also like to acknowledge seven new members of our team who are with us today - they are part of our latest group of cadet pilots. We launched our first cadet pilot program last year and I'm pleased to say that first group are now in their final weeks of training and will graduate next month.

To our shareholders, thank you for your continued support. You have my assurance that we will continue to work hard to enhance our value as a business.

I believe aviation has a very bright future in Australia and as the economy continues to recover, so too will aviation benefit.

Since 2010, Virgin Australia has been focused on the same five-year strategy to bring competition to all sectors of the Australian aviation market and build a resilient business that can deliver sustainable performance for the long-term.

In that time, Australia has benefited greatly. We have grown our workforce from 6,400 to more than 9,5002, creating more than 3,000 Australian jobs and adding thousands more in contractor roles, we have increased our aircraft numbers from 87 to 1483, we have established a strong presence in the corporate, regional and budget market segments, lowering airfares in these areas. We have transformed the customer experience for domestic travel and, importantly, we have forged innovative alliance partnerships with four of the world's best airlines increasing Australia's visibility in more than 460 destinations worldwide.

All of this is good for the Australian economy.

The capital raising that we are currently undertaking will ensure we are in a stronger position moving forward, so that we can continue to bring much needed competition to the Australian aviation market and continue to grow jobs in Australia.

We know we have chosen the right partners with the right intentions. They are all aligned in the common goal of wanting Virgin Australia to provide strong competition in the Australian aviation market.

Having been in the Australian aviation industry for more than 40 years, I have seen the ups and downs, and I truly believe the best is yet to come.

The landscape of Australian aviation has changed forever. It is no longer a monopoly.
Thank you.