Virgin Australia will axe its daily flights between Melbourne and Hong Kong in February 2020 as part of a broad program to bring the airline back to profitability in the wake of seven straight years of losses adding up to $1.9 billion.
Also on the cut list:
- Canberra-Perth flights will cease from 6 December 2019
- Gold Coast-Perth flights will end on 19 January 2020
- Sydney-Christchurch flights are being dropped as of 29 April 2020
- reducing regional Sydney-Tamworth flights from a double-daily frequency to six services per week
- trimming Auckland-Sydney "from up to 19 return services to 14 services per week"
But it's not all slash-and-burn: dropping the Melbourne-Hong Kong service will free up the necessary Airbus A330 aircraft required for Virgin's launch of daily flights between Brisbane and Tokyo in March 2020.
"Flying to the right destinations, with the right customer demand, and the right sized fleet will improve our financial performance," said Virgin Australia CEO Paul Scurrah ahead of today's annual general meeting of the airline, his first since being appointed as CEO in March 2019.
Today's announcements follow a sweeping six-month review initiated by Scurrah to "right-size" the beleaguered airline "to meet current and forecast market demand conditions."
Scurrah's first moves included pushing back the arrival of new Boeing 737 MAX jets from November 2019 to July 2021 to delay a $1 billion delivery bill, and scuppering the launch of an improved Boeing 737 business class touted by previous CEO John Borghetti, whose eight-year tenure as CEO saw the airline reshaped from the low-cost Virgin Blue to a full-throated Qantas competitor in Virgin Australia.
Virgin Australia most recently posted a $315 million loss for the 2018-2019 financial year, although this was half the $653 million loss of FY18.
“We maintain a strong network of destinations and it’s important that our schedule continues to reflect demand from our business and leisure customers," Scurrah noted. "Some of today’s changes respond to shifting demand on some routes, and others are about refocussing Virgin Australia and Tigerair Australia on the destinations we feel they are best suited."
Asian pivot: from China to Japan
Virgin began flying between Melbourne and Hong Kong in July 2017, with the launch of Sydney-Hong Kong following in July 2018.
From the outset Virgin was elbowing its way into crowded markets dominated by Qantas and Cathay Pacific, with the latter offering not only multiple flights each day but a raft of onwards connections to Europe and the Americas, along with other parts of Asia.
The recent months of protests and political unrest in Hong Kong have impacted all airlines flying to the Asian metropolis but exacted a heavy toll on Virgin which is believed to have been facing relatively low patronage on the competitive route.
Scurrah said the Melbourne-Hong Kong route "has continued to underperform in line with the political landscape and we feel it’s best served through Sydney."
Former CEO John Borghetti saw Hong Kong Kong as the start of a determined and deliberate push into China, and in mid-2017 affirmed that "by the end of 2018 we will be in mainland China," with aim of eventually opening two routes to mainland China to take advantage of carriers owned by or affiliated to Virgin stakeholder HNA.
Scurrah remains confident of Asia's place on the airline's route map, but sees the pivot to Japan as being more sustainable, especially as it is underpinned by a new partnership with ANA offering codeshare flights and reciprocal points earning and lounge access.
Resuming full ownership of Velocity
Virgin has also confirmed plans to reclaim full ownership of its Velocity Frequent Flyer scheme by purchasing the 35% stake of Affinity Equity Partners, which bought into the program in 2014 for A$335 million. The buyback is estimated to cost $700 million, which would see Velocity valued in total at around A$2 billion.
"We're thrilled to buy back the Velocity business and bring it back under the airline," Scurrah said. "Velocity, with its 10 million members, is a very important part of our future."
The decision demonstrates Scurrah's confidence in the longer-term proposition for Virgin Australia and growing Velocity as part of that future. Loyalty programs are usually a pillar of strength for airlines – in the 2018-2019 financial year Velocity reported pre-tax earnings of A$122.2 million (up 12% over the previous year).
Velocity members were also wary of sell-off plans, fearing that the program's core benefits – especially when it comes to the earn-and-burn equation and redeeming points for seats – might slowly be watered down by non-airline stakeholders.
Scurrah said the buy-back "allows us to move from a very successful member acquisition phase to one focused on improving the engagement and earnings quality of those members."