SWOT Analysis and five keys audit of Virgin Blue Holding Limited

About the company

Virgin Blue Holdings Limited, an Australia-based company, is involves in the airline industry. The company’s segments include long and short hauls. The company owns a fleet comprising of 68 Boeing 737-700 & 800 series along with Embraer E-170 and E-190 aircrafts. Virgin Blue Airlines functions approx 2100 flights per week to 24 national cities and centers and 8 international places including ports in Figi, New Zealand, Tonga, Vanuatu, the Cook Island and Samoa.

Virgin blue had been established in the year 2000 as wholly owned subsidiary of Virgin Group. In 2002 Virgin, along with Partrick invested in the airline field. In the year 2008, Virgin Blue Holdings Limited came into existence and floated on the exchange for selling the holdings of Virgin Group. Virgin Blue Holdings’ main operation is in the airline business in Australia, while it operates in air transportation and schedule sector also.

SWOT Analysis Of Virgin Blue Holding Limited

Strengths:

Motivated management: The management of the Virgin Blue Holding Limited is highly motivated and continuously involved in value improvement process. A motivated team ensures giving it’s best to earn super profits.

Innovation: The corporate level strategy of this company is innovation. This helps the company in preparing the niche segment for itself. Also helps the company in having a upper hand over competitor.

Young staff: Strength of Virgin Holding Limited lies in their staff which is comprised of young people. This will increase their work efficiency and productivity, and thus lead to superior profit making.

Weakness:

Capital Intensive Business Lines: – Virgin Blue Holdings business is highly a capital intensive business thus requiring managing of heavy investment and maintenance cost. The point to reach breakeven too is thus, longer than otherwise.

Low return on investment: The airline industry is highly volatile and cyclical in nature and usually have low return on investment.

Opportunities:

Niche market: Instead of targeting the masses to fly economy and certain business class crowd, the company targets the student and this segment has high growth opportunities.

Less competitive market: Another opportunity for the company is that this market is less competitive market and has high growth scope, and thus it would enable them to get the mover’s advantage and becoming market leader thereby earning super profit.

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Richard Branson: Richard Branson passion for aircraft also helps in expansion of business.

Threat:

Existing player: Existing competitor can act as a threat for Virgin Blue and impact their market share. Also there is a threat from the entry of new player.

Air flight safety: Another concern for airline industry is safety. This is the most common sector for terrorist attack and any such event can damage their business and brand to a greater extent.

Key audit risks: Mainly the audit risks are of three types:

Inherent Risks

Control Risks

Detection Risks

The following are the key Audit risks-

Revenue Recognition: (Detection Risk) Identifying important ratios such as Accounts receivables/Sales or Inventory/Cost of Goods Sold is important are these are predictive of negative events.

Account affected: Profitability Ratios.

Expense Recognition: (Detection Risk) Deferred long-term expense and exaggerated depreciation often distorts balance sheet. Checking of these ratios such as Selling G&A Expenses to Operating Expenses YoY basis and also comparing them with industry standards.

Account affected: Profitability Ratios.

Asset-Liability Valuation: (Detection Risk) Liquidity, Asset Turnover, Net Income/Equity, Leverage, Goodwill, etc may be comparable with peer group and previous years.

Account affected: Asset Turnover Ratios and Liquidity Ratios.

Directors holding position of Officers: (Control Risk) As directors have fiduciary responsibilities towards the shareholders, they should not have positions that are subjected to conflict of interest.

Account affected: Dividend payments and other policies related to shareholders.

The CEO and Chairman are separate: (Control Risk) The roles of the CEO and Chairman are performed by separate people as the chairman would then be able to represent the shareholders interest better.

Account affected: Dividend payments and other policies related to shareholders.

Stepping down of Virgin’s long term CEO Brett Godfrey:

Earlier in 2010 virgin long term CEO Brett Godfrey stepped down and was replaced by John Brochette. Due to change in CEO, the auditors need to properly emphasize or assess the following points:

Change in corporate governance: Stepping down of the existing CEO can lead to corporate governance issues in organization. If the new CEO is not as effective, then it leads to bureaucracy and account manipulation issues in an organization. The auditor needs to evaluate this area carefully.

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Accountability of board of director: The auditor should make sure that same practices of accountability and displace is maintained in organization. There should not be any misappropriation or misuse of funds available.

Analysis of share holding pattern change: The auditor needs to analyze if there is any change in the shareholding pattern due to stepping down of the CEO. This will help in evaluating the existing funding structure of the company and help in evaluating welfare of shareholder by maximization shareholders wealth. The auditor should properly investigate where the funds are being divested.

Current Financial Information of Virgin Blue Holding Limited:

Net profit after income tax for 6 month period, ended 31/12/2009 was $62.5 million and that reflects $163.9 million more compared to the corresponding 6 month term ended 31/12/2008.

The net profit of the period is made up of:

In these 6 months to 31/12/2009, the underlying OPs profit before tax went up by 34% and got profit of $80.1million.

Basic EPS for the 6 months period ended 31/12/2009 had a profit of 3.3cents/share.

Business segments

Virgin Group has 2 segments, described below that are Group’s business segment. The business segment offers different services and products, and managed separately as they need different types of aircraft. For each business segment, the internal management reports are reviewed on monthly by the board. The summary describes operations in each segment:

• Short haul – Operations using short haul fleet by Boeing 737 aircraft & Embraer 190 and 170 aircraft. This includes Australian, New Zealand, Trans-Tasman and Pacific Island flying.

• Long haul – Operations that use Boeing 777 fleet. This predominantly comprises of Trans-Pacific flying.

Partnerships of Virgin Blue Holdings Limited:

Etihad signed a partnership with Virgin Blue Holdings Limited:

All Virgin Holding services will now be available also to the Etihad customers, by opening up of 44 destinations in Asia, Australia, Pacific Islands, New Zealand, and Los Angles. The code share agreement will come to effect right from October. As result of this deal, Virgin Australia is to become as first Australian carrier operator to operate at the Middle East since 1991.

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Together with V Australia and Eithad Virgin Blue will be able to fly twenty seven flights in between Abu Dhabi & Australia which will include the services between Abu Dhabi-Sydney, Melbourne & Brisbane.

Etihad management said that Australia is a very important market place for us & we are happy that after this collaboration we will be able to serve our purpose better. We currently fly about 450,000 people a year to Australasia, we think this deal will add about 100,000 to that figure. With this collaboration we will be in a position to serve the USA & Europe trips better from Australia, that will give us a distinct advantage over the other competitors, improves the sustainability & comfort of travel.

The agreement would joing the Blue Group and Etihad frequent flier programs, thus allowing the customers to “earn & burn” miles in all of these airlines that are involved in deal.

Partnership of Virgin Blue & V Australia with Virgin America for Frequent Fly:

Virgin Blue with its long-haul airline, V Australia has partnered with Virgin America to give benefits to loyalty customers to get some points when they take flight on sister airlines. This simply means that people travelling through any of these 3 flights will earn some credit that will be deducted under frequent travelling program. This partnership has applied from April, 2010.

This exchange agreement will enable Virgin Blue or V Australia’s Velocity customer to earn Velocity points & vice-versa through any of the 3 flights. Virgin Blue is presenting this as benefits to its guests & a act of Customer relationship management.

Virgin Blue team says that their motto is that people from whole USA & other parts of the world plan their tours with our developing airline family. Virgin blue is famous for its customer service, product innovation, great design & high level of facilities. Virgin Blue has got Best National Airline for 3rd consecutive year at the Australian National Travel Industry Awards.

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