Virgin Atlantic reports another year of heavy financial losses

Virgin Atlantic has reported another year of heavy financial losses. The airline has today published its financial results for the year ended 28 February 2013.

Whilst Virgin Atlantic has yet to file its financial accounts at Companies House, it has published headline figures to the media. Interestingly, this year, Virgin seems unconcerned about trying to bury bad news. Last year, it waited until a Friday afternoon in the middle of the Olympics to publish its results. This year, possibly due to a new CEO (Craig Keeger) who will be able to claim credit for a financial turnaround, the airline has not delayed its results and provided more detail than a headline profit for the group, which includes Virgin Atlantic and Virgin Holidays.

According to Bloomberg, the group reported a full year loss of £69.9m with Virgin Atlantic losing £93m after exceptional items and £128.8m before exceptional items. Passenger numbers increased by 188,000 to 5.5 million. Revenue increased 5% to £2.87 billion and Virgin’s passenger load factor increased 1.3% to 79%.

Last year, the airline group lost £80m. The airline was keen to blame the macroeconomic environment and the Olympic games. However, that is far from the whole story. Once again, the divergence in the performance between Virgin Atlantic and British Airways is stark. Both airlines are exposed to the same macroeconomic forces. Yet BA reported an operating profit of £274m for the year ended 31 December 2012 and that’s after absorbing the losses and integration costs as a consequence of its merger with bmi.

Virgin has been impacted by the transatlantic joint-venture between British Airways and American Airlines which gives them significant scheduling and frequency advantages. For example, Virgin’s sole daily flight to Miami compete against four daily flights by American and BA. Furthermore, the merger of bmi into British Airways has deprived Virgin of feed from bmi’s UK domestic network. Whilst BA is obliged to make seats on its domestic services available to Virgin for connecting passengers it is clearly disadvantageous for Virgin to have passengers connecting via BA and Terminal 5. BA has always a enjoyed the advantage of a much larger global network over Virgin Atlantic and as BA converts the Heathrow slots it acquired from bmi to launch new long-haul routes the network advantage of BA over Virgin Atlantic will only increase.

Eastbound, Virgin faces similar competitive pressures. Its daily flight to Dubai competes against three BA daily services and five daily services by Emirates. And there is strong competition on price and product on routes served indirectly from the UK by Emirates and other Middle Eastern carriers.

Virgin is keen to emphasise that it has taken measures to improve performance. It has initiated an efficiency programme to generate £45m of cost savings. It has refurbished its fleet of Boeing 747-400 aircraft at London Gatwick. It has taken delivery of new Airbus A330 aircraft with a new “Upper Class” business class product. It has also sought to generate more feeder traffic for its own network, relaunching flights from Mumbai at times to connect to transatlantic departures from London Heathrow to the East Coast of the USA. It has also introduced its own “Little Red” UK domestic network to generate feeder traffic from Manchester, Edinburgh and Aberdeen.

Most significantly, Virgin will enter into a transatlantic joint-venture with Delta (subject to regulatory approval – sought some five years after BA and American applied for their joint-venture) from a date to be announced. This will provide Virgin with access to Delta’s large domestic network in the US as well as its distribution network and corporate contract base. The two airlines will also be able to co-ordinate schedules. This will provide Virgin and Delta with a strong presence on the London – New York route with at least 9 joint daily services. However, the two airlines will have to work within the constraints of their relatively limited slot portfolio at London Heathrow (for all Virgin’s complaints about the lack of Heathrow slots and BA’s dominance it has been relatively inactive in the market for trading slots at Heathrow).

The Delta joint-venture addresses Virgin’s transatlantic network. However, Virgin lacks any similar partnerships for routes to Africa, the Middle East and Asia. In contrast to its sibling Virgin Australia which has pursued deep bilateral partnerships with Etihad, Singapore Airlines and Delta, Virgin has no such partnerships beyond Delta.

With a new CEO having taken over and Delta due to appoint two directors to the board of Virgin Atlantic I expect we can be confident of more changes at Virgin Atlantic over the coming years as more significant change is clearly required beyond a joint venture with Delta.

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