Virgin Australia targets cost reduction, improved yields. A group strategy presents opportunities

Virgin Australia's results for the six months to 31-Dec-2014 suggest stability is returning to Australia's small but always dynamic air transport sector: the main airlines are making acceptable returns on their domestic networks while international is under-performing. In Virgin's case, its AUD103.8 million (USD81.3 million) domestic EBIT profit was cut in half by international's AUD49.5 million (USD38.7 million) loss. For the first time in many years, Qantas' international network is profitable while Virgin's is not.

Virgin's domestic profit more than tripled as Qantas and Virgin ended their capacity war; it had produced market growth, but damaged yields. The improving domestic result was in comparison to deterioration at Virgin's smaller international network. Virgin has a substantial virtual network, but only a small international operation of its own, mostly focussed on leisure flights, where competition is stiff - and ultimately these are not core to Virgin's new corporate, up-market focus. Perhaps an indicator of the challenges Virgin has faced restoring domestic profitability, the airline is only now turning its attention to international. Options include withdrawals or transfer of services to wholly-owned LCC unit Tigerair Australia.