Virgin’s Financial Struggle
Virgin issues a profit warning
Virgin Australia have released a strong 2019 half-year results and an optimistic outlook. However, in light of the increased fuel price and weak demand, Virgin Australia had revealed that the company expected a $35.6 million loss in their full-year underlying earnings for 2019. Despite the forecast of 7% growth in the revenue, the loss would be around $100 million below last year’s result. The profit warning was contributed by the adverse performance in the foreign exchange. The news put the pressure on Paul Scurrah, who was appointed as the CEO and Managing Director of the company less than two months ago. In an attempt to improve its financial position, Mr Scurrah had reduced flight capacity across multiple routes affecting flights to and from Perth, Canberra and more.
Virgin’s share price closed at $0.18 last Friday. This was a 5.4% drop compared to the previous closed price. The drop was attributed to the profit warning by the company. Last year’s underlying earnings was $64.4 million. The volatility of the external shocks with lower levels of business and consumer confidence led to an expected loss of $35.6 million.
Alleviating financial conditions
In addition to the reduced flight capacity, Virgin announced the delivery of its Boeing 737 MAX aircraft to be delayed. The announcement at the end of April meant that the new delivery date was scheduled to be in July 2021. The two fatal crashes with the model MAX 8 might be attributed to the deferred delivery. The new delivery date will delay a $1 billion delivery bill. While the company had considered cancelling the order, incurring hefty fees, Virgin believed the MAX’s better fuel efficiency and lower running costs would help the airline achieve profitability. The order included a restructure in the aircraft order, converting 15 Boeing 737 MAX 8 to Boeing 737 MAX 10. The change meant that 25 MAX 10 and 23 MAX 8 will be delivered in July 2021 and February 2025 respectively.
As a strong competitor in the airline industry, Qantas has been exerting a lot of market pressure on Virgin. Qantas reported a half-year profit of $498 million despite the increased fuel prices. Qantas plans on increasing its presence in the market after the retreat of the global competitors out of Australia. The strategy would put Virgin in a difficult position as they need an effective route network. As of Monday, Qantas is trading at $5.30 per share. In the airline industry, Australia’s domestic airfares fell to $121.5 in May largely due to the recent market conditions.
It is important for Virgin to have strategies to withstand external volatility. The recent market conditions put Virgin’s financial performance in the negative territory.
Virgin will need to ensure new strategies are created for the profitability and growth of the company and give greater resilience to the challenging economy.
Click here for a one month free trial to our Lotus Blue Portal.