Virgin Australia Holdings Limited (Virgin) posted its results for the first half FY2017, noting weak operating results but countered by ongoing deleveraging
The following table summarises 1H17 results:
| $m | 1H FY17 | 1H FY16 | Var $ | % |
| Group revenue | 2,633.7 | 2,658.2 | (24.5) | (0.9%) |
| Group underlying EBIT | 127.7 | 161.4 | (33.7) | (20.9%) |
| Underlying profit before tax | 42.3 | 81.5 | (39.2) | (48.1%) |
| Statutory profit/(loss) after tax | (21.5) | 62.5 | (84.0) | (134.4%) |
| Net debt | 1,169.8 | 2,106.1 | (936.3) | (44.5%) |
| Financial leverage | 4.5x | 5.7x | -1.2x |
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Source: Virgin, FIIG Securities
Key points:
- 1H17 revenue fell marginally by 0.9% to $2.634bn from $2.658bn per corresponding period (pcp), primarily driven by ongoing subdued trading conditions in the domestic market. Group underlying EBIT was down 20.9% to $127.7m, resulting in an underlying profit before tax of $42.3m, a decrease from $81.5m pcp. Virgin recorded a statutory loss after tax of $21.5m in 1H17, a reversal of the $62.5m profit achieved in 1H16. The statutory loss included the impact from the implementation of Virgin’s Better Business program, to drive efficiency and save costs, mostly due to charges related to fleet simplification
- Virgin’s business segments reported mixed performances. The airline’s domestic business performed weakly, with underlying EBIT down 38.5% pcp, at $80.0m in 1H17 compared to $130.0m in 1H16. Its yield – a measure of revenue generated to passenger kilometres travelled – is also down by 5.6%. The international business, on the other hand, recorded an underlying EBIT of $0.8m following execution of improvement strategies in this segment, and reversed the loss recorded of $30.8m in 1H16. Yield for the international business fell slightly by 0.7%
- Although Tigerair’s underlying EBIT dropped by 55.4%, the business continues to be profitable at $6.2m in 1H17. However, Tigerair’s yield in 1H17 fell by 8.4% pcp
- Velocity’s underlying EBIT decreased slightly by 6.8% pcp to $66.0m, but achieved seven million members in January 2017, almost six months ahead of its target for 2017
- Cash generated from operating activities (before transformation and finance costs) improved by 46.1% to $143.5m in 1H17, driven by improved cash conversion. Virgin has also reduced its cashflows in investing activities, primarily capital expenditure, significantly by 40.4% to $156.5m in 1H17. The airlines stated that it is on track to achieve net free cashflow savings increasing to $300m per annum by the end of FY19
- Financial leverage (defined as net debt adjusted for operating lease rentals to EBITDAR) continued to drop to 4.5x at 31 December 2016 from 5.2x at 30 June 2016, and 5.7x at 31 December 2015. This improvement follows an 8.2% reduction in debt to $2.766bn at 31 December 2016 (from December 2015), combined with the significantly improved cash balance of $1.596bn (up by 76% pcp), the highest ever reported level. Virgin also benefitted from the $931.4m received from its shareholders following its entitlement offer during 1H17
- Virgin also announced that its new alliance agreement with HNA Aviation, Hong Kong Airlines and HK Express, with the intention to launch new flights – via codeshare - from Australia to Hong Kong in mid 2017. This is credit positive for the airline as the alliance will support Virgin’s access to the Chinese market, Australia’s fastest growing and most valuable inbound travel market. The proposed alliance is subject to approvals by the Australian Competition and Consumer Commission. Virgin is also on track to commence flights between Melbourne and Los Angeles starting April 2017, as previously announced
Outlook
Virgin did not provide any guidance in relation to its outlook, citing uncertainty in external market conditions at the time of its 1H17 results announcement.
Conclusion
Both S&P and Moody’s have a negative outlook on Virgin’s ratings (B+/negative and B2/negative respectively). S&P cited limited buffer at the rating level to absorb volatile fuel prices, foreign exchange movements and variable passenger demand as the reason for its negative outlook. Moody’s negative outlook, on the other hand, reflects the execution risks involved in the airline’s announced operational and capital efficiency initiatives. We agree with the rating agencies as while the new alliance could improve the airline’s profitability due to the potential for higher revenue with minimal costs as a result of the code sharing agreement, Virgin continues to be challenged by high fuel prices and weak domestic market conditions.