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Virgin profit shows airlines are flying different routes

Virgin Australia’s return to full-year profits with a turnaround from a $68 million loss in FY2011 to a $22.8 million statutory profit (after tax) has disappointed the market in early trading. But it also underlines the different flight paths now being flown by Australia’s two major airline groups.

Last week Qantas flew downwards into its first full year loss since privatisation, of $245 million, while cutting its capital expenditure liabilities by a massive $8.5 billion by dumping the firm orders for 787-9 Dreamliners it needs to modernise and expand not just its international services, but the Cityflyer capital city domestic routes.

But Virgin, which has never had a massive capex program, and has a fleet much newer at half the average age of the Qantas fleet, said it had done things differently, by taking government and business account flyers off Qantas, and growing its yields on international and domestic routes by more than 12% over the year. That’s a really critical measure of competitive health.

The Virgin push for “quality” buyers, prepared to fly at higher fares and more frequently than bargain hunters, began to pay off in the last financial year.

The two airline groups, not including Qantas low fare subsidiary Jetstar, are locked in a fierce fare war on the key domestic routes this morning, with Virgin selling business class seats for what it once asked for full fare economy seats, and offering economy seats at prices close to regular fare levels on Tiger, which is generally less costly than Jetstar. For those who fly, be it business or discretionary or leisure, the battle in which Qantas is losing money and Virgin (including international) is making money, is blazing out of control except for one thing. Seats.

Qantas is adding a huge number of seats. Virgin isn’t. Former Qantas executive general manager and now Virgin Australia CEO John Borghetti went out of his way this morning to say that apart from transcontinental routes to Perth, his much smaller airline would only contribute a sliver of the extra seats being unloaded into the Brisbane-Sydney-Melbourne triangle and the Melbourne-Sydney route in particular.

We expect to finish the first half of this financial year with between 28-29% of the expanding domestic market, which is what we have now,” Borghetti said.

He forecast that on Sydney-Melbourne, a route projected to grow by around 24% in terms of capacity based on Qantas/Jetstar plans and rising demand in general, Virgin Australia would contribute only 3% of the extra seats.

But with the defection of more business travellers from Qantas, it also expected to make more on its flights, through a combination of lower costs and a growing proportion of government and company account flyers (which has exceeded its target of 20% of its total revenues in the June quarter of the financial year just gone).

Last year we grew around available seat kilometres by 9.6% but our passenger numbers by only 5.6%, which is why our [profitability] went up,” Borghetti said. He said most of that growth, and this year’s, was being driven by Virgin putting much larger wide-body A330 jets on the transcontinental routes, which it had to do in order to compete against similarly large long haul Qantas aircraft.

In this sense Virgin Australia has arguably broken the Qantas two-brand strategy in that it is telling the market it is making money at the expense of both Qantas full service and Jetstar no service offerings. Of course Qantas may well set out to tell the market a different story, as it meets the Virgin “menace” with even more seats and fare sales than at any time since the domestic airline business was deregulated in 1989.

The winners from this contest are the travellers, whether they want full service quality or the bone pain and fine print penalties or traps by which the low-fare brands game their customers.

The losers are the owners of airline stocks, which by any measure, seriously underperform the airports and retail travel chains like Flight Centre, which pumped up its net profits before tax by 43% this morning to just over $200 million for the same year that Virgin made $23 million and Qantas lost $245 million.

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