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Virgin Australia (ASX: VAH) has made the decision to slash its overall network capacity in the second half as losses take their toll on the group's bottom line.
The three per cent reduction to its flight network is primarily in response to the impact coronavirus Covid-19 has had on the travel sector, with loss-making routes the first to go.
The changes will result in Virgin being slugged with a $50 to $75 million impact on its FY20 earnings.
Virgin Australia says the reductions are focused on leisure destinations where demand is weaker and includes the withdrawal from five unprofitable Tigerair routes.
Seven additional Tigerair A320 aircraft will cease flying by October 2020, following the announcement of five aircraft exits in November 2019, bringing the total to 12, as the group transitions Tigerair to an all Boeing 737 fleet.
"There's no doubt we are operating in a tough market, and we need to make sure our capacity deployment is disciplined to ensure our routes are profitable for our business," says Virgin CEO and managing director Paul Scurrah.
"Coronavirus is having a significant impact on the travel industry and these changes will help us manage the changes we're seeing in demand."
Tigerair Australia will exit the following domestic leisure routes in addition to frequency reductions on existing routes:
- Melbourne-Coffs Harbour from 27 April 2020
- Sydney-Coffs Harbour from 27 April 2020
- Adelaide-Sydney from 27 April 2020
- Sydney-Cairns from 27 April 2020
- Hobart-Gold Coast from 28 April 2020
The network cuts come as the group posts its first loss since FY17.
Virgin Australia reported group statutory losses after tax of $88.6 million, which includes one-off costs associated with the $700 million buyback of its Velocity Frequent Flyer program, write-offs of assets no longer in use, and workforce reductions.
Despite the loss, Virgin saw its revenue hit a new record, growing by $46.8 million to reach $3,116.3 million.
"While the half year has seen us grow revenue and passenger numbers along with strong RASK improvement, we are still in the early stages of transitioning our business to a lower cost base," says Scurrah.
"Therefore, the benefits of cost changes and further revenue efficiency have yet to be realised."
"There's further work to do on costs and we will continue to review the network and our capacity in line with demand."
Shares in VAH are up 5.83 per cent to $0.13 per share at 10.48am AEDT.
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