Virgin Australia has flagged an expected $35 million full-year loss, blaming “weakened” demand and this weekend’s federal election for the reversal on last year’s performance.
In a note to its shareholders, the company said “uncertainty” in the market had taken a toll on the business and its full-year results – to be released in August – are now expected to show a $100 million drop on the previous year’s $64.4 million underlying earnings.
“While we have continued to grow revenue, this announcement shows that our business needs to become more resilient to challenges such as weaker demand, high fuel prices and foreign exchange environment,” Virgin Australia chief executive Paul Scurrah said.
“There is a lot of work being done to develop our new strategy that will help position the group for long-term success. In the meantime, we are focused on short-term improvements,” he said.
Losses fuelled by fuel costs
Virgin attributed part of its losses to the cost of fuel, which has increased 117.4 per cent since January 2016.
Qantas similarly pointed to increased fuel costs in its February half year results, in which it reported a 16 per cent drop in its half-year profits – down to $498 million from the previous year’s record $595 million.
Fuel prices “cratered” in 2014 off the back of low crude oil prices, according to IBISWorld senior industry analyst Tom Youl, and while the current prices are closer to ‘normal’ than high, the speed at which the price regained its losses has weighed on airlines.
The current price is also unlikely to be the top, Mr Youl said, however any further increases will likely be incurred at a more reasonable pace.
Short-term pain for travellers
Anyone looking to fly within Australia could face increased ticket prices in the short term, Mr Youl said, depending on how Virgin looks to fix its ailing earnings.
The business will need to reassess the routes it flies and whether the flights it currently operates are worth maintaining, and a pull back in the volume of flights on a particular route will push ticket prices up.
However, Australian airlines have performed well over the past 18 months to two years, Mr Youl said, and ticket prices are unlikely to spike considerably over the long term.
He said Virgin maintained strong revenue growth over the past year and a half – driven particularly by the business’ international arms – and this looks unlikely to change in the near term.