CAPA Live: Virgin Atlantic laser focused on being cash positive
Virgin Atlantic is maintaining a focus on cash positive flying and finding new routes where the service is important. The airline has reduced its cost base so that destinations that in the past were out of reach – just because of the equation between the revenues and the costs – are now within reach.
The airline urges the UK government to view aviation as a national infrastructure and agree to testing as it is clear that a testing regime ensures that the infection does not travel.
Virgin Atlantic’s commitment to net zero by 2050 and having the youngest fleet in the sky is unwavering.
Talking at the CAPA Live on 11-Nov-2020, Virgin Atlantic’s CEO Shai Weiss spoke with CAPA’s chief financial analyst Jonathan Wober. Key highlights from the transcript can be found below.
We are back flying and have a laser focus on cash positive flying. It’s all about the agility of decision making and finding new routes where the service is so important. We’ve reduced our cost base.
“What we've learned is that we've almost moved away from a budget. What most airlines are doing is very frequent scenario analysis and adapt[ing]. There’s a team in our company called Fly Red, which is basically the team that brings all our commercial customer operational and financial affairs into one decision body that meets once a week and as needed to adapt to the programme.
“But, after a period of 90 days that we did not fly from 20-Apr[-20] onwards, we're back flying. And even during the lockdown, we have actually been able to maintain our flying programme with of course changes and trimming, given our laser focus in flying only cash positive flying. That's really the number one criteria for us. With that in mind, we're flying to the US continuously. We're flying to many destinations in the Caribbean, of course, to Asia in Hong Kong and Shanghai, Johannesburg and Tel-Aviv. We're adding capacity to India out of Manchester and Heathrow. And actually adding capacity to Pakistan for the first time to serve the VFR market."
“So it's all about the agility of decision-making, finding new routes where the service that we provide is so important. And I must say through this crisis, we've reduced our cost base. So destinations that in the past were out of reach just because of the equation between the revenues and the costs are now within reach, which is an upside of a dramatic change in our cost base.”
We were 70% Atlantic with 30% outside[,] but looking forward that’s more likely 60/40. We’ve become much more agile and connected and learning to make decisions with imperfect information.
“If you look at the history of Virgin Atlantic, it has been the most successful when it flew the most amount of traffic across the Atlantic. Having said that, pre pandemic we were about 70% into the Atlantic, into the US market and 30% outside. But I think when we are now looking, it's probably about 60/40, rather than 70/30, which is a dramatic shift."
“And in terms of horizons, we have different windows. One is the operational window, 14 days out. Then we have kind of the medium term window, which is three to six months. And then the longer term, which of course is a year to three to five years. And we keep on doing that. But you can assume that the major focus is really on the near-term windows of zero to six months, where there are so many dramatic changes."
“For example, only 10 days ago, we all heard our prime minister announce a lockdown, which you would expect changed behaviours. So between that announcement and the assessment of what needs to get done, that is a window of days and hours that we adjust the framework and adjust the network. But ultimately actually, on this one specifically, our focus on flying only what is cashflow positive. The need to dramatically change the network was not necessary."
“This is an ongoing scenario planning rather than budgeting forecast. We've become so much more agile, so much more connected and also learning to make decisions on imperfect information. But throughout the crisis, we took decisions ahead of our competitors, bold and decisive, which continues to serve us well. But I do want to emphasize with a great detriment to many great people who worked for Virgin Atlantic, which will hopefully come back when we are back to normalcy in the next year or two.”
Insights from Virgin Atlantic CEO Shai Weiss at CAPA Live, 11-Nov-2020
Gatwick has a special place in the company’s history and we hope to resume[,] but consolidation at Heathrow has allowed us to simplify our operations.
“We have only suspended our flying out of Gatwick because we still have the slot portfolio, which is of course essential to flying out of Gatwick. And Gatwick has been a great place for Virgin Atlantic. It's the historical launch of the airline 36 years ago to a flight to Newark. So Gatwick has a special place in our company history and hopefully we'll resume."
“But indeed the consolidation at Heathrow has also allowed us to simplify our operations, which has also affected our efficiency in deploying the planes and using our workforce to fly those planes. So it has a dramatic impact on the variable costs and the utilisation of our assets in Virgin Atlantic."
“But indeed we know that Gatwick is a very good airport, which is focused very much on leisure travel, mostly point to point, so very limited connectivity coming in from other places. And we know or expect that leisure travel will actually resume quicker than the business travel. So we're not ruling Gatwick out, but for now, I expect next year, no changes to the configuration. But that of course depends on the demand and what we can see evolving given the vaccine, given the treatment, given the testing.”
Manchester is our home in the north of the UK and it is an important stronghold for Virgin Atlantic. We have flights to Pakistan and we’ll probably add Caribbean routes too.
“Manchester is our home in the North. And we think there's a great opportunity to serve the Northern powerhouse out of Manchester. We have a deep bet on Manchester. I'm going back pre pandemic. This was a decision, a strategic decision that we made a call that in Manchester, there is a great opportunity to serve 20 million people within the vicinity and so much more, by the way, with connectivity. It could be at Düsseldorf. It can be in any other connecting airport in Europe, and of course for Ireland as well."
“But we made a bet that there would be a winner in Manchester. It would be either us or Thomas Cook. Now we did not make the outcome happen. But we contributed in a small way because we knew it was an important stronghold for Virgin Atlantic. And I think you can see our flights to Pakistan, or flights to India and of course the connectivity to the US. We'll probably add Caribbean routes out of Manchester."
“So this is a tremendously important hub for Virgin Atlantic, which we intend to grow based on the demand. But we think we have a great service to provide to the Northern powerhouse and the 20 million people who live within that vicinity."
“Hopefully we will resume flights from Manchester in the new year when things begin to open up. But we are launching[,] already in December, flights to Pakistan and to India. So, that will start kind of December, January is when we think things start to move again in Manchester."
“Glasgow also remains in our plans. But in terms of the major [destinations], and we'd love to serve these places, especially when they're flying on leisure travel to Orlando or the Disney locations and our very strong position with Virgin Atlantic holidays. But as I mentioned, we will continue to evaluate and serve these markets. They've been very good to Virgin Atlantic. And I think we have in return been very good to them.”
We welcome the opportunity for Flybe to be resurrected to feed our services but at the moment we are focussing on the recovery of Virgin Atlantic and getting back the very best for our customers and our people.
“We are an interested party in Flybe. Because we have, of course, a residual interest in the business. And we welcome the opportunity for Flybe to resurrect itself yet again, and to serve the various regions in the UK. The strategy of investing in Flybe all had to do with connectivity into Manchester and Heathrow so that we could feed more of our planes, but of course just serve under the new name, which was going to be Virgin Connect, the UK and broader into Europe."
“For various reasons, it really got caught up in this pandemic impact on the entire UK aviation. And unfortunately they were not able to survive, but we hope and hear that there may be some signs of a resurrection. And of course, if the commercial terms are there, we will be willing partners just as we've been in the past."
“At this juncture, our focus is really on the survival of Virgin Atlantic and then entering the recovery mode, rather than short haul domestic feed. And as you can imagine, capital is tight. So it's not that easy to just deploy further capital. So we must be really, really focused on cashflow positive activities in the recovery phase."
“Longer term, we'll re-evaluate to see where things are, whether Flybe is around under a new lease of life or whether we need to do something ourselves. But I think over the next 18 months, the focus is really getting back to our very best for our customers and getting back to our very best for our people and ensuring that Virgin Atlantic is here to benefit from the recovery, which will come."
“We've reduced our cost by GBP335 million. If we are able to see just the return of revenues as they were in 2019, but adapted to our current cost base, we should be in a very good financially sustainable future where we are sustainably profitable as well. So that's really the focus for the next a few months and probably a year, year and a half ahead. And after that, we'll be in evaluation mode.”
Our joint expanded joint venture between AF-KLM and Delta never really got off the ground[,] but once the situation stabilises the ethos of the JV will be stronger than ever.
“When your partners are airlines, they have the same issues as you face. But the joint venture[,] and actually the new joint venture, the expanded joint venture between Air France, KLM and Delta, uniting these two joint ventures only happened at the beginning of the year. So we never really got it to really get off the ground."
“And I think the next incarnation of this is once the situation stabilises, in each of the home markets for each of the carriers, whether it's France, the Netherlands and the US and of course the UK for Virgin Atlantic, the ethos of the joint venture will be stronger than ever, the ability to unite forces and demonstrate that we are the best across the Atlantic and beyond will be there."
"I mean, our joint ventures respectively have been the most successful. And it is very much an anchor of our strategy, which is really focused on being best in partnering. That has not changed. We just need to get back to, I guess, more stability, more long term views. And the joint venture is a cornerstone at least for Virgin Atlantic, but I know for our partners as well.”
The prospects of a travel bubble across the North Atlantic are very good in the medium term. The first stage is to open borders and prove that a testing regime ensures the infection does not travel. A lot of jobs are at risk[,] and Zoom has its limitations.
“What we want to see is this happening as soon as possible. We were hoping for Thanksgiving, I think that's not going to happen. And now we're just urging people, especially with the transition or the likely transition of power in the US with the president elect Biden and his team coming on board. We want to see more cooperation."
“First you need to open the borders of the United States to non US citizens. And then as I mentioned, it is this adherence to the fact that pre-departure testing, or even upon arrival or three or five days, thereafter are much better than quarantine is now widely accepted. We've presented some papers together with other participants in our industry."
“So for us, it's a two-stage approach. One is to open the borders. And of course then prove that a testing regime is a robust way of ensuring that the infection does not travel between nations, and it screens effectively. And all that is of course, pre vaccine. When there is a vaccine and it's widely available, I'm assuming, of course, that takes care of that."
“And we're calling both in the UK and New York[,] and of course the US more broadly[,] to act now. So many jobs are at risk. And so many business cannot, you know, Zoom has its limitations. People need to convene in order to innovate, in order to negotiate, in order to cooperate. And that is only available through actually face-to-face meetings, breaking bread, and just getting the true measure of the people in front of you.”
It is time to understand that the economic recovery of the UK is tied to free movement of people, capital and goods. A testing regime has got to take place.
“I think unfortunately, we've been stuck in a position where the UK has not viewed aviation as a national infrastructure. If you look at the US, Germany, France, Italy, and many other places, they have really put it at the forefront of national infrastructure."
“I think it's time to understand that the economic recovery of the UK is also tied to free movement of people, capital and goods. USD262 billion of trade between the US and the UK. We are the seventh largest trade partner for the US. The US is our largest. USD50 billion travel on planes. So you've got to do this."
“And I think we have provided a solution with substantive proof that basically takes away the myth of the 7% that was presented early on in the cycle that testing only catches 7%. It is absolutely not true."
“Actually with a testing regime, whether it's three days before departure or three days after departure, you can find between 70[%] to 85% of all cases really making the travel of infections between nations non existent. It's literally one in 500,000 or one in a million, if you believe the Mayo Clinic studies, which I understand are coming out very soon.”
The pandemic has to be a positive in terms of the environment as four engine fleets are being replaced with more efficient twin engines. If we don’t use this opportunity to double down on sustainability, shame on our industry.
“And then we intend[,] and will have[,] and are the youngest fleet across the Atlantic, the most sustainable, you know, we forgot to talk about sustainability because we're not flying. But the fleet that we will have will be, we've already reduced it until 2019 by about 18% in terms of CO2 emissions. And we'll go another 10[%] to 12% further once the new complete fleet is in there. So both on sustainability, the comfort for passengers and the fuel consumption, all great winners. And of course, we have delayed some of the deliveries over this restructuring period. But the shape and the size is probably, the size a bit smaller, but the efficiencies are much larger."
“The pandemic has to be a positive. And just fleet renewals, right? If you look around the globe, you know that the four engine large fleets are being replaced with more efficient twin engines. That's got to be a net positive. I think if we don't use this opportunity to double down on sustainability shame on our industry, because once the population, our fellow citizens will get out of the pandemic, they will also look at how people reacted in the post pandemic era."
“Sustainability is not going away. Our commitment to net zero remains as is by 2050. Our commitment to having the youngest fleet in the sky is unwavering. Now, you would say we're actually earlier in our cycle because we've retired the 747s and the A340s and our fleet is so much more efficient. And we urge everyone to make that into a consideration in how they design their fleets for the future.”
Highlights of CAPA Live, 11-Nov-2020
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