01 December 2008

Virgin Blue plans drastic cuts

A Herald Sun report says that Virgin Blue will be cutting back on flights, cancelling routes and taking other drastic cost-saving measures in the New Year to cope with the slowing economy.

Australia's second-biggest airline expects to break even at best in the current financial year but will absorb losses from the start-up costs associated with the launch of V Australia, the trans-Pacific subsidiary set to start service on February 27.

Capacity growth originally budgeted for 20 per cent will fall to 8 per cent, chief executive Brett Godfrey told shareholders at the annual meeting in Brisbane last week.

A review to be completed next month will determine where the new round of cuts fall as the carrier focuses on boosting its cash reserves.

Virgin Blue launched a $50 million cost-savings initiative in June and has already deferred aircraft deliveries, redeployed planes and frozen executive salaries.

Jet fuel costs have soared from 15 per cent to 32 per cent of the carrier's cost base but, with the recent decline in world oil prices, the airline's biggest problems now are the economic downturn and plummeting Australian dollar.

Chairman Neil Chatfield said the current financial year will be "the most difficult Virgin Blue has yet experienced" since starting operation in 2000.

"Despite a recent easing of global oil prices, which has brought some relief, the softening economic conditions are presenting a continuing challenge to our business," he said.

"The economy, the global financial crisis and the impact on consumer confidence will combine to overtake fuel as the biggest issue for our industry in the next 12 to 24 months."

Mr Godfrey said fuel surcharges had proved to be only partially successful because the higher fares had driven away the most price-sensitive customers.

Fares have come down by as much as $20 since June but surcharges are likely to remain because fuel is paid for in American dollars, he said.

Virgin Blue's net profit plunged nearly 55 per cent to $98 million in the year to June 30 - down from a record $216 million in 2007.

Mr Godfrey declined to provide guidance for the year ahead but the airline has acknowledged that its pre-tax profit will be sliced by $200 million because of costs associated with fuel and currency hedging.

Spending in the second half will be trimmed by more than $150 million and up to $100 million may be freed up by offloading non-core assets.

The company again declined to pay a dividend, citing the need to bulk up its cash savings.

Virgin Blue shares gained 1 to close at 32 yesterday.

Former National Party leader and deputy prime minister Mark Vaile has been voted to the Virgin board.

Shareholders also approved an incentive package for Mr Godfrey with 1.6 million performance rights and 331,661 shares.

A Report by The Mole