Virgin Express has Increased Profits

Highlights:  ? Net profits of EUR 410,000 for the full year, up from EUR 130,000 last year.  ?  Voted “Best Short Haul Airline - 2002” by Belgian travel trade.
?  Load factors above 80% and on-time performance greater than 90%.
? Operating costs well controlled and now down to EUR 6.14 cents /ASK.
? Priorities for 2003 include raising equity for expansion and starting a second continental
Chairman’s Statement:
I am very pleased to announce a net profit for the year 2002 of EUR 410,000 (EUR 130,000 in
2001). This result has been achieved in spite of the cessation of our Sabena contract
(accounting for more than 40% of our revenues in 2001), the start up of a competitor SN
Brussels Airlines (SNBA), and significant price discounting from our major airline competitors.
In my Chairman’s report last year I commented that we had successfully refocused our
business back to a Brussels hub, significantly improved the quality of our product and had
returned the company to profit. Our priorities for 2002 were to fill the 40% gap in our revenues
caused by the bankruptcy of Sabena, and continue with our product improvement, whilst
expanding our route network to better serve our growing customer base. In spite of an
extremely hostile trading environment, all of these objectives have been achieved.
We now offer 15 major city destinations from Brussels, up from the 8 destinations we offered
following our restructuring, and before the bankruptcy of Sabena. New destinations over the
last 12 months include Athens, Bordeaux, Lisbon, London City, and Palma de Mallorca. In
2002 and up to the end March 2003, we had co-operated with SNBA on a number of code
share routes, particularly to London Heathrow, Copenhagen, Gothenburg, Stockholm, Rome,
Barcelona, Madrid and Nice. Virgin Express offers “value for money” fares whilst SNBA
focussed on a full service traditional offering. By mutual agreement we will stop all trading links,
as of 30th March 2003. As a result of the sale of the nine SNBA slots in London Heathrow, we
terminated our London rotations early, at the end of October 2002. We are very pleased to
have announced code share agreements with Malmö Aviation between Brussels and
Scandinavia and with VLM Airlines, who previously code shared with SNBA, between Brussels
and London City. In addition we have signed a cooperation agreement with BudgetAir to fly a
daily rotation between Amsterdam and Rome.
Our revenues have grown by 7% to EUR 227 million, having carried 2.5 million passengers,
with a doubling of own sales. Load factors have been 80.7% for the whole year, with yields of
EUR 86 per sector. Competition has been very strong, with excess capacity on all routes and with traditional airlines discounting their fares to well below their costs, in order to fill this excess
capacity. This situation cannot continue for long and we are already seeing signs of some full
service airlines grounding aircraft to cut capacity. We are very concerned that SNBA has just
increased its fleet by three A319s, at a time when it has just announced an operating loss of
EUR 100 million for 2002 and aim to deliver a profit for 2003. Additional capacity on routes can
only result in further discounting of fares and additional losses.
We continue to focus on controlling our costs. In 2002 our operating cost per ASK dropped
12% to EUR 6.14 cents/ASK, competitive with easyJet and significantly below all traditional
airlines. We benefited from lower fuel costs and a weaker dollar, but suffered from increased
insurance costs and airport charges. Expenditure on marketing has increased in line with our
expanding route network. Maintaining the lowest possible costs and the highest operational
efficiencies are critical to ensuring we can remain profitable whist our industry restructures.
Over the past year our product offering has continued to improve. Our customers tell us that on
time performance is critical to them. Our punctuality record is now outstanding with 90.7% of
our flights on time throughout 2002, well ahead of the industry average of 78%. Combining this
punctuality record with superb “value for money” has resulted in growing support from our
customer base in Brussels, where we are now the largest schedule carrier. Not only are we the
largest carrier but, in November 2002, we were delighted to be voted “Best Short Haul Airline-2002”
by the Belgian travel trade, with Lufthansa coming in second place.
Although we are pleased to have made progress in the Brussels market, we recognise the
limited size of this market. As a result, we have been investigating the potential of setting up a
second operating hub in Europe. In July 2002 we announce that we were considering
expanding into Germany with a base in Köln-Bonn. Following announcements from Lufthansa
and TUI that they were also planning to start up their own “low-fare” airline, we made the
sensible decision to withdraw, accurately predicting a major fares war. Since then, we
announced the intention to form a joint venture with the largest French private shipping
company, CMA CGM, to bid for part of the assets of the Group Air Lib and start a “value for
money” low fare airline out of Orly/Paris airport. Negotiations are at early stage with the
appointed receiver and the other relevant authorities. If the right terms can be finalised with all
parties, including staff, the opportunities for a low fare airline serving the very large Paris
market, currently starved of “value for money” fares, are clearly very significant.
In 2003 we intend to build on the success of 2002. To continue our growth, we are planning to
raise EUR 35 million of equity, by way of a placement to Virgin Sky Investments Ltd (VSIL), our
60% shareholder, with claw back for the IDR holders. These funds will be used to repay
existing loan obligations. We expect to seek shareholder approval in April 2003 and issue a
prospectus, to qualifying IDR holders, in May 2003. In addition, we have agreed in principle
with VSIL for a new working capital facility of up to EUR 50 million, available as from the
completion of the equity financing.
Year 2002 has been challenging with all parts of our organisation working very hard to deliver
these results. All of us at Virgin Express have built a company of which we are proud and we
are determined to continue offering our customers the very best level of service with “value for
money” fares to an expanding list of destinations. Our industry faces a number of major
uncertainties, including the potential effects of the Iraq war and terrorism. We expect seasonal
losses in the first quarter, with load factors as forecast and yields below last year but in line with
many of our competitors, followed by a profitable second quarter.
We are affected by an industry fares war, as the major operators struggle to adjust to their
excess capacity. However, our low fare market continues to grow and we are gaining share, as
the travelling public will no longer accept high priced fares on short and medium haul journeys.
In spite of the uncertainties, we are confident that as long as we keep our costs and our fares
low, and continue to offer the best service to our customers, we will prosper.