Virgin Australia (ASX: VAH) 1, Qantas (ASX: QAN) 0, and falling further behind?

Well, after Virgin Australia's news yesterday, you couldn't argue with a scoreline like that.

Qantas, the giant, is being outplayed by the nimbler Virgin and it is showing up in the most important scoreline of all, profitability.

And to the chagrin of many at Qantas, Virgin's success is being driven by John Borghetti, the man who was passed over as CEO, in favour of Alan Joyce.

Virgin Australia yesterday reported a statutory after tax net profit of $51.8 million, compared to the $42 million by the entire Qantas group.

The group said underlying Net Profit Before Tax was $96.1 million, a 34% improvement, despite continuing high fuel prices, while total revenue increased 18% to $2 billion.

The airline also revealed a restructure with the business splitting into domestic and international airlines.

That news and the surprisingly good profit saw the airline's shares jump 8.3% or 3c to 39c yesterday.

That was in a market that was weak all day and closed lower.

The one thing Virgin shared with Qantas was the absence of an interim dividend and the reason for not paying it.

In Qantas' case it was to conserve capital in an uncertain business environment.

Virgin also said it had also decided to omit a payment to shareholders: "In light of the uncertain economic environment and the need to support our current and future strategic initiatives, we will not declare an interim dividend".

Virgin's cash holdings reached a record $506 million of unrestricted cash, and $851 million in total cash balances.

The company said its growing international business had earnings before interest and tax of $35 million, up 39%.

Qantas said its international business lost $200 million.

Interestingly, Mr Borghetti also announced a plan to split the company into a domestic Virgin Australia Holdings company and a new Virgin Australian International Holdings unit.

The aim is to increase investment in the domestic operations by bringing international partner Etihad Airways into the share register as a significant and equity partner who will help fund a major assault on the Qantas Cityflyer domestic trunk routes as well as grow the traffic Virgin Australia is bringing to its hub at Abu Dhabi.

Air New Zealand, which owns just under 20% of Virgin's shares, could become another new shareholder in the domestic airline.

Existing shareholders are given shares in the new international company by way of an in specie dividend. It will be an unlisted company, but will have a separate board, some of whom have already been named.

They include former finance minister Lindsay Tanner and businessmen Graham Bradley and Tony Shepherd.

This will require Foreign Investment Review Board approval, and will be bitterly opposed by Qantas.

"The proposed structure involves securing majority Australian ownership in VAH's international airlines by changing the shareholding and governance structure of the international airlines to ensure compliance with the ANA," Virgin said yesterday.

"The proposed new structure will facilitate overseas institutional investment in the domestic business, which will improve the liquidity of VAH and in turn enhance shareholder value.

"There will be no change from an operational perspective for staff and consumers as both the domestic and international businesses will continue to operate as an integrated airline under one brand."

The restructure of its international operations will be compliant with the Air Navigation Act, which limits foreign ownership of Australian international airlines to 49%.

Virgin isn't wasting any time setting up the new structure. It said yesterday that it was intended that the in specie dividend will be determined on March 16, with implementation by the end of next month.

A question that arises is will Sir Richard Branson's Virgin Group sell its 26% stake in Virgin Australia to Etihad, or other possible partners? Etihad has said it is interested.

Mr Borghetti said the airline had made significant progress on diversifying its revenue sources with 17% of the airline's revenue in the December half coming from the corporate and government market (which typically paid higher average fares per passenger, or yields), up from 13% in the 2011 financial year.

Virgin said due to the uncertain business climate, it was unable to offer specific earnings guidance for the full year, saying only it expected an improvement in underlying performance in 2011/12, compared with the prior year.

Virgin reported a full year loss of $67.8 million in 2010-11 because of the collapse of its booking system in late 2010 and the impact of the Queensland floods in early 2011.

And Friday morning saw weak profit news from Virgin Australia's biggest shareholder, Air New Zealand. The airline saw profit slide in the December half year and as a result dividend has been cut and jobs will go.

And, looking to the rest of the year, Air New Zealand said it would struggle to match the 2010-11 year's earnings.

It was a result very different to the one from Virgin, and was more like the recent Qantas profit performance.

Air NZ said net profit for the six months ended December 31 was $NZ38 million ($30 million) compared with $NZ98 million a year ago.

Chief executive Rob Fyfe, who leaves at the end of the year, said the soaring cost of jet fuel and a weak global economy had taken their toll.

He said 441 jobs would go before the end of the financial year in June.

Of those, 266 were jobs or contracts that were not being replaced or renewed but the other 175 jobs will be lost through redundancies.

The company declared a dividend of 2 cents a share from 3 cents last year.

Air NZ is controlled by the NZ Government, although part of the stake is due to be sold in the next year or so.

Copyright Australasian Investment Review.
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