Balancing game change and short cash at Virgin Blue

The epithet “the airline industry is always in crisis” could be your reaction to Virgin Blue’s announcement this morning that it expects to post a financial loss of A$30-80m this year compared to last year’s $34.3m profit.

Chair_3.jpgIndeed, Virgin Blue has been directly affected by a number of incidents that are affecting travel demand: Queensland floods, New Zealand earthquake, and rising fuel prices. So far the carrier has managed to avoid direct repercussions of the earthquake in New Zealand, but a medium/long-term indirect affect is not yet clear. Those events are affecting other airlines too: Air New Zealand last week said it expected to post a second half loss–but not, it should be noted, an annual loss. The difference is Virgin Blue has another burden.

Thumbnail image for VB Uniforms-5.JPGThe carrier’s game change programme seeks to ultimately improve margins, especially with corporate travelers, but you have to spend money to make money and boy has Virgin been spending: new route to Abu Dhabi, new partnership with Etihad, new cabins (above), new uniforms (left), and new menus. Bigger costs are yet to come, like the re-branding and two A330-200 aircraft due to enter service in the next few months.

The two aircraft are leased, which helps defray costs over an outright purchase, but costs are still incurred in crew set up, spare parts, and maintenance (the two frames, formerly with Emirates, are a decade old). Better economics will come with the two A330-200 aircraft due next year direct from the Airbus production line, the first time the carrier will take brand new Airbus aircraft.

Still more changes and costs–some announced, some not–are on their way, so that helps explain how Virgin, unlike Air NZ, will undo its first half profit of $37m statutory before tax, meaning the carrier will lose $67-117m this half of the financial year. Virgin thus finds itself needing to more carefully balance game change with cost. It is understood some initiatives, like new training, have been scaled down. Fuel contingency amounts are being fine-tuned. Employees are also conjuring cost-cutting ideas.

Chief executive John Borghetti and his team have a solid vision of where and what they want their rejuvenated carrier to be. They have to navigate that path, which includes cost oversight and cost-cutting but also managing shareholders and investors by convincing them spending now is the right time to make the transformation lest Qantas has any more time to play catch-up, as it did with the trans-con market.

One Response to Balancing game change and short cash at Virgin Blue

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