VA's poor first quarter result

[Melburnian1]

Dannyism, I would call VA a 'struggling' business.

I don't understand why JB (CEO) was recently rather generous with what appeared to be an above-inflation pay rise for flight crew.

QF is salivating in making profits, but when one also considers its performance during the last five years in aggregate, it too has not exactly set the investing community on fire.

Both businesses have huge fixed costs and despite for instance AJ's denials, much of the 'improvement' in QF's performance has come from lower fuel prices. The latter is unlikely to last forever.

Both companies need to replace major assets such as some planes.

While I don't like Mr Warren Buffett's politics, his longstanding view that airlines and insurance companies should be avoided by investors is sensible. Notably he invests in freight rail operators: although they too have had challenging times with the decline in coal haulage among other problems, overall investing in rail freight is preferable to investing in airlines' self loading freight carriage.

It will be very interesting to see whether VA's major investors - HNA Group, SQ and EY plus others - are all patient when in five years VA has repeatedly, as it has in the past, failed to turn a profit or cover the cost of capital.

Is Australia domestically a natural monopoly for an airline? The 'two airline' policy was in a different era but it kept fares high, and the two airlines fairly stable. Now we have a situation with two airlines (each having an LCC subsidiary) where one mainline group (VA) is profitless, and has also sold off much of its loyalty scheme; the other (QF) is making profits but not consistently if we look back a few years, and which has cut back on international operations compared with 20 or even 10 years ago (no BKK, HKG or SIN - LHR for one) even if its spin is that it is now 'expanding internationally'.

 

[trippin_the_rift]

What are your thoughts on the health and life of VA as a business?

It's important to separate Virgin Australia, and Velocity, because the later is tremendously profitable.

As for Virgin Australia (the airline side), there're multiple factors at play, and while I won't go into all of these, I do believe there is a much larger vision and reason why all these strategic investors would dump cash into VA year after year.

Consider this - if Velocity didn't have such a wide net of partnerships for points earning and burning, and if Velocity points weren't as attractive as Qantas points when you compared them side by side - this would place greater value on a QF point in the consumer mind. Consumers would take up more QF point earning credit cards, and therefore the banks wouldn't care for, nor promote Velocity earning credit cards.
Not only would this place more customer value, loyalty, spend and revenue into QF pockets, but it would take away points revenue, loyalty and flight revenue away from Virgin Australia.


There is evidence that when members hold elite status and a credit card they can be 50% more valuable than other members. Of course - this all changes with the RBA party-killers, and Qantas Loyalty appears to be much more proactive in the search for new opportunities.

With all of this in mind - VA investors may be taking the opposite approach to investment in that it may not be an investment to return a profit - but an investment to stop market share attrition and to put the brakes on Qantas.


Simply put - how much more revenue would VA's airline investors have lost from flights and banks if they didn't invest?

 

[UP4014]

But Virgin now has Tiger - that's its LCC.

I can only see the mix continues to shift - more Tiger flights, less Virgin.

The only question is whether Virgin can hold enough frequency to be attractive to the corporate market

Good, I want to see more Tiger and less Virgin, it will be a win for both QF and Vigin.

 

[Deleted member]

i have always had only a passing interest in anything to do with VA, I rarely if ever fly them, have found them not to my taste. However the recent Fly Buys / VA link up saw me move 100,000 Fly buys to my VA account. because of my ignorance (and lack of interest learning more) of the VA Velocity program, I am really confused as to why any red blooded AFF'r would choose Velocity over QFF. It strikes me as being a FF program with a short game in mind, rather than a long game. maybe someone can convince me otherwise, but I suspect i made a poor decision by sending my Fly Buys across.

 

[Dannyism]

Simply put - how much more revenue would VA's airline investors have lost from flights and banks if they didn't invest?

Thanks, I follow you, but am surprised by the explanation. The comment "it may not be an investment to return a profit - but an investment to stop market share attrition and to put the brakes on Qantas" is certainly something I hadn't considered. Strategically investing while expecting a loss, but the lesser of two losses... I'll certainly be thinking it over.

The only thing I'm fairly certain of is that I see Virgin as running a hybrid airline model and I think that model suits my travel needs. http://www.prologis.aero/competences/low-cost-and-hybrid-airline-business/

Whatever business model they run though, they still need to turn a profit.

 

[trippin_the_rift]

i have always had only a passing interest in anything to do with VA, I rarely if ever fly them, have found them not to my taste. However the recent Fly Buys / VA link up saw me move 100,000 Fly buys to my VA account. because of my ignorance (and lack of interest learning more) of the VA Velocity program, I am really confused as to why any red blooded AFF'r would choose Velocity over QFF. It strikes me as being a FF program with a short game in mind, rather than a long game. maybe someone can convince me otherwise, but I suspect i made a poor decision by sending my Fly Buys across.

"I have no interest in learning more, but what do I do with my 100k points" ? ;-)

Thanks, I follow you, but am surprised by the explanation. The comment "it may not be an investment to return a profit - but an investment to stop market share attrition and to put the brakes on Qantas" is certainly something I hadn't considered. Strategically investing while expecting a loss, but the lesser of two losses... I'll certainly be thinking it over.

There is also the consideration of what the total value an investment into VA brings to investor airlines. How much more traffic do they receive from VA because of it and what is this worth? For SQ - how many more Krisflyer points are being created into the program etc. One should always consider the total net gain from an investment and not purely at any immediate returns.

 

[Melburnian1]

There is also the consideration of what the total value an investment into VA brings to investor airlines. How much more traffic do they receive from VA because of it and what is this worth? For SQ - how many more Krisflyer points are being created into the program etc. One should always consider the total net gain from an investment and not purely at any immediate returns.[/COLOR]

I may be wrong but it is hard to imagine that the returns of which you speak would outweigh the large losses that VA appears to make each year.

 

[Happy Dude]

....I am really confused as to why any red blooded AFF'r would choose Velocity over QFF.....

QFF points are fairly useless if you don't have QFF status.

But, things have changed at Velocity recently - heavy EY redemption fees, reduced international lounge access, reduced benefits on cheapie fares, etc etc ad nauseum, so you might actually be right. There's plenty out there reviewing their loyalty/choices.