Virgin Australia Bemoans Soft Demand, Deepens Savings Drive -- Update

   By David Winning and Rebecca Thurlow 
 

SYDNEY--Virgin Australia Holdings Ltd. (VAH.AU), Australia's No. 2 airline by market share, sounded a downbeat note on domestic demand for air travel as it made progress on achieving key goals such as cost cuts.

Chief Executive John Borghetti said consumer demand in Australia remained very soft, continuing a six-month trend that's already prompted Virgin to cut capacity--the number of seats available to passengers--on routes to regions hurt by the resources downturn.

Mr. Borghetti said uncertainty around the federal election on July 2, which was won by Malcolm Turnbull's conservative coalition after a prolonged vote count, had added to the industry turbulence by prompting people to put off travel plans.

"What we are not seeing is any improvement in that going forward," said Mr. Borghetti, adding that Virgin would keep adjusting capacity depending on demand.

As a result of the market uncertainty, Virgin isn't giving specific profit guidance to investors. Still, Mr. Borghetti said the company was performing well and its international business is on track to become profitable by the end of June, 2017.

Virgin said it also expected to beat a target of 1.2 billion Australian dollars (US$915 million) in cost savings by the end of the 2017 financial year while also targeting an additional A$300 million in net free cash flow savings by the end of the 2019 financial year.

The airline made a net loss of A$224.7 million in the year through June as it booked costs for a fleet culling program designed to wind back capacity after years of investment to take on bigger rival Qantas Airways Ltd. (QAN.AU). However, its underlying pre-tax result swung to a profit of A$41 million, in line with guidance, from a loss a year ago.

As part of that cost-saving drive, Virgin aims to remove some planes acquired through recent acquisitions, including a fleet of Tigerair-branded A320 aircraft that are due to leave service over the next three years.

In recent years, supported by big shareholders including Etihad Airways and Singapore Airlines (SINGY), Brisbane-based Virgin Australia has invested heavily in transforming its business from a budget carrier to a full-service airline, competing head-to-head with Qantas. The two airlines engaged in a damaging price war that caused losses for both companies before pressure from investors spurred them to scale back on capacity.

Qantas' finances have since rebounded strongly, but Virgin Australia's recovery has been less spectacular. In spite of falling fuel prices that have proved a boon elsewhere, Virgin Australia's heavy investment in recent years has left it more highly geared than Qantas, making it harder to compete.

Chinese companies HNA Group and Nanshan Group bought stakes in Virgin Australia in May and June, respectively, as the Australian carrier sought fresh capital to shore up its balance sheet.

The airline this week completed a A$852 million offer of shares to existing investors, raising further funds to reduce debt and finance its cost-cutting program. Major shareholders including Singapore Airlines, Virgin Group, HNA and Nanshan participated in the offer.

-Write to David Winning at [e-mail] and Rebecca Thurlow at [e-mail]

(END) Dow Jones Newswires

August 04, 2016 20:43 ET (00:43 GMT)

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