Virgin Australia Holdings FY13 full year results 30 August 2013
Year in review Fast tracked major restructuring and transformation program Difficult economic and competitive environment, significant one-off pre-tax restructuring and transformation costs, and carbon tax Strong cost discipline maintained despite major enhancements Implemented Sabre reservation system, driving transition to global ticketed environment and single airline designator moved away from the low cost carrier operating model Completed strategic acquisitions of 100% of Skywest and 60% of Tigerair Australia 1 Entry of Singapore Airlines as substantial shareholder, and increased shareholdings by Air New Zealand and Etihad Airways Delivered on key targets of the next phase of the Game Change Program Note: 1 Completed on 8 July 2013 2
Fast-tracked major restructuring and transformation program established a new market structure Virgin Australia now has an established presence across all market segments and estimated lowest cost base Velocity now well positioned as a true alternative generating value for Virgin Australia and Velocity members Strong shareholder base with investments from major global airlines Virgin Australia is well positioned across key market segments for sustainable growth Source: Analyst reports (July 2013), company reports, and internal estimates 3
Financial highlights Statutory loss after tax of $98.1m in line with guidance of a loss of $95 to $110 million Pre-tax loss (excluding one-off transformation costs and Skywest 1 loss) of $35.2 million in line with guidance of a loss of $30 to $50 million Total revenue and income over $4.0 billion for the first time, up from $3.9 billion in FY12 Outperformed main competitor on Group yield growth Strong underlying cost performance underlying CASK 2 (excluding fuel) approximately equal to FY12, inclusive of major product and service enhancements Positive operating cash flows 3 of $184.2m Total cash position of $580.5m, with unrestricted cash of $326.5m Note: 1 Refers to Skywest Airlines Pte Ltd (formerly known as Skywest Airlines Ltd); 2 Underlying cost per available seat kilometre (CASK) (excluding fuel) is a non-statutory measure and is defined on page 30; 3 Operating cash flows excludes net finance costs and business transformation expenses 4
Group profit or loss summary 12 months ended 30 June 2013 $m 2012 $m Statutory (loss) / profit after tax (98.1) 22.8 Income tax (benefit) / expense (51.6) 4.4 Statutory (loss) / profit before tax (149.7) 27.2 Business transformation and other expenses 105.1 27.0 Pre-tax trading loss of Skywest 1 9.4 - Pre-tax loss excluding one-off items and Skywest loss (35.2) Hedging ineffectiveness 2 (37.6) 28.3 Underlying (loss) / profit before tax 3 (making no adjustment for ~$25m of waived ancillary fees or other earned revenue impacts from the Sabre migration) (72.8) 82.5 Note: 1 Skywest generated pre-tax loss of $10.2m and has been adjusted for $0.8m of business transformation expenses; 2 Hedging ineffectiveness treatment is defined on page 30; 3 Underlying (loss)/profit before tax (PBT) is a non-statutory measure used by Management and VAH s board as a primary measure to assess financial performance of VAH and individual segments and is defined on page 30 5
Domestic underlying EBIT summary 12 months ended 30 June 2013 $m 2012 $m Segment revenue 3,053.6 2,947.9 Underlying Domestic EBIT 1 (44.4) 93.2 ASKs (m) 25,883.3 24,343.7 Unadjusted for significant revenue loss related to Sabre migration Includes allocated corporate overheads and Skywest EBIT loss Note: 1 Earnings Before Interest and Tax (EBIT) is a non-statutory measure used by Management and VAH s board as a primary measure to assess financial performance of VAH and individual segments per note 5 of the Virgin Australia Holdings preliminary final report for the year ended 30 June 2013 6
International underlying EBIT summary 12 months ended 30 June 2013 $m 2012 $m Segment revenue 1,121.1 1,053.4 Underlying International EBIT 1 7.7 23.5 ASKs (m) 15,882.4 15,415.8 Unadjusted for significant revenue loss related to Sabre migration Includes allocated corporate overheads Note: 1 Earnings Before Interest and Tax (EBIT) is a non-statutory measure used by Management and VAH s board as a primary measure to assess financial performance of VAH and individual segments per note 5 of the Virgin Australia Holdings preliminary final report for the year ended 30 June 2013 7
Cashflow summary 12 months ended 30 June 2013 $m Operating (excluding business transformation expenses and net finance costs) 2012 $m 184.2 378.6 Business transformation expenses (81.5) (5.4) Net finance costs (42.1) (38.1) Investing 1 (496.0) (242.8) Financing 196.4 (13.5) Net cash (outflow) / inflow (239.0) 78.8 Balance at start of period 802.6 731.3 Exchange rate changes 16.9 (7.5) Balance at end of period 580.5 802.6 Note: 1 Includes cash consideration for acquisition of Skywest of $42.2m in FY13 8
Balance sheet summary As at 30 June 2013 $m 30 June 2012 $m Cash and cash equivalents 580.5 802.6 Property, plant and equipment 3,005.2 2,769.0 Other assets 840.3 423.6 Total Assets 4,426.0 3,995.2 Interest bearing liabilities 1,889.9 1,674.1 Unearned revenue 736.1 691.9 Other liabilities 759.9 699.5 Total Liabilities 3,385.9 3,065.5 Unrestricted Cash 326.5 480.1 9
Mainline average fleet age 4.2 years at 30-Jun-13 Virgin Australia Jun 2012 Jun 2013 Deliveries Retirements / lease return Jun 2016 E190 18 18 - - 18 B737-700 7 3 - (3) 0 B737-800 61 70 21 (12) 79 A330-200 5 6 2-8 B777-300ER 5 5 - - 5 ATR-72 6 11 8-19 Mainline average fleet age 4.2 4.2 Charter operations and other services A320-2 - - 2 F100-10 - - 10 F50-8 - - 8 Total fleet 102 133 149 Note: Figures up to 30 June 2013 firm deliveries only and excludes additional options and purchase rights 10
Hedging policy AUD designated hedging policy since 2011 provides a large degree of short term certainty and longer term participation and protection Fuel cost increases of 3.3% 1 on ASK growth of 5.0% 2 Non-fuel currency 78% hedged for FY14 at an average rate of AUD:USD 1.0096 Hedging summary Brent Remainder of FY14 3 Operating requirements hedged 75% Participation in favourable price movements 74% Worst case hedged rate (inclusive of option premium) AUD 107/bbl Note: 1 Excludes the impact of carbon tax with average AUD Jet Fuel spot price decreases between FY12 and FY13 of 0.9%; 2 Capacity growth includes Virgin Australia Regional Airlines (previously known as Skywest) for May and June FY13 figures; 3 Figures as at 21 August 2013 Source: Bloomberg 11
FY13 key milestones Boeing 737 MAX order Skytrax Best Airline in Australia Pacific Region Virgin America codeshare launch S Wonderful marketing campaign launch Pilot Cadet program launch Announced Singapore Airlines and Virgin Australia codeshare expansion Completed share placement to Singapore Airlines New Sabre system, and reduced schedules and capped flights ACCC 3 clearance of Skywest acquisition Skywest shareholders approval for acquisition FIRB 4 clearance for Skywest acquisition New Canberra terminal open Randstad, Most attractive airline employer Virgin Australia Regional Airline launch FIRB 4 clearance for Tiger Australia transaction Completed 60% acquisition of Tiger Australia Draft ACCC 3 approval of Air NZ alliance reauthorisation Etihad Airways increases shareholding Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Coast2Coast, Trans Continental Perth launch Etihad Airways increases shareholding to ~10% Announced acquisition of Skywest and 60% stake in Tiger Australia, and Singapore Airlines investment CSIA 1 Australian Service Excellence Awards SIC 2 approval for acquisition of Skywest New Sydney domestic terminal pier expansion $12m Tourism Australia partnership Tiger Airways shareholders approval for transaction Roy Morgan, Domestic airline of the year Skywest acquisition complete ACCC 3 clearance of Tiger Australia transaction Share issue to Singapore Airlines Freddie Awards, Best Airline Availability Note: 1 Customer Service Institute of Australia; 2 Securities Industry Council; 3 Australian Competition and Consumer Commission; 4 Foreign Investment Review Board Air New Zealand increase shareholding Velocity Global Wallet launch Skytrax, Best Airline Staff Service in Australia Pacific Region 12
Virgin Australia is now a competitor in all segments Virgin Blue Virgin Australia International Domestic Corporate Domestic Leisure Regional and charter Budget Loyalty FY11 relaunch FY12 relaunch FY13 transaction FY14 transaction Repositioned from a low cost carrier and reshaped the Australian aviation market 13
Strong shareholder support 23.0% 1 19.9% 12.5% 10.5% 2 100% 100% 60% Note: Shareholding percentages correct as at 31 July 2013; 1 Air New Zealand has entered into an agreement to take its interest to 22.99% (current stake 19.99%) and has publically stated its intention to acquire a further 3.00%. Both acquisitions (6.00% in total) are pending review with Foreign Investment Review Board (FIRB) and Australian Competition and Consumer Commission (ACCC); 2 Etihad has approval from FIRB to acquire up to 19.99% 14
Strategic fundamentals underpin future Virgin Australia business growth Effective competitor in all segments Penetrating high yield corporate & government, regional and charter markets Tigerair Australia positioned in the budget market Global network of over 450 destinations through virtual international network, with expanding partnerships Sustainable business model Customer service excellence driven by staff Superior brand and product positioning Capital light expansion model with young, efficient fleet Estimated lowest cost base Continued improvement & growth initiatives Business improvement projects to drive efficiency Building a transformational loyalty business, providing a true loyalty program alternative in the market Growing penetration into global markets with improved global distribution and reach Strong shareholder base Continued support from Virgin Group shareholding International shareholder support from major global airlines Strong long term strategic alliance partnerships Source: Analyst reports (July 2013), company reports, and internal estimates 15
Achieved network optimisation Increased frequency on short haul, corporate routes Triangle frequency share 1 increased to 47% in FY13 from 44% in FY10 Introduced widebody on Trans Continental services Capacity share 1 increased to 36% in FY13 from 27% in FY10 H1 FY14 domestic capacity target range of 3-4 2 % (excluding Tigerair Australia) Domestic market capacity share 3 (Jul 10-Jul 13e) Percent 70% 60% 50% 40% 30% 20% 10% 60% 27% 13% 62% 34% 4% 0% Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13e Virgin Australia Group 4 Qantas Group 5 Other 6 Note: 1 Virgin Australia head to head comparison against Qantas, excluding Jetstar; 2 H1 FY14 growth target takes into account Virgin Australia Regional Airlines for the full prior comparable period, and excludes Tigerair Australia; 3 Based on BITRE market data and company operating statistics, excludes charter operations; 4 Includes Virgin Australia Regional Airline from May 2013 and Tigerair Australia from July 2013; 5 Includes Qantas, QantasLink and Jetstar domestic; 6 Includes Skywest until April 2013 and Tigerair Australia until June 2013 Source: Bureau of Infrastructure, Transport and Regional Economics (BITRE); Diio Mi; company reports 16
Strong yield performance good indicators leading into FY14 In FY13 outperformed main competitor on Group yield growth Positive monthly yield growth in Q4 FY13 continuing in July 2013, with improving load factor trends from June 2013 Positive monthly RASK 1 growth in June 2013, continuing in July 2013 Yield growth underpinned by increasing late booking profile Domestic bookings within 3 weeks of travel +15% on pcp 2, with yield premium doubling to ~20% over all bookings Virgin Australia domestic statistics (Jul 12-Jul 13) Load factor percent 90% 80% 70% 60% 50% 40% Jul-12 Aug-12 Sabre transition and customer experience protection initiatives Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Yield 3 growth Revenue load factor 4 Loads recovering in June & July 2013 Note: 1 Revenue per available seat kilometre; 2 4 trading weeks of July 2013 compared to July 2012; 3 Yield figures exclude additional revenue from revenue passenger transport (RPT) services acquired from Skywest; 4 Revenue load factor means revenue passenger kilometres (RPKs) as a percentage of available seat kilometres (ASKs), as per monthly operating statistics 17
Virgin Australia traction in the domestic corporate market Domestic airline business traveller satisfaction 1 (Jul 12-Jul 13) Percent very or fairly satisfied Domestic airline consideration next business trip 2 (Dec 09-Jun 13) Percent would consider Virgin Australia Jul-12 Jun-13 Jul-13 77.8 81.0 85.6 Qantas 81.8 78.8 81.9 Gap -4.0 +2.2 +3.7 80 70 60 +28pts 50 40 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 +15pts Virgin Australia Qantas Note: 1 3 month moving average; 2 Monthly data; Base for both graphs: Australians 14+ who have used listed airlines for domestic travel in the last 12 months Source: Roy Morgan 18
Virgin Australia branded operations versus Qantas branded operations on-time performance On-time performance impacted during Sabre transition but recovering Domestic on-time performance 3 departures (FY13) Percent 85 Performance impacted by implementation of Sabre in Q3 FY13 noticeable recovery in Q4 FY13 80 75 70 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 Virgin Australia brand 1 Qantas brand 2 Note: 1 Includes Virgin Australia branded operations, both mainline and regional, excludes Tigerair Australia; 2 Includes Qantas and QantasLink operations, excludes Jetstar; 3 On-time performance (OTP) in accordance with BITRE definitions, flight departure is counted as on time if it departs the gate within 15 minutes of the scheduled departure time shown in the carriers schedule Source: Bureau of Infrastructure, Transport and Regional Economics (BITRE) 19
Established a superior position in customer experience and service excellence Launched wireless inflight entertainment, now available on 30 aircraft Continued lounge upgrades in Sydney, Melbourne and Brisbane Lounge network expansion for Darwin, Cairns and new Perth facilities in 2014 Opened new terminal and lounge facilities in Canberra New domestic Perth terminal in 2014 Roy Morgan Customer Satisfaction Awards Domestic Airline of the Year Skytrax World Airline Awards Best Airline Staff Service, Australia Pacific region 3 rd consecutive year Randstad Awards Most attractive airline employer CSIA 1 Australian Service Excellence Awards National Division of a Large Business National Customer Service Team of the Year Freddie awards (travel loyalty) Best Airline Availability Awards in FY13 Best Elite Program - Asia Pacific Best Airline Loyalty Program - Asia Pacific Note: 1 Customer Service Institute of Australia 20
Continuing strong cost disciplines Business efficiency program on track over $60m 1 of productivity gains in FY13 Focus remains on having an efficient business, key focus areas for FY14: Group fleet and network optimisation Workforce productivity and effectiveness IT architecture, systems and processes Group procurement leveraging scale Strong cost performance, underlying CASK 2 (excl. fuel) approximately equal to FY12 Business efficiency project run rate targets (FY13-FY15) Millions of dollars 250 200 150 100 50 0 Target achieved 60 120 200 FY13 FY14 FY15 Note: 1 Figure has not been audited or reviewed by KPMG; 2 Underlying cost per available seat kilometre (CASK) (excluding fuel) is a nonstatutory measure and is defined on page 30 21
Velocity Frequent Flyer is a key value driver Membership +0.5m to ~3.7m members on track for target of 5m members by end of FY15 Continued strong growth on key performance metrics Launched new initiatives : Dual-sided membership and pre-paid Visa travelcard, the Global Wallet first to market New American Express Escape card Velocity Facebook page and pet frequent flyer program Awarded for Best seat availability in the Region Continuing to strengthen and mature the business to optimise for ongoing future growth Velocity key metrics performance Performance metric FY13 (growth %) Members +17% Billings ($) +18% Points earned airline partners +56% Points redeemed +39% Continued expansion of value proposition and contribution to Group results 22
Regional Significant progress on regional integration Commenced roll out of Virgin Australia branding across the airline's operations (aircraft and airports), and aligned systems and airline designator codes Advanced with integrating the networks of the two airlines Expanding network with entry into monopoly routes Launched Bundaberg-Brisbane ATR services (previously a monopoly route) Launched Moranbah-Brisbane ATR services (previously a monopoly route) Launching Cairns-Weipa ATR services in 2014 (currently a regulated, monopoly route) Focusing on extracting cost synergies within broader group Positioned in regional and charter to capitalise on growth opportunities 23
Continuous improvement in Tigerair Australia will underpin turnaround Rebranded to Tigerair Recent positive trends: Strong load factors, 88% in Jun 13 and 92% in Jul 13 Forward loads building, +6ppt on pcp 1 Significant customer satisfaction improvement Further improvements will focus on: Scale in fleet and economies of scale Improving operational and service standards Pursuing synergies leveraging both shareholders scale and experience Domestic airline satisfaction 2 (FY13) Percent very or fairly satisfied 75 70 65 60 55 50 Jan-13 Feb-13 Mar-13 Tigerair Apr-13 May-13 Jetstar Jun-13 Jul-13 Note: 1 Prior comparable period as at 30 June 2013; 2 3 month moving average, Australians 14+ who have used listed airlines for domestic travel in the last 12 months Source: Roy Morgan 24
On track for delivery on a consistent strategy Game On phase % completed Implement business efficiency project Build a transformational loyalty business Increase access to global markets Further enhance guest experience through innovation inflight and on-the-ground Continue to develop our people and service excellence our key differentiator FY13 FY14 FY15 25
Completed year 3 of 5 year plan Sustainability Lead & leverage Growth Plan & implement Formulate Game Change strategic plan and commence implementation Reposition Conclude roll out of Game Change strategic plan and begin benefits realisation from H2 FY12 Build upon strategic repositioning on a strengthened domestic market position and commence Game On phase Drive future earnings growth through Game On phase Positioned to continue sustainable and resilient earnings growth FY11 FY12 FY13 FY14 FY15 Game Change Game On 26
Virgin Australia Group: a diversified business with strong shareholders in a new aviation market Strategic transformation work completed full integration and synergy benefits to follow An effective and sustainable competitor in all market segments A strong customer proposition with a reputation for excellent service driven by staff Yield growth driven by penetration in corporate markets and global distribution systems Strong cost disciplines and committed to maintaining the lowest cost base position Velocity presents a significant opportunity for value creation Source: Analyst reports (July 2013), company reports, and internal estimates 27
Outlook Given the uncertain economic environment we are unable to provide guidance for the 2014 Financial Year at this time. 28
Disclaimer, definitions and ASIC guidance Disclaimer The following non-ifrs information has not been audited or reviewed by KPMG: underlying (loss)/profit before tax, underlying EBIT, underlying domestic EBIT, underlying international EBIT, and underlying CASK. This presentation has not been audited or reviewed by KPMG; however, IFRS data has been derived from the unaudited annual consolidated financial statements that are in the process of being audited by KPMG. Definitions Underlying PBT: Underlying (loss)/profit before tax (PBT) is a non-statutory measure used by Management and VAH s board as a primary measure to assess financial performance of VAH and individual segments. From financial year 2013 VAH included all time value movement in hedges in underlying profit leaving hedge ineffectiveness to be excluded from underlying profit. This approach is consistent with the approach applied in the first half of the financial year 2013, but represents a change from the financial year 2012. In the financial year 2012, unrealised time value movement of $24.2 million was included in underlying profit. While it is not appropriate to change comparative information, should this approach to program management have been applicable in the financial year 2012, then the underlying profit would reduce by $24.2 million. EBIT: Earnings before interest and tax (EBIT) is a non-statutory measure per note 5 of the Virgin Australia Holdings preliminary final report for the year ended 30 June 2013. It is used by Management and VAH s board as a primary measure to assess financial performance of VAH and individual segments. From the financial year 2013, VAH has included the time value movement on cash flow hedges in EBIT (see Hedging ineffectiveness definition). Underlying CASK: Underlying cost per available seat kilometre (CASK) is a non-statutory measure which comprises total revenue less underlying (loss)/profit before tax (excluding Skywest) and the following: fuel and revenue relating to non-ticket or nil margin activities $47.5 million (2012: $47.4 million, this revenue is not included in the definition of yield). In 2012 additional amounts relating to hedging ineffectiveness of $10.1 million, net loss on disposal / write down of property, plant and equipment of $18.7 million were excluded. Hedging ineffectiveness: The ineffective cash flow hedges and non-designated derivatives in the statutory consolidated statement of profit or loss include gains and losses from both time value movements on options and ineffectiveness on hedges. Ineffectiveness on hedges relates to movements in the value of hedges that do not qualify to be deferred in the hedge reserve under the current accounting standards and are required to be recognised in the profit and loss, while time value movements on options represents the gain or loss on the option premiums that is attributable to the amount of time remaining until the expiration of the option as well as being dependent on market volatility. In the financial year 2013, a $11.5 million gain was attributed to the time value movement on options and was included in the underlying loss before tax. A further gain of $37.6 million, related to the ineffectiveness on hedges, was excluded from the underlying loss before tax. This approach of including the time value movement on options was only applied on a go-forward basis for the first time in the first half of the financial year 2013, and not in the financial year 2012, due to the partially matured hedging program announced to shareholders in August 2011. In the financial year 2012, the unrealised time value movements on options amounted to a loss of $24.2 million, while the ineffectiveness on hedges was a loss of $4.1 million both of which were excluded from the underlying profit before tax in that period. While it is not appropriate to change comparative information, should this approach to program management have been applicable in the financial year 2012, then the underlying profit would reduce by $24.2 million. This approach reflects Virgin Australia s view that with the maturing of the structured hedging program (with 18 month forward positions), costs and gains associated with the time value movements on options are now part of the overall hedging program and as such will be included in underlying (loss)/profit before tax going forward. ASIC guidance In December 2011 ASIC issued Regulatory Guide 230. In order to comply with this Guide, Virgin Australia is required to make a clear statement about whether information disclosed in documents other than the preliminary financial report has been audited or reviewed in accordance with Australian Auditing Standards. The following non-ifrs information has not been audited or reviewed by KPMG: underlying (loss)/profit before tax, underlying domestic EBIT, underlying international EBIT and underlying CASK. This presentation has not been audited or reviewed by KPMG; however, IFRS data has been derived from the unaudited annual consolidated financial statements that are in the process of being audited by KPMG. 30