Virgin Australia is in a deep financial hole, with its latest $349 million loss capping years in the red.
“It’s seven years of losses worth over a billion dollars,” said aviation expert Neil Hansford, from Strategic Aviation Solutions.
“When you’re in a deep hole you stop digging, but they haven’t stopped digging. Now they’ve come out with announcements that really should have been taking place over the last several years.”
“We intend to further reduce flying across elements of our short-haul international and our domestic network to match our strategic positioning and the market conditions as well as to maximise route profitability,” Virgin Australia chief executive Paul Scurrah said.
“This may involve potential withdrawals from certain markets which are uneconomical for us, however we will be reviewing all routes in detail.”
The managing director of Air Intelligence, Dr Tony Webber, takes the Virgin CEO’s statement at face value.
“For domestic, you’ll see chopping across the board, I think,” he said.
Aviation analyst Geoffrey Thomas from AirlineRatings.com told ABC News that the review will certainly result in fewer flights and may result in some whole routes being cancelled by Virgin.
“They do need to trim the sails and do some trimming of frequencies,” he said.
Possibly a route or two here or there will have to go.’’
Mr Hansford said both Virgin and Qantas had already been reducing the number of flights between the major cities to ensure that planes are full, or close to it.
“They and Qantas have been cutting back capacity primarily by reducing frequency – particularly on the ‘golden triangle’ of Brisbane, Sydney, Melbourne – and by cutting frequency you’re still giving an acceptable service,” he said.
Smaller cities likely to see flight cuts
However, Mr Webber and Mr Hansford agree that the smaller cities and regional destinations are more likely to face big cuts, with some at risk of losing Virgin services altogether.
“You’ll start looking very heavily at the leisure routes, and the leisure routes maybe will have a reduction in daily frequency,” Mr Hansford said.
“Some leisure routes, say the Tasmanian routes, where they get Sydney and Melbourne, they may lose their directs from Perth or their directs from Adelaide.
“Some of the direct services into some of the lesser ports in Queensland – Cairns will be sound, Townsville, Mackay and Rockhampton, but some of the other ports being served really start to be very questionable.”
Mr Webber disagrees about which destinations may be affected, believing that the lower dollar may strengthen demand for some domestic tourist destinations.
If I was guessing it would be the tier-two cities where they would look at cutting capacity,’’ he said, citing Adelaide, Hobart, Rockhampton, Townsville and Darwin as examples.
“Hamilton Island, Proserpine, Cairns, Margaret River and south-east Queensland leisure destinations may do OK.”
International flights may be scaled back
But Mr Webber and Mr Hansford agree it is Virgin Australia’s international division that is the source of the biggest losses.
“The days of Virgin being on the Pacific and on Hong Kong really have to be questioned,” Mr Hansford said.
He pointed out that the Hong Kong flights benefit two of Virgin Australia’s major shareholders – more than 90 per cent of Virgin’s shares are owned by foreign airlines, with two Chinese airlines owning a combined 40 per cent, and Etihad and Singapore owning about another 40 per cent between them.
But he added that even some popular routes are not necessarily very profitable.
“Nothing’s in and nothing’s out,” he said.
In the end it gets down to load factor and yield, and prices on Bali – and there’s new entrants – are going down, and you may find that they may retreat and only service Bali say from Perth, Sydney and Melbourne and cut down some of the other Bali services.
“Some of their Pacific Island services may be fairly questionable.”
Mr Hansford said New Zealand was an obvious destination for Virgin to cut capacity to, given intense competition with Qantas and Air New Zealand, which are financially stronger airlines.
“I’m not saying walking off it, but reducing capacity on it,” he added.
Will fares rise with fewer seats available?
However, the analysts are divided on whether a reduction in flights will see a matching increase in air fares.
Mr Hansford believes Qantas will take advantage of any reduction in Virgin’s capacity to maintain and even increase its market dominance.
“Now that Virgin is injured and it’s wounded, Qantas won’t take their foot off the pedal and they will keep on their competitiveness to maintain their current market share,” he said.
In a recent interview with The Business, Qantas chief executive Alan Joyce seemed to indicate this would be the case.
“We are seeing some of the very cheap air fares disappearing from the market,” he said.
It’s cheaper to fly [to some destinations] than to park your car at the airports.
“This is the best value we’ve had in 10 years. Air fares have typically been down by around 40 per cent. That’s not going to change because we’ve changed our business and passed on those benefits to the consumers.”
However, Dr Webber, who is a former Qantas chief economist, argues that some increase in air fares is inevitable as capacity is cut and as fuel costs rise.
“Virgin’s going to cut capacity, so prices will go up,” he said.
“Unit costs have gone up, so air fares will have to go up.”