Virgin Australia Holdings Limited (VGN) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for Virgin Australia's FY '26 Results Presentation. Joining me today is Race Strauss, our Chief Financial Officer. We also have other members of the executive leadership team in the room to help answer your questions at the end of the presentation. I'd like to begin by acknowledging the traditional owners of the land on which we live, work and fly and pay my respects to elders past and present. I also extend that acknowledgment and respect to any Aboriginal or Torres Strait Islanders peoples joining today's call. Turning to Slide 2 and an overview of today's results. FY '26 was another year of significant progress for Virgin Australia. We delivered earnings growth and margin expansion despite a challenging cost environment while continuing to strengthen the operational and commercial foundations of the business. The result reflects resilient customer demand, disciplined capacity management, the continued delivery of our transformation program and the benefits of decisions we have made over several years to simplify and strengthen the company. It also reflects the commitment of more than 8,500 people. Their focused on safety, our guests and on operational delivery is what turns strategy into results every day. Moving to Slide 3. The 3 key messages I want you to take away today. First, our strategy is working. We delivered strong earnings growth and further margin expansion in the year characterized by above-inflation cost pressures and a challenging geopolitical environment. Second, the quality of our earnings continues to improve. We achieved stronger commercial and operational outcomes supported by transformation, disciplined capacity management and improving customer metrics. And third, we're investing to strengthen Virgin Australia's long-term competitive position. That includes targeted investment in velocity, our fleet, AI and our people. Taken together, FY '26 demonstrates that our strategy is delivering sustainable earnings growth. The disciplined application of our capital allocation framework has also enabled the Board to declare a fully franked dividend of $0.076 per share, our inaugural dividend since we REIT listed in 2025. Turning to Slide 4. We continue to measure progress against the 4 pillars that underpin our ambition to be Australia's most loved airline by our people, our guests and our owners. We're operating a focused business with a clear value carrier proposition, targeted customer segmentation and exposure to the highly attractive Australian domestic aviation market. Velocity provides an additional source of earnings stability and long-term growth. We're improving the experience our guests value. Strategic NPS increased again. Our share of corporate and SME customers continue to grow, and our fleet is transitioning to newer and more efficient Boeing 737 MAX 8, Embraer E190 E2 aircraft. Operationally, on-time performance improved to 77.1% and exceeded 80% in the June quarter. Our completion rate increased to 98.7%, the highest of the major airlines and load factor was 84.9%. Financially, our fuel hedging program protected earnings. The balance sheet remained conservative with leverage below 1x underlying EBITDA and the underlying EBIT margin increased by 60 basis points to 12%. These outcomes are connected, simpler business and better operations improve the guest experience, which supports commercial performance and ultimately creates stronger financial returns. Moving to Slide 5. This slide provides useful context for the progress we've made over the last 3 years. Underlying EBIT has increased more than 70%. And importantly, the underlying EBIT margin has increased by 320 basis points, which is supported by the transformation program. Importantly, this has not simply been the growth from adding capacity. It reflects better revenue outcomes, a more efficient operating model, the contribution from Velocity and the cumulative benefits of transformation. This track record also gives us confidence the strategy can deliver growth while also improving the quality and resilience of earnings. Turning to Slide 6 and the headline results. We're very pleased with the FY '26 results, which finished ahead of market expectations despite fuel price increasing significantly in the second half. Underlying EBIT increased 13% to $753 million. And as already noted, the underlying EBIT margin expanded 60 basis points to 12%. Statutory NPAT increased 5% to $501 million, which reflects a reduction in significant items and a lower benefit from deferred tax asset recognition than the prior year. As I just stated, the Board declared the first dividend since the IPO with $0.076 fully franked, which reflects both the strong result and the balance sheet. Key drivers of this performance were resilient customer demand, continued delivery from transformation and effective fuel hedging program, which together helped offset significant inflation in a number of cost categories. Turning to Slide 7 and the Airline segment. The Airline segment delivered a strong result across our domestic, short-haul, international and charter businesses. Increasing EBIT -- underlying EBIT increased 15% to $616 million with an EBIT margin expanding 60 basis points to 10.2%. RASK increased 5.9% for the year, including 6.4% growth in the June quarter, consistent with our guidance from April. This reflected strong demand, particularly from leisure customers as well as continued delivery from commercial transformation initiatives. We also remain disciplined with capacity management as total ASKs increased 1.8% CASK increased 5.1%, which reflects the significant inflation the industry continues to experience with offsets from transformation. and Race will take you through more detail shortly. Importantly, our operational performance also improved for the year, and I've spoken about some of these key metrics already. This resulted in strategic NPS improving by 3 points to 30. These results demonstrate that we can grow earnings while continuing to improve the experience we provide our guests. Moving to Slide 8. Velocity delivered another strong year and remains a key source of growth and earnings diversification for the group. Underlying EBIT increased 12% to $143 million, and the margin expanded by 110 basis points to 29.4%. External billing also grew 12%, supported by continued strength across financial services and the broader partner portfolio. We added more than 800,000 new members during the year and active members increased 9%, and the coalition includes more than 80 partners. Member engagement remained strong as we increased opportunities to earn points through new partnerships and the annualized impact of relaunched financial service products. Redemption was constrained during the year by reduced long-haul availability following the Middle Eastern conflict, which limited the reward seats members could access on partner services. We expect redemption to return to normal levels as capacity is restored. Looking ahead, the Reserve Bank's interchange fee changes are scheduled to commence on the 1st of October of 2026. We plan to accelerate investment in growth opportunities to strengthen Velocity's future earnings trajectory, and I'll return to that in the outlook statement. Turning to Slide 9. Transformation remains central to our strategy and to our ability to grow margins in an inflationary environment. We delivered more than $450 million in gross transformation benefits in FY '26. That takes cumulative gross transformation benefits over the past 3 years to more than $1.1 billion. The benefits are broad-based. Commercial initiatives are roughly 50% of the total and include revenue management optimization, increasing direct sales and growing B2B share. Operational initiatives are roughly 40% and include seat densification, car fleet renewal, integrated planning and fuel efficiency. The final 10% is Velocity. We're using data and personalization to deepen engagement and improve member value. Transformation is now embedded as continuous improvement rather than a finite program. This is important because the external cost environment remains challenging, and we need to keep improving the way we operate. We're targeting more than $350 million in additional gross benefits in FY '27. Future benefits will come from both existing and new initiatives, increasingly enabled by our investment in AI. These benefits will partly offset further cost inflation and support ongoing margin improvement. I'll now hand over to Race to take you through the financial results in more detail.

Thanks, Dave, and good morning, everyone. This financial result reinforces the key message that the strategy is delivering. Both the airline and Velocity grew EBIT and improved margins, while the group generated strong operating cash flow and retained a conservative balance sheet. This enabled balance sheet capacity to be deployed to the fleet renewal with the debt-funded purchase of 4 MAX 8 aircraft and the Board to declare the first dividend since the IPO. Turning to Slide 11. These results are presented on an underlying basis and exclude significant items, which decreased substantially this year as we transition these costs above the line. It's also important to note that our underlying results do not include the benefit of expired COVID credits. At the group level, revenue increased 8% to $6.3 billion, and underlying EBITDA increased 15% to $1.24 billion. Depreciation and amortization increased to $487 million, primarily reflecting the investment in newer, more fuel-efficient aircraft. That investment produces operational and fuel benefits, but of course, also increases depreciation as the fleet is renewed. Underlying EBIT increased 13% to $753 million, and the EBIT margin expanded by 60 basis points to 12%. Net finance costs increased modestly to $174 million. Higher interest on leases associated with fleet renewal was partly offset by increased interest income. Income tax expense was $175 million, reflecting a 30% effective tax rate and the full utilization of our remaining tax losses. This resulted in underlying NPAT of $404 million, up 22% and diluted underlying EPS of $0.509, up 13%. Diluted EPS reflects all shares, including those still under escrow. Turning to Slide 12 and the drivers of EBIT growth. This bridge shows the growth in underlying EBIT through the lens of flying activity, unit revenues and unit costs. We saw strong revenue growth through higher yields and RASK with additional costs due to the inflationary environment, particularly in airports and labor, which I'll talk about shortly. Of note is fuel, which was broadly flat despite volatility in the oil price. Activity reflects additional flying with 1.8% ASK growth across the network and captures the incremental revenue and direct cost. RASK was the largest positive contributor, adding $347 million as RASK increased 5.9%. Nonfuel costs increased by $309 million, and this increase illustrates why transformation remains essential. Around 40% of the $450 million gross transformation benefits delivered during the year were operational initiatives, which helped offset industry-wide cost escalation and enabled margin expansion. These costs include the benefit from lower maintenance due to the transition to the newer fleet and some lease extensions we undertook in the second half, which defer expenditure. Maintenance unit rates are still higher due to the global supply chain pressures as we noted in the first half. Velocity contributed a further $16 million of EBIT growth. Moving to Slide 13. Total underlying operating expenses increased 6.5%, which is consistent with the growth of the business. It includes the benefits of transformation, lower maintenance costs and fuel costs being held flat. The outcome on fuel costs demonstrate the effectiveness of our hedging program, which protected the business from significant increases in oil and refining margin prices in the second half. The all-in fuel price of $168 per barrel also includes the benefit from improved burn rates from newer aircraft like the MAX 8, which is 20% more fuel efficient than the 737-800s. The increase in operating costs is also reflective of the inflationary cost environment we are operating in, particularly airport and labor costs. Airport costs increased 15%. As we have noted for some time, continued capital investment by monopoly critical infrastructure is flowing through to higher airline costs, and we will remain focused on productivity and commercial discipline to mitigate this pressure. Labor costs increased 8%, which reflects transformation investment, growth in the business and the inclusion of public company costs. Turning to Slide 14 and cash flow. The business generated strong cash flow with operating cash flow of $1.3 billion being deployed towards our capital needs, including fleet renewal. Cash increased by $725 million to over $1.8 billion, but that did include a precautionary drawdown of our corporate facility to provide additional liquidity during the year. Therefore, net debt was largely unchanged. CapEx was $884 million, consistent with guidance and reflecting the step-up in fleet renewal this year, including our decision to debt fund the acquisition of 4 MAX 8 aircraft with more coming in FY '27. There were $471 million of proceeds from asset sales, principally the sale and leaseback of 6 MAX aircraft. Financing cash flows included $171 million of interest paid for both leases and bank debt and $254 million of lease principal payments. Moving to Slide 15. Our balance sheet remains conservative and provides flexibility to fund the next phase of investment. Total debt increased to $3 billion, reflecting fleet investment and the precautionary drawdown of the revolving debt facility during the year to provide additional liquidity of around $350 million. Interest-bearing liabilities include the debt finance purchase of 4 new aircraft, while aircraft lease liabilities increased following the delivery of 13 new leased aircraft. Cash, cash equivalents and term deposits increased to $1.8 billion and unrestricted liquidity was approximately $1.6 billion at year-end. As noted, net debt was broadly stable at $1.2 billion and leverage reduced to 0.9x underlying EBITDA. That is below our target range and reflects strong cash generation and prudent application of our capital allocation framework, while giving us capacity to continue investing in fleet with more aircraft to be delivered in FY '27. Turning to Slide 16. The transition to a younger and more efficient fleet remains on track. We took delivery of 17 new aircraft during FY '26, 13 Boeing MAX 8 aircraft and 4 Embraer E90E2 aircraft. This enabled further simplification of the fleet with the Fokker F-100 sold and the remaining Airbus A320s no longer in operation. At 30th of June, our narrow-body fleet comprised 108 aircraft, excluding 3 Airbus A320 aircraft held for return. The investment in new aircraft has resulted in the average fleet age reducing from 13.4 years to 11.5 years, and this is expected to further reduce as replacement continues. In February, we spoke about our intention to increase the owned aircraft mix, which improves financial returns over the life of the assets. Our fleet plan has this increasing to 39% by the end of FY '27 with the debt-funded purchase of 5 MAX 8 aircraft and 2 Embraer E190-E2 aircraft and the conversion of some 737-800s from leased to owned. By June 2027, MAX 8 aircraft are expected to account for approximately 25% of the 737 fleet, delivering ongoing fuel, maintenance and sustainability benefits. Moving to Slide 17. Our capital allocation framework is unchanged, and declaring a dividend demonstrates the framework in action. We first prioritize the balance sheet and business-as-usual investment that is required to operate safely and sustainably. Our long-term leverage target remains 1x to 2x net debt to underlying EBITDA. We then invest excess cash in value-accretive opportunities where expected returns exceed our cost of capital through the cycle. That includes fleet, network, technology and other growth initiatives. Where capital remains surplus to those requirements, it will be returned to shareholders through the most appropriate mechanism, including dividends or share buybacks. Given the strength of the balance sheet, the cash generated during FY '26 and our confidence in the outlook, the Board has declared a dividend of $0.076 per share fully franked. This is an important milestone for Virgin Australia as a relisted company and reflects our commitment to disciplined capital management and shareholder returns. The dividend will also be shared across the workforce as many Virgin Australia team members hold shares from the IPO. Our capital allocation framework does not include a target payout ratio, and future dividends will be determined by following the same process every 6 months. I'll now hand back to Dave to discuss the outlook.

Thank you, Race. Turning to the outlook for FY '27. Demand and forward bookings remain strong with consumers continuing to prioritize travel. Against that backdrop, we remain disciplined on capacity. Domestic capacity is expected to reduce by around 3% in the first half of FY '27 compared with the prior corresponding period. For the first half, we expect RASK growth of 6% to 8%, supported by strong demand, transformation benefits and our disciplined approach to capacity. Importantly, our disciplined focus on cost management continues with transformation benefits and lower maintenance costs expected to partly offset continued cost pressure from airports and labor. This result in CASK ex fuel growth remaining below RASK in the first half. Based on the current forward fuel curve, first half fuel cost is expected to be approximately $700 million, with hedging for the remainder of the first half being 96% for Brent and 20% for refining margins. Taking those factors together, we currently expect first half FY '27 underlying EBIT to be broadly in line with first half FY '26. For Velocity, we have continued strong underlying momentum in active member growth and external billings, but this is expected to be offset by the onetime impact from the RBA interchange fee reset and a ramp-up of investment in a 3-year Velocity transformation program. This is expected to result in Velocity's FY '27 underlying EBIT being broadly in line with FY '26. However, this investment is targeted to deliver low double-digit underlying EBIT growth for FY '28 and FY '29. We also will continue to invest in our long-term competitiveness of the business. FY '27 CapEx is expected to be around $900 million to $1 billion, including the purchase of 5 Boeing 737-8 aircraft and 2 Embraer E190-E2 aircraft. Despite that investment, we expect leverage to remain at the low end of our target range. Significant items excluded from underlying EBIT are expected to reduce again to approximately $40 million, comprising around $20 million of transformation costs and around $20 million of IPO-related share-based payments, plus any foreign exchange movements on aircraft lease liabilities. So the key message for FY '27 is clear. Demand remains strong. We're maintaining capacity discipline. Transformation continues to support the spread between revenue and nonfuel costs. We expect first half underlying EBIT to be broadly in line with last year despite the changed fuel environment. Turning to Slide 20, I'll finish where I started. Virgin Australia has a clear plan to deliver continued earnings and growth and margin growth over time. Our strategy is working, and we know where the next phase of growth will come from. We have multiple levers across the airline and velocity to keep improving earnings, margins and returns. Importantly, this is not dependent on one initiative or one part of the business. It's a broad-based plan underpinned by transformation, disciplined investment and a continued focus on execution. We believe that gives us a strong platform to deliver sustainable growth and create long-term value for shareholders. I want to thank every member of the Virgin Australia team for their contribution during the year. Their commitment to safety and service remains the foundation of our success. Thank you for your time this morning. Operator, we'll now take questions.

[Operator Instructions] Your first question comes from Andre Fromyhr with UBS.

My first question is just about the operating context at the moment and the demand sitting behind that. And I guess what we're observing in your outlook commentary is capacity reduction 3%, but offset by stronger than trend RASK growth. And I guess my question is, how much of that is circumstantial reacting to the higher fuel price environment? Or to what extent are you learning about the demand environment and customers' willingness to pay at certain fares and ancillary revenue that it doesn't all just revert back to lower fares and more capacity in the event that there's resolution to the fuel price.

Look, great question. Let me throw that to Paul Jones, our Chief Commercial Officer.

Thanks, Dave. So a couple of points I would note. The first is that the TRASK in half 2 was 5.3%. Quarter 4 was 6.4%. And so your commentary around a change of trajectory for half 1 FY '27, we're guiding 6% to 8%. So it's consistent with recent performance from our point of view. The demand in the market remains really strong. We're seeing that in leisure. We're seeing that in B2B, both corporate and SME. And so based on that, we feel really good about the demand outlook for the half. Post Iran crisis, we are expecting continued cost inflation that is above CPI in the industry and in our airline. And so we'll need to continue being really disciplined around RASK growth to ensure that we don't have margin dilution as a result of that.

Okay. And then if I could just ask one more, probably for Race about the CapEx guidance. Am I right to understand from the disclosures that $0.9 billion to $1 billion CapEx, that's just assuming fully owned on balance sheet rather than utilizing of leases. And I guess an extension to that is how much flexibility do you have over that order book or more broadly, your CapEx in FY '27 to be able to react if conditions worsen for you?

Yes. Thanks, Andre. Yes. So the CapEx guidance we've given assumes that we will debt fund all 7 new aircraft coming in, in FY '27. In terms of flexibility, we actually have quite a bit. We have a number of leases that are up for either extension or we can terminate those leases. So we actually have quite a bit of flexibility both in FY '27 and in FY '28.

The next question comes from Justin Barratt with CLSA.

Race, I appreciate your comments on capital management in your prepared remarks. But I guess just as an investment community, how should we be thinking about the opportunities for capital management going forward? I guess just asking in the context of, I guess, we're in a pretty tough environment for an airline and yet you have decided to pay a dividend. So is it fair to assume that we should be expecting some form of capital management per half going forward as long as things don't get meaningfully worse?

Yes. Thanks, Justin. Look, we've been very clear that we're not giving a target payout ratio. we will apply our capital allocation framework at every reporting period and determine if there are surplus funds. So that will be the way we're going to do it. I would not take this as a target payout ratio. Rather the commitment, we will apply the capital allocation framework at every period.

Great. And then I just wouldn't mind if you asked or spoke a little bit more about the investments that you plan to make in Velocity. It does seem like it's a bit of a transformation year for that business. So looking to explore that in a little bit more detail, please?

Yes. Let me hand that over to Andrew Cleary, who is our CEO Velocity and Chief Customer Officer.

Yes. Thanks, Dave. Justin. Look, we see huge potential ahead for Velocity to continue to be a growth driver for the group, and we're investing behind that now. As we've said in the guidance, the key opportunities in particular are there's very strong underlying momentum in external partner billings, FS and other partners as well as in the active member growth that we're seeing. When we look to the future, what we're investing is to build the technology, the data and the personalization capabilities to further connect the partner ecosystem. A key plank of the strategy will be expansion in FS, including beyond cards. So the deal that we announced last week with CBA Yello, for example, is just one that we expect over the coming 12 months. And finally, we will be selectively growing in attractive adjacent value pools. We see opportunity in holidays as well as e-commerce, as we've outlined.

Your next question comes from Lee Power with JPMorgan.

Just going on from Andre's question around pricing. Like one of your -- sorry, your peer talked yesterday about ancillary pricing and seem to present it as like an untapped avenue that they could push harder. Like you obviously in the comments report seem to have a somewhat aligned view. So I guess I'm just trying to work out what work have you done maybe around elasticity or the difference between pushing ticket price versus ancillary price increases? And what do you think that means given that the cost story doesn't sound like it's slowing down?

Thanks for the question. So it's Paul again. I -- in terms of -- we obviously have laid out and you've seen the slides, ancillaries is a really important pillar to our value business model. We have seen ancillary growth year-on-year, and we would expect that to continue into the future. Effectively, the changes that were announced in the market around baggage and that is a significant change. We don't, at this point, plan a change to our baggage policies. And therefore, it's effectively for those customers a price increase for many of them in terms of what comes into the market next year. That means that we obviously will be reviewing how we handle that from a pricing point of view. So yes, ancillary continues to be a really important lever. But more importantly, from my point of view, is the overall TRASK outcome that you get across the book across actually managing the revenue pool as one revenue pool as opposed to optimizing for the individual components.

Okay. And then just going on to the CASK ex fuel. So above CPI, is there like -- I don't know, I'm just trying to work out, is this something that we should be expecting like as a medium-term thing? Is it something that's more short term? But there's something else going on when we strip out fuel that you think from an industry, we should be factoring in? And then maybe above CPI, like if you want to give any sort of comment around what that actually means, like how far above CPI?

Yes, it's Race. So look, the main point here in terms of -- if you look at our cost drivers, one of our biggest cost base is, about 20% of our cost base is airports, and that is growing by 15%, and I would expect that to continue growing above inflation. It's important that we work with the airline partners to ensure we get the right investment that our customers want, but that we also get a return on that investment. So that is a key driver of cost going forward. Labor costs will obviously continue to be a growing cost going forward. What's really important for us is the transformation program that as these costs, which are predominantly industry-based costs continue, that the transformation program, which is embedded in our business plays a key role in ensuring that we can get margin accretion.

You clearly doing a good job of that, but I really appreciate the color.

Your next question comes from Jakob Cakarnis with Jarden Australia.

Maybe one for Andrew and Paul potentially to share, but just that 6.4% fourth quarter RASK growth, I appreciate the answer to Andre's question that you'd probably hold that continuing into the first half of '27. Because there's no disclosure to trace this through, can you just give us a sense of how much load factors contributed to that 6.4% RASK, please?

Yes. Thanks for the question. Load factor hasn't been a significant change for us in the second half, half-on-half. And we -- our business model, we would continue to expect mid-80s load factor. So it really hasn't been driven from a load factor gain perspective.

Okay. So that was about 30 basis points year-on-year in the half. Is that about right for the fourth quarter?

That sounds right, but I'd want to go and check the numbers, but that does sound right.

Yes. Okay. I guess where I'm getting there is that there were some changes that you guys have been clearly disclosing about the fare buckets that you've used and just how effective that's been for your own revenue management. I'm just wondering when do we start cycling those? And do we interpret the RASK guidance moving forward as much more yield orientated? I appreciate you're managing that from a TRASK perspective.

Yes. We're only giving guidance for half 1 and TRASK and our strategy will continue in half 2. As we've said, as a company, we need to ensure that our RASK growth exceeds our CASK growth in order for us to continue to improve margin. But I really can't give much more color than that from a commercial competitive point of view.

Okay. Just one for Race. I appreciate the answer earlier to Justin's question, just not wanting to be drawn into committing to capital management. But I mean, the leverage where you are and where you'll go versus target with the CapEx guidance, I'm sure it's going to be on everyone's mind. So is there any way to think about would the preference theoretically be as a consistent base dividend moving forward as a mix if it were to continue, appreciating it's going to be reviewed every 6 months?

Yes. Look, we're not committing -- to be crystal clear, we're not committing to any forward payout ratios. We are committing to apply our capital management framework. We are expecting strong cash generation. That is allowing us with our conservative balance sheet to continue to buy aircraft. And our commitment is we will be within the range of 1x to 2x. If the capital allocation framework allows surplus funds, we will find the most effective way to get that back to shareholders, but we are not committing to any payout ratio.

Let me reframe it, Race. Given that you guys said from the first half that you're accruing franking credits and you paid a fully franked dividend, I assume you're going to be accruing those moving forward with the tax paid position, would the preference for capital management be as a dividend as opposed to, say, other forms of capital return like on-market share buybacks?

Yes, in that we will be increasing our franking credits, franking balance. We know that our shareholders are predominantly Australian-based. So certainly, that is a definite option for us that should there be shareholder returns in the future, the paying of fully franked dividends is the most likely approach, but we will consider what is the most effective way to return funds at each process.

Your next question comes from Tom Peyton with RBC Capital Markets.

I just wanted to ask a couple of questions about Velocity. You sort of flagged double-digit growth in FY '28, '29 to low double digit. Just wondering whether that's a per year CAGR and whether we should be thinking about that as like a back-ended program or sort of linear sort of consistent step-up?

Yes, sure. So FY '27, we're obviously ramping up that investment. So a lot of the cost is coming through this year ahead of the revenue that will be driven by that investment and then expecting double-digit growth in both FY '28 -- low double-digit growth, as we've guided in both FY '28 and FY '29. We haven't guided beyond the 3-year period.