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Virgin Australia Holdings flies into the red

Virgin Australia Holdings Limited (ASX: VAH) has reported an $83.7 million loss for the first half, showing that intense competition has bloodied both competitors.

Qantas Airways (ASX: QAN) yesterday announced a $252 million loss for the same period.

As the chart below shows, aviation profitability in the last half was much worse than Qantas CEO Alan Joyce’s estimate of $100 million.

Australian Aviation profitability

Source: Virgin Australia

That shows the effect of massive increases in airline seat capacity, with both airlines forced to cut ticket prices to get people into their planes.

Virgin says it continues to outperform Qantas in Total Group Revenue, Domestic and International yield growth and Group Revenue Load factor, but that really means nothing if they continue to report losses.

The airline has more than $2 billion of debts, only partially offset by $665 million in unrestricted cash, which was boosted by its recent $350 million capital raising.

And while the company reports operating cash flows of $47.6 million, Virgin was forced to spend more than $306 million in capex.

Foolish takeaway

With negative free cash flow, Foolish investors would be wise to give Virgin as much of a wide berth as Qantas. Neither are investment grade.

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Returns as of 6th October 2020

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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