VIRGIN AUSTRALIA: Makes first profit in over a decade

On Tuesday 10 October 2023, Virgin Australia recorded its first profit under its new majority ownership. Bain Capital, became the majority owner after the airline went into administration in 2020 at the beginning of the pandemic.

IPO?

Virgin Australia is currently a private company. It does not need to report to the Australian Stock Exchange, although that may change.

The airline announced of a profit after tax of AU$ 129 million on revenue of AU$ 5 billion. This means Virgin Australia is back on track for an Initial Public Offering (IPO) probably in early 2024.

Virgin unexpectedly suspended moves towards the IPO earlier in 2023. The AFR reports that the market is receptive to a float at a price, a ‘deep discount to Qantas’.

Profit sustainability

The issue will be if the market believes that this is an enduring level of profit – about 7.4% across regional, domestic and international. With current travel demand going gangbusters, the test will be if it can retain or increase this margin when demand resumes a more normal rate.

For a comparison, Qantas maintains margins on domestic operations of 18.1 per cent. International margins are lower at 13%, but that represents a significant increase over margins pre-COVID-19.

CEO Jayne Hrdlicka claims that the airline has implemented a a much lower cost base than previous versions of Virgin. A characteristic which will only be enhanced once it takes delivery of eight new Boeing 737-MAX 8 aircraft before the end of the 2023 financial year. These aircraft are expected to show a 15% reduction in fuel consumption, which will also slim that cost base.

Staff have also foregone bonuses during the administration period of the company, but had now been restored with staff receiving around 6.5% of their salaries in additional pay.

Target Markets

The new Virgin Australia, has largely abandoned trying to attract the large corporate clients. Instead it focuses on small to medium sized business and leisure travellers. Luckily, that is also where current growth in demand lies. Large corporates have been slower to return to the kind of travelling schedules their staff maintained pre-COVID.

On time performance

Virgin has not scored so well on the rate of delayed and cancelled flights however. For most of the 12 months, it has scored significantly worse than Qantas and Jetstar. Although still near the bottom, its performance is improving as it meats the staffing and logistics challenges that the recovery in travel has caused.

2PAXfly Takeout

I have travelled on Virgin a couple of times since COVID restrictions eased. The sunny disposition of its staff has been retained, although it initially seemed weird to see cabin crew cleaning the aircraft as you disembark. Maybe that’s just me.

Virgin Australia’s online and app based booking process, I like. It feels friendlier then the disfunctional Qantas tech experience. It also feels like they have a focus on customers that Qantas has lost. Despite their on time and cancellation performance being pretty appalling, they have not attracted the level and intensity of opprobrium that has been directed to Qantas. That’s a skill in itself. They have also rolled out a luggage tracing capability in their app, which Qantas are still dragging their heels on.

If demand maintains, then Virgin Australia is in a good position to retain its market share, and profitability, despite challenges from low cost leisure route startup Bonza, and REX’s expansion into capital city flying. Now that REX has begun rolling out a proper loyalty scheme, and plans some lounge refurbishments, they may be an increasing threat to Virgin.

I’ll look forward to their progress, and will probably seek some shares in their IPO.

Mind you, as CEO Hrdlicka is will aware, there is a lot than go wrong between now and then.