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Virgin Australia FY2014's loss aggravated by short haul international operations; FFP a new strength

Analysis

There was never any doubt Virgin Australia would incur a FY2014 loss in its domestic operation as a result of over-capacity. And indeed Virgin had a domestic AUD59.2 million EBIT loss, larger than FY2013's AUD34.6 million loss. But more unwelcome was a large swing at its international operation, which posted a FY2014 EBIT loss of AUD66.8 million, significantly worse than FY2013's AUD8.5 million loss. International's margin of negative 5.8% was also significantly worse than domestic's negative 1.9%.

International was impacted by substantial competition to Southeast Asia, an overall small market for Virgin but with disproportionate losses. More subdued domestic market conditions should improve Virgin's performance at home, but international offers no such comfort, raising the question of whether Virgin needs to leverage its LCC unit Tigerair Australia to take over leisure routes no longer suited to Virgin's full-service proposition and cost base.

Virgin's overall FY2014 underlying loss of AUD211.7 million was in line with market expectations and accompanied by news Virgin is selling a 35% stake in its loyalty programme, valuing it at AUD960 million, a significant part of Virgin's total market capitalisation of AUD1.4 billion. Virgin is looking to accelerate growth in this division whereas Qantas has decided to retain total control and the annual revenues.

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