Onboard Virgin Atlantic’s inaugural flight to Seattle, CEO Craig Kreeger talks to Paul Revel about new challenges, investments, aircraft and more…
Virgin Atlantic’s 2016 financial results show a small profit – £23m profit before tax and exceptional items (PBTEI) – on a group revenue of £2.69bn. How do you view these results?
2016 was a very good year in a difficult economic climate. It was our third consecutive year of profitability, our fourth year of profit improvement, albeit modest.
In the last few years we’ve put a lot of money in the bank, that has enabled us to ride through what we anticipate being a difficult period. The good news is we’re continuing to focus on the £300m plan we made two years ago to invest in the customer proposition.
But it is a new world economically – particularly the impact of the change in strength of the pound. The June 23 Brexit vote was obviously a surprise to many. We had done some hedging in case – but we didn’t extend hedging anywhere near far enough.
A weak pound is not beneficial for our business. We buy fuel and airplanes in dollars, and more than half of our revenue is in pounds. We saw an immediate drop-off in demand on June 24. Both revenue and costs were negatively impacted by the weak pound – we estimate it cost us £50m from June 24 to the end of the year. That puts our results in context – ending up with £23m profit is a pretty good number.
But our current expectation is that as things are today, 2017 will be money losing for us. Given the uniqueness of what’s going on right now, it’s likely. We are taking action to amp up our selling at foreign points of sale, we’re doing some things to ameliorate it.
What about the impact of fuel price changes?
Look at our results and you’ll see pretty big numbers in fuel hedging losses [£179m hedging loss in 2016, a £198m improvement y-o-y].
Hindsight is in 20/20 vision... But our job is to run our business in the environment that we forsee – we are continuing to hedge, in fact our current hedging is actually making us money this year, because we were buying during 2016 when fuel prices were running up.
I think we’ve learned we were over-hedging in 2014, that revenues move a little bit with fuel prices so you don’t need to hedge quite so much.
Tell us about your plans for new aircraft
We have ordered 12 A350-1000s for between 2019 and 2022, scheduled to replace our last four A340-600s and our eight B747s…
It will be a shame to see the end of those B747s…
That will be a very sad day for all of us, the day the last 747 goes. It is a fantastic aircraft. But the economics of the A350 are phenomenal, in in terms of fuel consumption and environmental impact.
We’ll be able to put a great customer proposition onboard too. We’re really excited about it.
Presumably that onboard product is top secret…
Of course it is!
You mentioned your investment plan – what else are you doing?
All aircraft will be wifi enabled by the end of May. We’re refurbishing our A330 upper class, to look a lot more like this one [onboard the Dreamliner], by end of the year.
We’ve moved all of Delta’s flights into Heathrow T3. It means Delta customers now have access to our Clubhouse, and check-in facilities – it helps with efficiencies, we now share ground handling and manage Delta check-in. So we’re now co-located in the big airports, like JFK, Atlanta and now Heathrow. It’s hugely beneficial to customers – if you need to switch to a Delta flight or vice-versa, we don’t have to shuttle you between terminals, we can make it happen very quickly. Particularly in a market like New York where we have nine flights a day, that’s a great opportunity.
We moved into our new facility at Gatwick in January, in the north terminal, where we have the brand-new Clubhouse and V-Room.
The financial report also cites a 30 per cent y-o-y increase in passengers connecting between Delta and VA. How is the joint venture going?
We are still in growing phase, still fine-tuning the network and putting the right airline and aircraft in the right markets… this flight we’re on now is a good example – the Virgin Atlantic brand fits very nicely with Seattle and its entrepreneurial spirit and young vibrant culture.
And while it’s expensive for Brits to go abroad, it’s cheap for Americans to come to the UK. Having a partner on the other side who can amp up marketing and sales focus on the US point of sale to offset some of the weakness we see in the UK – that’s a fantastic benefit of this JV. This year we probably need them more than we ever have.
Do you see the new Manchester-San Francisco service as a business travel route?
It’s a great mix of business and leisure. Up until this season, our Manchester flights have been generally leisure – the Caribbean, Vegas, Orlando. This year’s routes; Boston, San Francisco and New York are great ‘blend’ markets – a good mix of business and leisure. If you look at the Northern Powerhouse concept, and the growing entrepreneurial tech sector in Manchester, Boston and San Francisco are perfect examples of synergy, with very strong tech sectors.
How do you view the rise of low-cost long-haul services?
It’s both a challenge and opportunity. Obviously increasing capacity and decreasing pricing is one of the realities, both generally and with LCCs particularly. Our goal to compete is to make sure we find the right value proposition – that includes offering low prices. So competition has continued to evolve, we had a very good year competing in 2016. We see growth now with Norwegian, in 2017, and we’ll continue to find that niche that allows us to compete with Norwegian on one hand, and carriers like BA on the other.