Commodities

Virgin Australia's new CEO swings axe as loss puts focus on costs

Credit: REUTERS/DAVID GRAY

Virgin Australia Holdings said on Wednesday it would cut 750 jobs, merge business divisions and conduct a sweeping review of its operations after swinging to an annual underlying loss due to soft market conditions and higher fuel costs.

By Jamie Freed

SINGAPORE, Aug 28 (Reuters) - Virgin Australia Holdings VAH.AH said on Wednesday it would cut 750 jobs, merge business divisions and conduct a sweeping review of its operations after swinging to an annual underlying loss due to soft market conditions and higher fuel costs.

Chief Executive Paul Scurrah said the airline had formed a new management team to focus on cutting costs to get into a strongly profitable position over the coming years, but he declined to promise a return to profit this financial year.

"Should conditions swing in our favour then I could see that (a profit) is possible, but we can't guarantee it," the CEO who took up the role in March told Reuters in a phone interview.

Virgin said the job cuts would save A$75 million ($50.7 million) and affect 30% of head-office and corporate roles, while the back offices of Virgin, Tigerair Australia and its regional business would be combined.

Australia's No. 2 airline has struggled relative to deep-pocketed rival Qantas Airways Ltd QAN.AX, and decisions made by Scurrah's long-serving predecessor, John Borghetti, make it difficult to respond to declining consumer and business confidence and slow economic growth.

Scurrah said softer trading conditions experienced in the second half of the financial year were continuing, and costs would rise a further A$100 million from fuel and unfavourable foreign exchange in FY20.

The company reported an underlying pretax loss, its most closely watched measure, of A$71.2 million ($48.1 million) for the year ended June 30, compared with a A$64.4 million profit last year.

The result was significantly worse than its guidance provided in May for an underlying loss of at least A$35.6 million, although it was in line with analyst expectations, according to Refinitiv data.

On a statutory basis, including one-off gains and losses, it reported its seventh consecutive annual loss, this time of A$315.4 million due to impairments of budget airline Tigerair Australia and its international business, deferred tax assets and restructuring costs.

Virgin shares sank as much as 9% in morning trade after the result, touching 10-year lows, and closed down 6%, while the broader market .AXJO and Qantas were both up 0.5%.

VELOCITY STAKE

IVirgin's Velocity frequent flyer division was a bright spot in the results, with earnings before interest and tax up 12% to A$122.2 million.

Scurrah said the airline did not plan to sell down any of its 65% stake in the loyalty programme as part of a potential exit by fellow shareholder Affinity Equity Partners.

"It is not our intention to reduce our stake in Velocity," he told Reuters.

Virgin had earlier left open the option of reducing its stake to as low as 51% through a trade sale or IPO.

The Brisbane-based airline said it would conduct a review of its capacity, routes, fleet and supplier contracts to eke out further cost cuts, which Scurrah said would be completed by the end of the calendar year.

It was evaluating the performance of all of its routes and expected capacity growth to be negative in the first half of the current financial year, Scurrah said.

Contracts with aircraft lessors, airports and other suppliers would be scoured for annual savings of A$50 million.

Scurrah said the company would focus on being the best-value airline for corporate and leisure travellers in Australia, rather than worrying about competing against Qantas.

"I intend to run our own race, to be our own company," he said.

Virgin has appointed Keith Neate as its new CFO. Neate was once a chief financial officer of the airline under its previous low-cost guise Virgin Blue and more recently the CFO of Aurizon Holdings Ltd AZJ.AX.

The company also named John MacLeod, a former Air Canada AC.TO executive, as its chief commercial officer.

($1 = 1.4806 Australian dollars)

(Reporting by Jamie Freed in Singapore; additional reporting by Niyati Shetty in Bengaluru; Editing by Stephen Coates)

((Niyati.N.Shetty@thomsonreuters.com; +918067497199;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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