For an IPO, market conditions would have to be right and Bain would have to own a significant stake of at least 70 percent in the company. A large part of it would have to be held in trust for a longer period of time.
From P&L, Virgin’s passenger revenue for the year ended June was $1.88 billion, or about a third of the $5.3 billion it generated in fiscal 2019 before the pandemic.
Revenue in 2022 was severely impacted by the lockdowns that stifled domestic aviation activity until around December last year. It remained subdued until February, when international borders reopened for the first time in two years.
In the three months to June this year, customer demand returned to levels similar to those prevailing at Virgin before COVID. This coincided with significant price hikes for airline tickets, according to data from the Department of Transportation released on Thursday.
An index of cheapest domestic fares compared to the historical average shows that the best available business fare increased by 26 percent between August and September. The best available discounted fare was 46 percent higher in September than in August.
Virgin’s pricing strategy reflects the benefits of an oligopoly. It can stay just below Qantas’ elevated prices while remaining competitive in the knowledge that it only needs to maintain its 33 percent market share to meet its profit target.
Hrdlicka has saved about $300 million in expenses since taking over as CEO from Paul Scurrah in late 2020. This is on top of the estimated $150 million in cuts during the tenure.
She has also made investments in the company, such as the $88 million in restructuring and layoff expenses, $42 million in costs related to IT transformation projects, and $9.4 million in asset impairment and accelerated depreciation F100 aircraft show.
Sale and leaseback
The 2022 financial statements do not provide a realistic indication of capital expenditure. Prior to assuming office, Virgin spent approximately $200 million per year on capital expenditures, compared to $52.8 million in 2022 spent on variable-rate aircraft leases.
Also, as of this writing, it’s unclear what Virgin’s investments will be over the coming years. Chief Financial Officer David Marr has yet to figure out the mix of purchased and sale-and-leaseback aircraft.
Virgin plans major investments in the Boeing 737-8 and 737-10 aircraft. He can finance them from his own balance sheet. Virgin previously didn’t have the right balance between owned and leased aircraft.
Marr will have the flexibility to make those decisions since the government has reduced total liabilities from $8 billion to the current $4.3 billion. Virgin’s net debt was reduced to $1.3 billion.
Net finance costs are now about 40 percent below where they were in 2019, and it won’t be long before Virgin regains a credit rating for use in bond issuance.
Investors will be careful
Probably the single most important number in the 2022 financial statements is free cash flow from operations of $262 million. This reflects underlying performance, despite the fact that revenue was impacted by $180 million in government support.
As a private company, Virgin is in a better investment position than a public company because it doesn’t have to worry about the stock price. That attitude is likely to change post-IPO, so investors will be wary.
Hrdlicka is intensifying the battle for loyalty rewards with Qantas with the launch this week of a program called Switch-A-Roo, which will allow “Platinum and Gold (or higher) frequent flyer members on competing airlines to apply for Velocity Gold status under a new Fast.” -Track Trial Membership”.
This campaign has garnered a strong response, likely helped by the damage done to the Qantas brand over the past 12 months, including complaints about the benefit from frequent flyers.
Attracting individual flyers to Virgin’s Velocity program is one thing, but getting corporate customers to reject Qantas will be much more difficult.
The chief financial officer of a top 20 company says he was offered a generous package to switch from Qantas, including offsetting all existing frequent flyer points with Velocity points. But he couldn’t deal with backlash from employees, who have always been keen to earn their Qantas frequent flyer points when they travel to work.
Velocity loyalty program revenue was just $155 million in fiscal 2022, less than half of the $388 million in 2019. A sustainable revenue number is closer to 2019 numbers.
Velocity’s growth should be supported by international long-haul partners signed by Hrdlicka, including United Airlines, Qatar, Singapore Airlines, ANA and Hawaiian Airlines.
Virgin’s recovery could see the airline post its first profit since 2017 next year. Hrdlicka’s challenge will then be to convince institutional and private investors that buying an asset from private equity is a good idea.
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