Grant Bradley The wounded Virgin
Aussie airline’s losses could lead to more costly fares over the Tasman
Virgin Australia is reviewing all its routes and products — including to New Zealand — as it looks to slash costs after suffering losses for the seventh year running.
The review is long overdue, but the outcome could push up the cost of flying across the Ditch.
It may not seem like it for anyone booking late or around holiday times, but the Tasman has long been a very competitive stretch in global terms. The presence of Virgin Australia with about 15 per cent of the market has been a big part of that.
Starting as Pacific Blue, with a modest level of services out of Christchurch, the airline has been here for 16 years. Its transtasman operation accounts for only 5 per cent of its capacity so it is vulnerable to cuts.
After a messy break-up with Air New Zealand last year, Virgin was forced to increase its own flying across the Tasman. The airline started new routes and transformed itself into a full-service carrier, adding full meals with complimentary drinks and no charge for checked-in bags.
That was great for passengers but costly for the airline, which slumped to a full-year loss of A$349.1 million ($373m), taking its losses during the past seven years past $1 billion. It suffered during a “knock down, drag out” Australian domestic capacity war with Qantas and has launched long-haul routes to Los Angeles and Hong Kong. Those routes had some observers puzzled when they started, and have them scratching their heads even harder now.
New chief executive Paul Scurrah has landed in a financial storm that’s been brewing for years. At its results briefing last month he announced that he has a restructuring and cost
cutting exercise underway that is aimed at saving A$75m a year. Some in the airline business believe that to turn around Virgin’s financial position, it’s too little. And too late.
About 750 head office and corporate staff — from a total headcount of 10,000 — face losing their jobs. The airline’s three parts — Virgin Australia, Virgin Australia Regional Airlines and Tigerair — will have their operations merged in the shake-up.
There’s a lot of talk about rightsizing the business — terms that will be familiar to its competitors, which have been doing this sort of thing for years.
The Virgin group will reduce flying in parts of its short-haul international and domestic network to meet demand and maximise route profitability.
“This may involve potential withdrawals from certain markets which are uneconomical for us, however we will be reviewing all routes in detail,” Scurrah says.
Short-haul routes under the microscope include those to New Zealand, the Pacific Islands and to Hamilton Island, Papua New Guinea, the Solomon Islands and Bali.
Scurrah has been holding a series of “town hall” style meetings across the company to field questions from staff who were more accustomed to a spend-up under former boss John Borghetti, who transformed the airline from a budget operation set up to compete against the failed Ansett to a more serious rival for Qantas.
Decisions are expected by the end of the year, and Tasman routes such as the seasonal Auckland-Newcastle service and Wellington-Sydney will be vulnerable.
Latest seat utilisation figures from the Australian government paint a gloomy picture for Virgin Australia across the Tasman. While they are something of a crude measure, as they don’t show what passengers pay for those seats — and Virgin insists it is happy with revenue performance on the sector — they are indicative of the hard slog the airline faces every day, especially into Sydney.
Seat utilisation — or load factor — in June sagged below that of its main competitors across the Tasman. Air New Zealand’s planes were around 76 per cent full, Qantas close to 74 per cent and Jetstar 73 per cent, but Virgin’s planes were 66 per cent full, according to figures from the Department of Infrastructure, Transport, Cities and Regional Development.
Since the bust-up with Air New Zealand last October, the Kiwi airline has grown its transtasman operation, particularly into Brisbane, and has about 40 per cent of capacity, with more use of widebody planes which are popular with passengers.
Qantas, which also has some twinaisle Airbus A330s across the Tasman, and its budget arm Jetstar have around 35 per cent of the market. But a strong third player is crucial: airline pricing is very dynamic and if competition reduces, fares naturally go up.
And although Virgin uses only Boeing 737-800s, having a third airline with inclusive Economy Class products and a boutique-size Business Class with access to good lounges on both sides of the Tasman is especially welcome
The drums were beating loudly last year for the entry of Virgin’s budget offshoot Tigerair Australia into the New Zealand market, especially after a request was approved by the Australian government to transfer capacity on routes to New Zealand.
But there is no sign of Tigerair yet, and none on the horizon. All indications point to Virgin focusing on getting its Australian domestic operations in better shape, rather than deploying Tiger here and facing the challenge of introducing an unfamiliar brand to the New Zealand marketplace.
Nothing is off the radar in Virgin’s review, and transtasman passengers may be hoping the focus will fall on its long-haul routes. While latest figures show its Sydney-Los Angeles flights are standing up to the competition, the same doesn’t go for its Hong Kong flights.
In June, 317 Cathay Pacific flights were 85 per cent full, 122 Qantas flights were 86 per cent full, but only 67 per cent of seats on Virgin’s 57 flights were occupied.
Air New Zealand — whose profit came in at the top end of a forecast range, albeit after that range was revised down — ended the Virgin codeshare deal because it was getting less from it than its former partner. Now, that looks even more like a good decision.
As well, in 2016 the Kiwi airline bailed out of an equity stake in Virgin that it had built for more than $400 million. It took a heavy loss after selling most of its 25 per cent stake at A33c a share. It could have been worse — Virgin today is trading at under A16c.
Tasman routes such as the seasonal AucklandNewcastle service and Wellington-Sydney will be vulnerable