Virgin Blue posts six-month profit

Guest Writer

SYDNEY 24 February 2010: Virgin Blue Holdings Limited today reported a net profit after tax of $62.5 million for the six months to 31 December 2009, compared to a loss of $101.4 million for the prior corresponding period.

Group revenue increased 12.2% from $1.35 billion in the previous equivalent reporting period to $1.51 billion for the six months to 31 December 2009, with Underlying Profit Before Tax1 of $75.6 million up 34% compared to the prior period.

Virgin Blue Airlines Group Chief Executive, Brett Godfrey, said that while favourable fuel movement had certainly helped, he was proud of the entire Virgin Blue Airlines Group team for achieving a continued decrease in the Cost per Available Seat Kilometre, excluding fuel (CASK) of 4.5%, through cost saving initiatives and enhanced productivity across the network, during the toughest operating environment in the industry’s history.

“Any way you cut it, to continue to achieve cost reductions while we continue to grow our business and position it to rapidly and fully exploit any improvement in economic conditions demonstrates the remarkable commitment of each and every one of our team members and the resilience of our model,” Mr Godfrey said.

Mr Godfrey cautioned that the operating environment is still uncertain and that concerns remain around the pace of the global economic recovery and the continuing uncertainty in domestic and international markets.

“We have a seasonal business and our traditionally busiest part of the year is the December first half - that and ongoing strong price competition will likely see pressure maintained on yield improvement for the remainder of this year,” Mr Godfrey said.

“However, we do not intend to shy away from remaining competitive, and we plan to vigorously defend our core domestic markets. In that regard we are intending to secure additional short term domestic capacity and have reached an in principle agreement with Boeing for an order of up to 50 aircraft. These aircraft will come equipped with the upgraded Boeing Sky Interiors as well as performance improvements that will deliver significant fuel and maintenance efficiencies.”

OPERATING PERFORMANCE – GROUP

Production, as measured by Available Seat Kilometres (ASKs), increased by 24.7% to 16.4 billion compared with the six months ended 31 December 2008, while passengers carried during the six months to 31 December 2009 remained stable at 9.27 million.

Revenue grew 12.2% to $1.52 billion for the six months, up from $1.35 billion for the equivalent past reporting period, while total revenue per available seat kilometre (RASK) declined 10.1% to 9.24 cents. The decline in RASK reflects the growth in production of 24.7%, together with the impact of VAustralia for the first time in this reporting period, with RASK for international markets traditionally much lower than that for short haul.

Total operating expenses were $1.41 billion, up just 4.5% on the prior year against a total production increase of 24.7%. This is contrasted by total CASK, decreasing 16.2%, and CASK (excluding fuel) decreasing 4.5%. A reduction in the average price paid for jet fuel of 27.5% to US$92 per barrel delivered $115 million in cost savings, whilst the underlying unit cost decreased as a result of a continued focus on cost saving initiatives and enhanced

productivity across the network.
Short Haul

Profit Before Tax for the Short Haul business was $108 million, up 126% against the prior period.

Despite intense competition in the domestic market, decisive capacity management during the recent economic downturn saw 4.9% of capacity redeployed from this market to other new short haul markets, driving domestic yield growth up 2.7% against the prior period, continuing to demonstrate the validity of the New World Carrier strategy for Virgin Blue. Load factor for the domestic market increased 1.3pts to 82.9%.

The non-domestic short haul markets saw capacity growth of over 64%, which on a stage length adjusted basis led to yields for the total short haul operation reducing by 4.3%.

Overall, short haul passenger revenues increased 3.5% to $1.26 billion and passenger load factor decreased marginally by 0.1pts to 80.1%. With 28 new short haul routes launched in the last 18 months Virgin Blue’s network footprint continues to strategically grow to position the company well for when the economic conditions improve.

Long Haul

Total long haul revenues for the six months to 31 December 2009 were $117 million with a load factor averaging 80.8%.

V Australia delivered a Loss before Tax of $39 million, reflecting the difficult long haul environment compounded by the US centric focus of the launch routes, and the original delays to the launch of the services due to the Boeing strike. V Australia is however meeting expectations and will see a noticeable improvement in the in second six month period, despite the fact it is seasonally the poorer half in the year. Guidance previously given that V Australia would be profitable within 18 months of launch remains valid.

Services between Melbourne and Los Angeles were launched in November 2009, and services between Brisbane-Phuket, Melbourne-Phuket and Sydney-Nadi were launched late in the reporting period to improve aircraft utilisation and manage the exposure to US-centric market trends. The introduction of direct non-stop services to South Africa in March 2010, is also expected to further improve V Australia’s earnings performance.

The company is also positive about the potential additional benefits of its proposed joint venture alliance with Delta Air Lines. The agreement will significantly enhance V Australia’s network and improve its competitive position against the incumbents on the U.S.-Australia and U.S.-South Pacific markets.

In December 2009, the Australian Competition and Consumer Commission granted authorisation to Virgin Blue and Delta Air Lines to enter into the joint venture on their flights between Australia and the United States (the trans-Pacific
routes).

Virgin Blue and Delta are currently awaiting the outcome of their application for antitrust immunity from the US Department of Transportation for permission to implement the Joint Venture.

Balance Sheet and cash flow

Operating cash inflow for the six months was $203 million, up from $123.5 million in the previous corresponding period.

Capital expenditure for the period was $285 million, which included one Boeing 777-300ER, two Embraer E-190s, three Boeing 737-800s and deposits on future aircraft. Net proceeds from funding were $253 million, including $223 million from the successful equity raising in the period. Cash balances at 31 December 2009 were $842 million, up $370 million for the six months since June.

Dividend

The Company believes it prudent not to issue an Interim Dividend at this time.

CEO Succession Virgin Blue Chairman, Neil Chatfield said “As reported at the Company’s AGM in November, following Brett Godfrey’s decision to retire from the company, the Board has been working with an international executive search firm to evaluate a number of high potential CEO candidates. At the present time, the Board is working with a shortlist of candidates and expects to further update the market in the near future”.

OUTLOOK

Virgin Blue confirms its recently updated outlook for the year ending 30 June 2010. Specifically, the Company estimates that its Profit before Tax (excluding ineffective cash flow hedges and non designated derivatives) for the financial year will be in the range of $80-110 million.

However, while the Board and management are of the view that the Group is well positioned to take advantage of an improving market, they remain alert to the pace of the global economic recovery and the continuing competitiveness in domestic and international markets. As previously advised, seasonality and competitive activity in the domestic market will put continued pressure on yields for the remainder of this year.

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