Next month Virgin Atlantic will celebrate its 25th anniversary with a unique flypast when one of its Boeing 747-400s performs with the world famous Red Arrows at Biggin Hill.

But for Chairman Sir Richard Branson, the celebrations started this week when he was able to reveal a doubling in pre-tax profits to £68.4million in the year to February 28. Turnover rose 8.4 per cent from £2.38 billion to £2.58 billion.

It is perhaps no surprise that Sir Richard scheduled his announcement just days after British Airways revealed it had suffered a turbulent ride last year.

Virgin Atlantic’s arch rival lost £401million in the 12 months to March, its worst performance since privatisation in 1987, after its fuel bill trebled from £1 billion to £3 billion and both business class and first class passengers stayed at home.

Air FranceKLM, Europe’s biggest carrier, has reported similarly dismal figures, and more than 30 airlines have gone into administration since the oil price started to rise last year.

It seemed as if Virgin Atlantic, which started life with a leased Boeing 747-200 flying from Gatwick Airport to Newark in New Jersey, had conquered the skies. But it seems the battle is far from over. Granted, there are patches of clear blue but there are also some storm clouds on the horizon.

Last year 5.77 million people, or roughly 15,765 every day, flew with Virgin Atlantic to destinations including New York, Mumbai and Sydney, as the airline took customers from its competitors. Load factors – a key industry average which is calculated as the ratio between passenger miles flown and seat miles available – remained strong. More importantly, perhaps, Virgin Atlantic lured lucrative business class customers from its rivals.

Its Premium Economy seats, for example, where passengers pay a ‘premium’ for extra legroom, comfortable seats, better food and a glass of champagne, were much in demand from passengers who would normally fly business. It could only benefit from the closures of business class services MaxJet, Silverjet and EOS.

Unlike British Airways, where banking and finance passengers account for 40 per cent of its revenues, Virgin Atlantic has never targeted business customers. Indeed, a few years ago it moved to target civil servants and government officials.

But much of Virgin Atlantic’s success last year is down to simple housekeeping measures. It already pays its cabin crew lower salaries than British Airways, but staff still agreed to a pay freeze. And costs have been cut further. Its popular in-flight beauty service for Upper Class customers has been axed. It has also deferred orders for new planes, and concentrated on mature (and hence proven) routes.

And on the plus side, it managed to hedge its fuel prices at exactly the right time. In 2006, the airline predicted the global economy was starting to slow; it hedged on currencies and fuel, so when the price of oil soared to a record high of $147 per barrel last July, Virgin Atlantic was unaffected. The airline spent almost £1 billion on fuel last year.

But Steve Ridgeway, chief executive of Virgin Atlantic, does not expect to repeat the trick this year. He warned that reduced passenger numbers, pressure to cut prices and high fuel costs will prevent any of the world’s major airlines making money this year.

The International Air Transport Association (IATA) estimates that premium air travel fell by 19 per cent in March, and predicts global passenger traffic will fall 5.7 per cent this year.

Virgin Atlantic is taking corrective action now. It has reduced capacity by about seven per cent on routes such as New York, Washington and the Far East, and plans to cut a further five per cent over the coming year. It has also announced that up to 600 jobs will be cut this year.

But while Ridgeway is talking about troubles this year, there are some concerns about last year’s numbers. As a privately owned company, Virgin Atlantic does not have to provide much information to the outside world. But it seems that profits from ongoing operations, excluding exceptional items, fell from £44.4million to £25.9million, and the latter figure was boosted by currency gains totalling £68million.

Singapore Airlines, which holds a 49 per cent stake in Virgin Atlantic, also tells a different story. Its annual figures, produced under the widely adopted international financial reporting standards (IFRS), suggest that Virgin Atlantic barely broke even last year, and suffered heavily in the fourth quarter.

Chan Hon Chew, senior vice president for Singapore Airlines, attributed the group’s £45.9million loss in the fourth quarter to its stake in Virgin Atlantic, adding that, over the full year, its stake generated just £172,000 in profits.

The difference lies in methodology. Virgin Atlantic chooses to use UK accounting standards, known as UK Gaap (generally accepted accounting practices), while Singapore Airline and other listed companies moved to IFRS in 2006. Both are legitimate accountancy methods, but IFRS values hedging facilities (and the money they make or lose) while Gaap does not.

Howard Wheeldon, a senior strategist at BGC Partners, admires Virgin Atlantic’s success in doubling pre-tax profits in 12 months, but adds: ‘Sadly, this being a private as opposed to a public company, no further details have been made available and we are left to scratch our heads wondering about the state of Virgin Atlantic’s balance sheet and borrowings.’

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