RATIO ANALYSIS

- Nil

Directors’ meetings

Details of the number of meetings held by the Board and its Committees during the 2017 financial year and each director’s attendance at those meetings are set out below:

Board Committees(1)

(1) Committee meetings are open to all directors to attend. Where a director attended a meeting of a Committee of which he or she was not a member at the time, this is indicated by ( ).

(2) Indicates the number of meetings held during the period the director was a member of the Board or relevant Committee or, in the case of alternate directors, while they were acting in the place of their appointing director.

Directors’ interests

The table below sets out the relevant interests in shares of Virgin Australia Holdings Limited held, as at the date of this report, by the directors and alternate directors. These include any interests held by them directly, indirectly or beneficially (including shares held in the name of a trustee, nominee or superannuation fund). Details of these relevant interests have been disclosed to the Australian Securities Exchange (ASX) in accordance with section 205G(1) of the Corporations Act 2001 (Cth) and the ASX Listing Rules.

Number of relevant interests in ordinary

Director shares

As at the date of this report, no options or rights over (nor contractual rights to call for or deliver) shares in Virgin Australia Holdings Limited or any related body corporate are held by any director or alternate director. Nor does any director or alternate director hold any right or option over (or any contractual right to call for or deliver) any debentures of, or interests in a registered scheme made available by, VAH or any related body corporate.

Company secretary

Ms Sharyn Page BA LLB ACIS was appointed Company Secretary on 1 February 2016. Ms Page was previously Company Secretary and General Counsel of SKILLED Group Ltd (December 2012 – December 2015) and Head of Human Resources (July 2014 – December 2015). Prior to that, Ms Page was Company Secretary of Spotless Group (2010 – 2012), Deputy Company Secretary ANZ (2009), Company Secretary Arrium Limited (2008 – 2009), Board Executive and Company Secretary AMP Limited (2005 – 2008) and Assistant Company Secretary AMP Limited (2003 – 2005). Ms Page previously held a number of legal and compliance roles within the financial services industry.

Corporate governance statement

The Corporate Governance statement for Virgin Australia Holdings Limited is located at www.virginaustralia.com/corporategovernance.

Directors’ report

Directors’ report (continued)

Directors (continued)

Directors (continued)

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Operating and financial review

Principal activities and overview of the Group

The principal activities of the Group during the 2017 year were the operation of a domestic and international passenger and cargo airline business and a loyalty program. The Group offers a variety of aviation products and services to all key segments of the Australian aviation market, including corporate, government, leisure, low cost, regional and charter travellers and air freight customers. There were no significant changes in the nature of the activities of the Group during the year.

The Group flies to over 40 city and regional destinations in Australia and a range of international destinations including Hong Kong, the United States of America, New Zealand, Indonesia and the South Pacific Islands.

The Group operates a fleet of aircraft that includes Boeing 737 and Boeing 777 aircraft, Airbus A320 and A330 aircraft, ATR aircraft, Embraer E190 aircraft and Fokker F100 aircraft.

The Group employs more than 9,800 people in Australia, New Zealand and the United States of America.

The Group has strategic alliances with four key airline partners: Air New Zealand Limited, Delta Air Lines Inc., Etihad Airways P.J.S.C. and Singapore Airlines Limited. During the 2017 financial year, the Group also formed a new strategic alliance with HNA Aviation, Hong Kong Airlines and HK Express. That alliance received final authorisation from the Australian Competition and Consumer Commission in August 2017. Together with the Group’s domestic and international operations, the strategic alliances, codesharing and interline agreements provide a global virtual network of over 485 destinations to Virgin Australia travellers.

Key developments

On 4 August 2016, the Group completed a one for one pro-rata non-renounceable entitlement offer to raise $852.0 million. On 20 September 2016 the Group completed an additional placement to HNA Innovation Ventures (Hong Kong) Co. Limited (HNA) of $89.2 million.

In September 2016, the Australian Competition and Consumer Commission (ACCC) approved the reauthorisation of the Group’s alliance with Singapore Airlines for five years.

In October 2016, the Group issued US$350.0 million in bonds to investors in the US Bond Market. The bond issue was part of the Group’s ongoing funding program, which ensures the Group has an efficient, flexible and diverse funding portfolio.

In February 2017, the Group announced a proposed alliance agreement with HNA, Hong Kong Airlines and HK Express which was subsequently authorised by the ACCC on 10 August 2017 for a five year term. Under the alliance, the Group operates direct flights to Hong Kong and has entered into codeshare, interline and frequent flyer reciprocity agreements with its alliance partners.

Over the 2017 financial year, the Group made strong progress in implementing the Better Business program of capital and operational efficiency initiatives. The Group finished year one of the three year program ahead of schedule. The Group has increased the Better Business savings target from $300.0 million to $350.0 million per annum in annualised cash savings by the end of the 2019 financial year.

A key part of the Better Business program is the Group’s fleet simplification initiatives including a reduction of up to eight ATR aircraft and the removal of all E190 and Tigerair-branded A320 aircraft from the fleet. During the current financial year, the Group sold ten Embraer E190 aircraft and confirmed plans to cease all E190 operations by the end of the 2017 calendar year. Refer to note D1 for further information on assets classified as held for sale. Refer to note C6 for further information on onerous contract provisions.

In May 2017, the ACCC granted approval of a five year strategic partnership between Alliance Aviation Services Limited (Alliance) and the Group. The partnership will enable Alliance and the Group to form a charter partnership to jointly grow their charter business. The entities will also enter into agreements to provide and procure services for each other on a preferential basis. This includes, but is not limited to, aircraft procurement, spare parts pooling, maintenance, ground handling services and customer benefits.

In July 2017 Virgin Australia ceased flying to Gladstone, Bundaberg and from Brisbane to Port Macquarie and a marketing and distribution agreement was signed with Alliance that provides Virgin Australia codeshare operations on Alliance operated flights into these ports.

Statutory results

A summarised statement of profit or loss for the current year compared to the prior year is provided below.

The Group recognised a statutory loss after tax of $185.8 million, a $38.9 million improvement compared to the previous year.

Revenue and income increased from $5,021.0 million to $5,047.3 million, a $26.3 million increase. This reflects the increase in revenue passenger kilometres (RPKs)(1) over the same period.

Net operating expenditure decreased from $5,278.7 million to $5,171.2 million, a decrease of $107.5 million. The improvement is mainly due to a reduction in impairment losses on assets classified as held for sale, impairment losses on other assets and onerous contract expenses. The costs in the comparative period arose from the commencement of the Group’s fleet simplification program which included an announcement to remove leased ATR, leased and owned Embraer E190 and owned Fokker F50 aircraft from the fleet. This resulted in the recognition in the prior comparative period of an onerous contract provision of $100.2 million in relation to leased Embraer E190 and ATR aircraft, impairment losses of $118.1 million on assets associated with these aircraft and impairment losses of $100.5 million in relation to owned Embraer E190 and Fokker F50 aircraft. In the current period, the Group announced that an additional two ATR aircraft would be removed from the fleet from July 2017. These changes resulted in the recognition of an additional onerous contract provision of $29.6 million and impairment losses of $65.9 million in relation to these aircraft. In addition, a loss of $7.8 million was recognised in relation to owned Embraer E190 and Fokker F50 aircraft classified as held for sale. Refer to note C6 to the consolidated financial statements for further information in relation to costs associated with onerous contracts. Refer to note D1 to the consolidated financial statements for further information in relation to assets classified as held for sale.

The Group recognised profits from equity-accounted investees of $2.1 million during the year, an improvement of $1.4 million on the prior comparative period. Refer to note F2 to the consolidated financial statements for further information in relation to investments accounted for using the equity method.

Net finance costs have decreased from $169.6 million to $167.8 million, a $1.8 million decrease in costs. This includes an increase of $5.5 million in finance income, mainly as a result of additional funds held on deposit. Offsetting this is an increase of $3.7 million in finance costs, mainly as a result of additional unwinding expense in relation to onerous contract provisions. Refer to notes B4 and E3 to the consolidated financial statements for further information.

The income tax benefit decreased from $201.9 million to $103.8 million, a decrease of $98.1 million. The comparative figure included a tax benefit of $41.5 million in relation to an amended tax assessment. The remaining decrease is mainly due to the decrease in the loss before tax. Refer to note B5 to the consolidated financial statements for further information.

(1) Revenue Passenger Kilometres or RPKs is a non-statutory measure derived from the number of paying passengers multiplied by the number of kilometres flown on Virgin Australia or Tigerair Australia operated flights.

Underlying results

The following table summarises the amounts that are excluded from the statutory results to arrive at the underlying and segment results. The Group’s underlying loss before tax(2) was $3.7 million, a decrease of $44.7 million on the previous year’s profit of $41.0 million.

(2) Underlying profit/(loss) before tax is a non-statutory measure. This measure is used by management and the Board to assess the financial performance of the Group. This non-IFRS information has not been audited or reviewed by KPMG.

(3) Segment results include references to Segment EBIT which is a non-statutory measure per note B1 to the consolidated financial statements and Segment EBIT margin. Segment EBIT and Segment EBIT margin are used by management and the Board to assess the financial performance of the individual segments within the Group.

Segment results (continued)

Virgin Australia Domestic

Virgin Australia Domestic’s revenue and yield(4) performance were impacted by subdued trading conditions. The business exercised disciplined capacity management in response, with sectors flown declining by 5.9 per cent on the prior financial year. Yield declined by 1.5 per cent and RASK(5) declined by 0.2 per cent compared to the prior financial year. Segment EBIT for Virgin Australia Domestic was $92.9 million.

However, the underlying performance of Virgin Australia Domestic in the fourth quarter of the financial year showed improvement compared to the prior corresponding period.

Throughout the year, Virgin Australia Domestic continued to enhance and differentiate its domestic customer experience. The business introduced EconomyX, an extra legroom seating product that is unique to the Australian aviation market and is delivering revenue growth with a strong penetration among guests. Virgin Australia Domestic was the most on time major domestic airline in the 2017 financial year and has now led its major competitor in On Time Performance(6) for the past three financial years. Virgin Australia International

Virgin Australia International reported a profitable Segment EBIT result of $0.5 million, in line with 2017 financial year targets and a $49.3 million improvement on the prior financial year. Virgin Australia International’s RASK grew by 1.4 per cent and Yield grew by 2.1 per cent on the previous year.

These outcomes are the result of the international improvement strategy that has been implemented over the past two years. During this period, Virgin Australia International has withdrawn from the loss-making markets of Phuket, some routes to Denpasar (Bali) and Abu Dhabi and expanded to growth markets by commencing Melbourne–Los Angeles services in April 2017 and Melbourne–Hong Kong services in July 2017. The airline also completed the rollout of its award-winning business class product on the Boeing 777 fleet, which supported yield and unit revenue improvement.

Velocity

Velocity reported revenue of $371.0 million, a 13.2 per cent increase on the prior financial year. Velocity’s Segment EBIT performance in the first half of the year was impacted by investment in technology, new partnerships and internal resources to position the business for future growth. However, Segment EBIT performance in the second half improved by 16 per cent on the first half, with Velocity delivering a full year Segment EBIT performance improvement of 2.2 per cent compared to the prior financial year.

Velocity’s growth in membership was supported by an average daily join rate of 4,689 people across the current financial year. Velocity continued to add earning and redemption partners for a diverse portfolio of more than 400 brands.

In April 2017, Velocity was awarded ‘Best Redemption Ability’ in the Middle East and Asia/Oceania region for the fifth consecutive year at the 2017 Freddie Awards. Velocity was also awarded ‘Best Elite Program’ in the Middle East and Asia/Oceania region.

Tigerair Australia

Tigerair Australia reported a Segment EBIT loss of $24.3 million, representing a decline of $26.5 million on the prior financial year. This result was impacted by the costs associated with the launch and withdrawal of flights to Denpasar (Bali). Excluding the impact of the Denpasar international operations, the segment EBIT performance of Tigerair’s domestic operations was profitable in line with 2017 financial year targets.

Passengers carried by Tigerair Australia grew by 10.7 per cent and RASK grew by 3.6 per cent on the prior financial year. Passenger growth outpaced Available Seat Kilometre(7) growth of 10.2 per cent. Tigerair’s capacity growth over the year was driven by operations to Denpasar, which were launched and withdrawn during the year, and the comparative impact of the addition of a fourteenth Airbus A320 aircraft.

Tigerair Australia was the most on time low cost carrier in the current financial year and has now led its major competitor in On Time Performance for the past three financial years.

(4) Yield is a non-statutory measure derived from segment revenue normalised for cargo operations on a consistent basis divided by Revenue Passenger Kilometres of the Regular Passenger Transport business.

(5) RASK is a non-statutory measure derived from segment revenue normalised for cargo operations divided by Available Seat Kilometres of the Regular Passenger Transport business.

(6) ‘On Time Performance’ refers to flights that depart within 15 minutes of the scheduled departure times shown in the carriers’ schedules. Reflects BITRE data for the monthly on time performance for all Virgin Australia designated (Virgin Australia and Virgin Australia Regional Airlines) and all Qantas designated services (Qantas and Qantas Link).

(7) Available Seat Kilometres or ASKs is a non-statutory measure derived from total number of seats available for passengers multiplied by the number of kilometres flown on Virgin Australia or Tigerair Australia operated flights.

Financial position

A summarised statement of financial position for the Group for the current year compared to the prior year is provided below:

Assets

Net cash and cash equivalents increased by $272.3 million to $1,396.1 million from $1,123.8 million in the prior period. Unrestricted cash increased from $728.9 million in the prior comparative period to $985.8 million in the current period. Positive net cash from operating activities of $273.9 million contributed to this increase.

Assets classified as held for sale decreased by $167.3 million compared to the prior year. The assets classified as held for sale as at 30 June 2016 of $171.6 million were sold during the year. An impairment loss of $7.8 million was recognised in relation to these assets. In the current period, Embraer training equipment with a carrying value of $4.3 million was transferred to assets classified as held for sale. Refer to note D1 to the consolidated financial statements for further information.

Non-current receivables increased by $33.4 million as a result of maintenance prepayments paid to third party maintenance providers.

Other non-current financial assets increased by $27.5 million as a result of an increase in maintenance reserve deposits.

Net deferred tax assets increased by $130.7 million. This is mainly the result of the tax benefit on the loss before tax of $103.8 million and the tax benefit in relation to cash flow hedges recognised in other comprehensive income of $21.3 million.

Property, plant and equipment decreased by $43.8 million due to the following factors:

· $421.5 million of additions; less

· $63.7 million of impairment losses and disposals; less

· $279.4 million of depreciation; less

· $4.3 million net transfers to assets classified as held for sale; less

· $30.3 million of foreign exchange losses as a result of the strengthening Australian dollar.

Refer to note D2 to the consolidated financial statements for further information on the movements in property, plant and equipment.

Intangible assets increased by $26.5 million due to the following factors: – $56.8 million of additions; less – $30.3 million of amortisation.

Refer to note D3 to the consolidated financial statements for further information on movements in intangible assets.

Financial position (continued)

Liabilities

Current and non-current provisions increased by $112.2 million as a result of an increase of $80.8 million in the current and non-current maintenance provisions relating to leased aircraft and an increase of $35.8 million in the current and non-current provisions relating to employee benefits. Refer to note C6 to the consolidated financial statements for further information on the movements in provisions.

Current unearned revenue increased by $83.8 million mainly as a result of the growth in the Group’s Velocity Frequent Flyer program.

Current and non-current interest-bearing liabilities decreased by $566.7 million as a result of the Group repaying several debt facilities, including the repayment of some facilities prior to the contracted expiry date. During the year, the Group also issued US$350.0 million of bonds to investors in the US Bond Market. The bonds have a five year term, maturing on 15 October 2021. Refer to note E3 to the consolidated financial statements for further information on the Group’s interest-bearing liabilities.

Other current liabilities increased by $21.6 million as a result of the recognition of deferred costs in relation to assets classified as held for sale that were sold during the current period. Refer to note D1 to the consolidated financial statements for further information on assets classified as held for sale.

Equity

Total equity increased by $675.0 million during the current period mainly as a result of the issue of share capital of $934.3 million, net of transaction costs which was partially offset by the $185.8 million loss for the year. Refer to note E4 to the consolidated financial statements for further information on share capital.

Net current liability position

The Group’s current liabilities exceeded its current assets as at 30 June 2017 by $560.8 million (2016: $1,066.1 million) including a current liability for unearned revenue of $1,074.2 million (2016: $990.4 million). Unearned revenue includes revenue received in advance which has been deferred in the statement of financial position until carriage is performed. The consolidated financial statements have been prepared on a going concern basis, based on the Group’s cash flows for the current year and estimated profits and cash flows for future years. The Group has a cash and cash equivalents balance at 30 June 2017 of $1,396.1 million (2016: $1,123.8 million) and has an unrestricted cash balance at 30 June 2017 of $985.8 million (2016: $728.9 million). Capital management is detailed in note E1 to the consolidated financial statements. Management of liquidity risk is detailed in note E7 to the consolidated financial statements.

Operating statistics(8)

Dividends

No dividends were declared or paid during the year ended 30 June 2017 or during the prior corresponding year. Equity distributions of $38.2 million (2016: $41.9 million) were paid to non-controlling interests during the year.

Likely developments

The key areas of focus for the Group are outlined below:

· Continuing strong momentum on the Better Business program, which is designed to reduce the Group’s cost base, enhance cash flow and improve the Group’s capital position.

· Consolidating the Group’s established position in the Australian domestic aviation market.

· Leveraging international opportunities, including in the Asian and North American growth markets.

· Leveraging investment in the Velocity business to drive further growth.

· Continuing the positive trajectory on debt reduction.

(8) This non-IFRS information has not been audited or reviewed by KPMG.

Significant risks and uncertainties

The Group is exposed to a range of risks associated with operating in the domestic and international aviation industry. These include:

· Fuel price and foreign exchange trends, which can significantly affect costs, including fuel, aircraft and funding costs;

· Increases in airport, transit and landing fees, and the costs of ensuring air traffic security;

· Competition from other airlines and from alternative means of transportation;

· Government policy changes or decisions which could have an adverse impact on its business, operations and financial performance;

· Industrial action by unionised employees, which can adversely impact operations, financial performance and staff engagement;

· Stability of critical systems, including technology and communication services, which can disrupt operations;

· Global economic and geopolitical conditions, as well as pandemics, terrorism, severe weather conditions, natural disasters or other Acts of God, which can materially adversely affect operations and demand for air travel;

· Losses associated with major safety or security incidents;

· Ability to obtain sufficient funds on acceptable terms, or at all, to provide adequate liquidity and to finance necessary operating and capital expenditures;

· Liquidity risk, inability to meet financial obligations, including aircraft purchase commitments, as they fall due; and

· Credit risk, failure of counterparties and dependency on third party service and facility providers.

The Group’s exposure to these risks has the potential to affect financial performance, operations, liquidity, and/or result in impairment of the Group’s cash-generating units (CGUs) and derecognition of defered tax assets. Impairment testing is performed on an annual basis, or more frequently if required, to determine if the impact of key risks has generated impairment losses during the financial year and considers the potential impacts, through sensitivity testing, for future financial years. Refer to note D4 to the consolidated financial statements for further information on impairment testing.

The Group aims to ensure that all activities are undertaken within the Board of Directors (the Board) approved risk appetite and management guidelines and with sufficient independent oversight to protect the safe operations, profitability, financial position and reputation of the Group.

The identification and proactive management of risk reduces uncertainty associated with the execution of the Group’s business strategies and allows the Group to maximise opportunities as they arise. All personnel are accountable for identifying, assessing and managing risks in a proactive manner. The Group has established the Audit and Risk Management Committee which is responsible for the internal controls, policies and procedures that the Group uses to identify and manage business risks. The risk management system implemented by the committee is described in further detail on the Company’s website www.virginaustralia.com/corporategovernance.

The Group is committed to managing risks in a proactive and effective manner. This commitment is supported by the Group’s philosophy and approach to effective risk management and is in line with the principles outlined in the Mission Statement, Safety Policy, Just Culture Policy and Risk Management Policy of the Group.

Significant events after the balance date

In the opinion of the directors, no matters or circumstances have arisen since the reporting date which significantly affected or may significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years.

Directors’ report (continued)

Operating and financial review (continued)

Operating and financial review (continued)

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Remuneration report – audited

Dear Shareholder

I am pleased to present our remuneration report for the 2017 financial year.

The key focus of the Remuneration Committee is to establish a remuneration structure that ensures the work of Executives is aligned with the best interests of all shareholders. Remuneration is structured to attract and retain Executives with the skills and experience needed to deliver the Group’s strategy and reward them for the achievement of business objectives.

The Board has worked to ensure that the remuneration structure is aligned with the Group’s focus on strengthening its financial foundation and performance. The 2017 financial year saw the Group focus on strengthening its balance sheet, enhancing cash flow and implementing the Better Business program, which will generate significant and sustainable Free Cash Flow savings. The Group’s strong performance in these areas has enhanced its ability to deliver future profitability and supports the Group’s objective of delivering value to all shareholders. The following table provides a summary of the remuneration structure and outcomes for the 2017 financial year.

I invite you to read the full report which outlines the Group’s remuneration philosophy and remuneration outcomes for the 2017 financial year. It is our intention to provide details on Executive remuneration in a manner that is clear, concise and transparent. In addition to the fulfilment of statutory reporting obligations, the Group has voluntarily disclosed the actual remuneration received by the CEO and Executives in the 2017 financial year.

Sam Mostyn

Chairman, Remuneration Committee

The report is structured as follows:

Key management personnel page 23

Key management personnel

The Remuneration Report sets out remuneration information for the key management personnel (KMP) of the Group.

KMP are those people who, directly or indirectly, have authority and responsibility for planning, directing and controlling the activities of the entity and Group.

For the Group, KMP are defined to be;

· Non-Executive Directors;

· Group Chief Executive Officer (CEO); and

· Executives in Group Management Committee positions.

This report has been prepared in accordance with section 300A of the Corporations Act 2001.

For the year ended 30 June 2017, the Group Board of Directors were:

(1) During the financial year Mr PT Tan, Mr C Mingqiong (commenced 5 May 2017) and Mr U Huttmeyer (ceased 30 June 2017) served as alternate Directors and were not eligible to receive fees in the current or prior period.

Since the end of the financial year Dr C-t Lu ceased as Director on 24 July 2017. On this date Mr L Xiang and Mr W An (alternate) commenced as Directors. In addition Mr D Baxby ceased as Director on 10 August 2017.

Key management personnel (continued)

For the year ended 30 June 2017, the Group Management Committee members were:

(1) Mr Sharp became acting Group Executive, Virgin Australia Airlines on 29 June 2017.

Remuneration governance

The Remuneration Committee is responsible for making recommendations to the Board on remuneration policies, structure and performance of the CEO, Executives and Non-Executive Directors. The Board independently considers these recommendations before making remuneration decisions.

The Remuneration Committee ensures that remuneration policies align with Group strategy and objectives through the attraction, retention and performance of Executives. Full details of the responsibilities of the Remuneration Committee are set out in the Group’s Corporate Governance Statement.

The remuneration of the CEO Velocity Frequent Flyer is determined by the Velocity Frequent Flyer Board within the broader Group framework and is aligned to the Velocity Frequent Flyer strategy.

Use of remuneration consultants

During the 2017 financial year the Board did not receive any remuneration recommendations from a remuneration consultant as defined by the Corporations Act 2001. The Board appointed Mercer Consulting (Australia) Pty Ltd to provide market advice.

Mandatory shareholding requirements

The Group does not have mandatory shareholding requirements for the CEO, Executives or Non-Executive Directors.

The Remuneration Committee considers that the interests of the CEO and Executives are sufficiently aligned with the Group strategy and objectives and shareholder interests through the current short and long term incentive design. Securities trading policy

The Group securities trading policy applies to all Directors and employees of the Group. The policy ensures all Directors and employees are aware of the legal restrictions on trading Company securities while in possession of unpublished price sensitive information. Directors and Executives are required to obtain consent prior to dealing Company securities. Trading is only permitted during nominated trading windows, which are open for a four week period commencing on the first trading day after the release of the Company’s quarterly, half-year and full year results. A copy of the Securities Trading Policy is available on the Company’s website.

The Securities Trading Policy prohibits short term trading and hedging economic exposure to unvested options issued pursuant to an employee option plan. Directors and the CEO are prohibited from obtaining margin loans using the Company’s securities as security for loans.

Use of Board discretion

The Board maintains absolute discretion in finalising remuneration outcomes for incentive based awards to the CEO and Executives. The Board may exercise discretion (either up or down) to take into account the impacts of external market conditions outside the control of the CEO and Executives. The Board is cognisant of ensuring any exercise of discretion reinforces the Group strategy and remuneration philosophy.

Executive remuneration overview

Remuneration philosophy

The Virgin Australia Group is focused on delivering sustainable shareholder returns through lowering its cost base, growing revenue and earnings and further optimising its balance sheet. At the same time the Group is firmly committed to delivering more choice and the best customer experience to Australian and international travellers.

The continued growth, development and success of the Group requires the alignment of Executive remuneration to the achievement of the Group strategy and delivery of shareholder returns.

Group Strategy

Summary of remuneration components

Fixed Remuneration Short Term Incentive (STI) Long Term Incentive (LTI)

Fixed remuneration includes base salary The STI is linked to performance over a one The LTI is linked to financial performance over and superannuation. year period. a three year period. Its structure takes into

The Board sets fixed remuneration levels to A balanced scorecard approach has been consideration the nature of the Group’s capital ensure the CEO and Executives are fairly adopted with financial and non-financial structure with its small free float and limited remunerated relative to similarly sized ASX listed measures linked to Group strategy and objectives. stock liquidity. companies and is reflective of each individual’s Any payment under the STI in the 2017 financial The LTI is a cash based plan paid upon delivery skills and experience. year is subject to achieving the annual Free Cash of significant improvement in Return on Invested

Flow target. Capital (ROIC). ROIC has been selected as it

A portion of the award is paid in cash following is an important indicator of sustainability and the end of the performance period. The remaining profitability for an airline Group and is based on portion is deferred in cash over one year. several financial metrics, including earnings and invested capital.

The remuneration of the CEO Velocity Frequent Flyer is determined by the Velocity Frequent Flyer Board within the broader Group framework. In addition to alignment with the Group Scorecard, the CEO Velocity Frequent Flyer has a set of measures under the STI aligned to Velocity Frequent Flyer performance. The CEO Velocity Frequent Flyer participates in a separate LTI plan governed by the Velocity Frequent Flyer Board.

Directors’ report (continued)

Directors’ report (continued)

Remuneration report - audited (continued)

Remuneration report - audited (continued)

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Remuneration mix

The remuneration mix has been structured to align the CEO and Executives with the short, medium and long term objectives of the Group.

The following graphs outline the remuneration mix for the CEO and average mix for Executives at maximum opportunity.

CEO Remuneration Mix Executive Remuneration Mix1

25

%

26

%

11

%

38

%

Fixed Remuneration

STI Cash

STI Deferred

LTI

20

%

20

%

10

%

50

%

(1) Excludes CEO Velocity Frequent Flyer due to the indeterminate target value of the Velocity Frequent Flyer LTI.

Fixed remuneration

The Group aims to provide fixed remuneration that attracts and retains a CEO and Executives with the skills needed to deliver the Group strategy and objectives.

The Group takes the following factors into account when setting fixed remuneration levels:

· The CEO and Executives’ individual skills, experience and ability to deliver Group strategy and objectives; and

· Remuneration levels in comparison to similarly sized ASX listed companies.

The Board did not approve any fixed increases in remuneration for the CEO and Executives in the 2017 financial year and has not approved any changes for the 2018 financial year.

Since the 2013 financial year, the only year in which increases have taken place for the CEO was in the 2016 financial year. This was based on comprehensive benchmarking which was performed against a peer group of ASX listed organisations (excluding mining organisations) with similar size and operational complexity. A similar review was also conducted for Executives. In line with the Group’s remuneration philosophy, the CEO and two Executives who were found to be well below the median of the appropriate benchmark for their role received an increase to move their remuneration closer to the median of the peer group. The Executives who were found to be positioned competitively relative to the peer group received an increase in line with the wage price index at the time. This review was done with external advice from Mercer Consulting (Australia).

Short term incentives (STI)

The purpose of the STI is to reward delivery of the Group strategy and objectives both financial and non-financial over a one year time horizon. The performance measures included in the STI program are also designed to align the CEO and Executives’ interests with the medium and longer term Group strategy and objectives and to position the Group for sustainable financial performance.

A review of the STI was undertaken at the commencement of the 2017 financial year to align the plan with the outcomes of the capital structure review. This resulted in the introduction of a Free Cash Flow performance gateway for the 2017 financial year and a single Group Scorecard to measure the performance of the CEO and Executives. The Group Scorecard includes both financial and non-financial measures aligned to the performance objectives of the Group strategy and objectives, with a particular emphasis on Free Cash Flow performance and the implementation of the Better Business program.

Short term incentives (STI) (continued)

Short term incentives (STI) (continued)

Long term incentives (LTI)

The purpose of the LTI is to reward Executives for the delivery of the long term financial objectives of the Group over a three year time horizon. The plan has been structured based on the nature of the Group’s capital structure with its small free float and limited stock liquidity and is directly linked to long term Group financial performance and shareholder interests.

The CEO Velocity Frequent Flyer participates in a separate LTI governed by the Velocity Frequent Flyer Board. No LTI was granted to the CEO Velocity Frequent Flyer in the 2017 financial year.

Long term incentives (LTI) (continued)

Cash-settled performance plans granted in prior financial years

Details of previously granted cash-settled LTI are provided in the table below. The structure of the plans are consistent with details provided in the section above with the exception of the performance hurdles for the LTI 3 grant.

For the LTI 3 grant to the CEO, the Board included strategic and operational measures aligned to the Group strategy and objectives. These included corporate / government revenue targets, Tigerair Australia financial performance, Velocity Frequent Flyer growth and safety performance.

Performance Period

(1) Excludes CEO Velocity Frequent Flyer

(2) Grant date for CEO Tigerair Australia was 25 November 2015

LTI option plans granted in prior financial years

The remaining option plan for the CEO was tested on 30 June 2016 and achieved partial vesting in accordance with the Senior Executive Option Plan (SEOP 20) rules. 60% of the resulting shares were transferred to the CEO at the end of the 2016 financial year with the final 40% transferred to the CEO in August 2017.

Performance Period

Velocity Frequent Flyer Long Term Incentive granted in prior financial years

The CEO Velocity Frequent Flyer participates in the Velocity Frequent Flyer LTI plan granted in the 2016 financial year. The Velocity Frequent Flyer LTI is a profit participation plan which requires participants to acquire a number of Co-Investment Participation Notes (CPNs) at face value. Participants are then issued additional rights referred to as Profit Participation Notes (PPNs).

Under the plan, participants benefit in upside business performance in the event Velocity Frequent Flyer investors (the Virgin Australia Group and Affinity Equity Partners) exit from their investment in Velocity Frequent Flyer. Participants will only be eligible to receive such a benefit from PPNs held if previously defined performance hurdles are met upon a pre-defined exit event. The benefit payable will depend on the number of PPNs issued to the participant and the value of the PPNs which is linked to pre-agreed hurdle rates in the disposal value earned by investors. In the event that a benefit becomes payable, the participant may be issued further rights in Velocity Frequent Flyer Holdco Pty Ltd or the Velocity Frequent Flyer Board may exercise its discretion to pay this entitlement in cash. This plan is subject to continued employment and good leaver provisions.

The LTI value at target for the CEO Velocity Frequent Flyer is indeterminate due to the nature of PPNs with no predefined exit or vesting date.

Service agreements

Each Executive has a formal contract, or “service agreement” that is of a continuing nature (subject to termination conditions). The notice periods in the service agreements for the CEO and Executives are summarised below. Under the service agreements, in the event of termination, the Group may provide payments in lieu of notice or for non-compete arrangements, and may exercise its discretion to award incentive payments.

(1) The Group may terminate without notice in the event of any act which detrimentally affects the Group (such as dishonesty, fraud or serious or wilful misconduct in the discharge of his / her duties or unremedied, persistent, wilful or material breaches of the terms of his / her service agreement).

(2) The CEO may terminate employment by giving the Group 30 days’ notice in writing on occurrence of a fundamental change (if the CEO ceases to be the most senior executive of the Group, there is substantial diminution in his role and responsibilities or the Company ceases to be listed on a recognised stock exchange), and receives payment equal to 12 months’ fixed remuneration. No such arrangements exist for other Executives.

2017 financial year outcomes

Performance against short term incentive measures and outcomes

Following the completion of the capital structure review in 2016, the Board elected to align the 2017 financial year STI with the key outcomes of the capital structure review to enhance the Free Cash Flow and capital position of the Group. This resulted in the Board increasing the weighting in the 2017 Group Scorecard towards improving the Group’s free cash position and the inclusion of the implementation of the Better Business program to generate significant and sustainable cash flow savings. The Board also designated the Group’s Free Cash Flow target as a performance gateway, meaning that the CEO and Executives were not eligible to receive an STI payment unless the Free Cash Flow target was achieved.

The following table reflects the Group Scorecard outcomes for the 2017 financial year.

Group Scorecard Measure Scorecard Weighting 2017 Scorecard Outcome

The Group delivered a significant improvement in Free Cash Flow in the 2017 financial year, recording a positive result of $34.3m, which was $126.4m higher than the 2016 financial year and the first positive Free Cash Flow result since the 2012 financial year.

The first year of the Better Business program was also successfully implemented ahead of schedule.

As the Group has achieved the Free Cash Flow performance gateway set by the Board post the capital structure review, the Board has elected to award STI to the CEO and Executives in line with the outcomes of the Group Scorecard.

The Group has completed the first year of the Better Business program and has developed positive momentum on Free Cash Flow. The STI for the 2018 financial year has an increased weighting on profit and includes a performance gateway based on profit for any payments against Group financial measures.

The CEO Velocity Frequent Flyer Scorecard did not meet the performance gateway for the 2017 financial year and as a result the CEO Velocity Frequent Flyer was not eligible to receive an STI for the 2017 financial year.

Directors’ report (continued)

Remuneration report - audited (continued)

Executive remuneration overview (continued)

Directors’ report (continued)

Remuneration report - audited (continued)

Executive remuneration overview (continued)

Remuneration report - audited (continued)

Executive remuneration overview (continued)

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2017 financial year outcomes (continued) Long term incentive outcomes

The following table reflects the outcomes for LTI grants tested for the 2017 financial year.

The corporate performance measures under the LTI 3 grant to the CEO were tested on 30 June 2017. The Board determined that 100% of the corporate performance measures had been achieved. This included the achievement of:

· Corporate / government revenue targets;

· Tigerair Australia financial performance;

· Velocity Frequent Flyer membership growth; and

· Safety performance measured based on lost-time injury frequency rates.

Overview of company performance

The table below provides summary information on the Group’s financial performance and the effect on shareholder wealth for the five years to 30 June 2017.

Actual remuneration outcome for the CEO and Executives in the 2017 financial year

The actual remuneration received by the CEO and Executives that were with the Group for the full 2017 financial year are set out below. It includes the value of fixed remuneration paid and any incentives that have vested at 30 June 2017. This differs from the remuneration details prepared in accordance with statutory obligations and accounting standards.

Total Actual

(1) Reflects the value of the 2017 STI that vested 30 June 2017 and is not subject to deferral.

(2) Reflects the value of 2016 deferred cash STI that vested 30 June 2017.

(3) Includes the value of cash LTI granted in the 2015 financial year and tested 30 June 2017. Additionally for the CEO the value of the second tranche of SEOP 20 (equal to $0.16 per option at vesting) that vested 30 June 2017 based on achievement against performance hurdles tested in the prior year.

Non-Executive Director remuneration

Virgin Australia Holdings Limited

The Board reviewed Director fees during the year. Director fees were last increased in March 2010 and independent benchmarking showed that fees were well below comparable external benchmarks for similarly sized ASX listed companies. The Board determined after careful consideration to increase fees payable to independent Non-Executive Directors and to cease the payment of fees to shareholder nominated Directors from 1 December 2016.

Independent Non-Executive Directors receive a base fee and where an Independent Non-Executive Director participates in a Board Committee, an additional fee is payable in recognition of the increased workload and additional responsibilities. Each Committee Chairman receives a premium over Committee Member fees reflecting the relative role responsibilities and expected time commitment. The Chairman of the Board is not eligible to receive additional fees for Committee participation.

For the purposes of ASX Listing Rule 10.17 and rule 47 of the Virgin Australia Holdings Constitution, a maximum aggregate amount of $1.2 million per annum may be paid or provided to Non-Executive Directors by way of:

(a) Directors’ fees (within the meaning contemplated by ASX Listing Rule 10.17); and

(b) Remuneration (within the meaning contemplated by rule 47 of the Virgin Australia Holdings Constitution) for their services as Directors of the Company.

The $1.2 million limit was approved by shareholders at the Company’s Annual General Meeting in November 2011. The total amounts of such fees and remuneration for the 2017 financial year were below the $1.2 million limit.

The annual fees paid to independent Non-Executive Directors for Board and Committee membership are set out in the table below and are inclusive of superannuation.

Non-Executive Directors do not receive incentive payments and are not eligible to participate in any Executive or employee share acquisition plans established by the Group. Non-Executive Directors are not entitled to any termination benefits. Virgin Australia International Holdings Pty Ltd

Members of the Board of Directors of Virgin Australia International Holdings Pty Ltd (VAIH), which under Accounting Standards is a controlled entity of the Company, receive an annual fee of $75,000. The Chairman of VAIH receives an annual fee of $140,000.

Mr Borghetti, in his capacity as a director of the VAIH Board, has elected to receive 50 per cent of the annual director fee, $37,500, which he has elected to donate to charity.

Travel entitlements

Independent Non-Executive Directors receive annual travel entitlements. Under the current Board-approved travel policy (which took effect on 1 December 2016), each Independent Non-Executive Director is entitled to 2 return international trips and 4 return domestic trips (flying business class) per financial year. Flights are not cumulative and lapse if they are not used during the financial year in which the entitlement exists. The accounting value of the travel benefit is captured in the remuneration table as a non-monetary benefit for travel during the relevant financial year.

Statutory tables

Non-Executive Directors

Details of the remuneration of Non-Executive Directors for the financial years ended 30 June 2017 and 30 June 2016 are set out in this section.

Cash salary and Non-monetary Superannuation Total

(1) Non-monetary benefits relate to travel entitlements as detailed on page 33.

(2) Directors not included in the table above are all shareholder nominated Directors and did not receive fees in the 2016 or 2017 financial years.

(3) Ms Bryan’s compensation includes Director fees of $68,493 (2016: $68,493) and superannuation of $6,507 (2016: $6,507) relating to her services provided to VAIH in her capacity as director.

(4) Mr Baxby’s compensation includes Director fees of $63,829 (2016: Nil) and superannuation of $6,064 (2016: Nil) relating to his services provided to Velocity Frequent Flyer in his capacity as Director which commenced 17 August 2016. Since the end of the financial year Mr Baxby has ceased as Director of Velocity Frequent Flyer effective 18 July 2017.

Statutory tables (continued) Key management personnel

Details of the remuneration of KMP for the financial years ended 30 June 2017 and 30 June 2016 in line with statutory requirements are set out in this section.

Short term benefits

Long term

benefits

Superannuation benefits

Termination benefits

(4)

Share based

payments

Percentage performance

related

Cash salary and

fees

Cash settled STI

Deferred cash

settled STI

Other short term

benefits

Non-monetary

benefits

(1)

Cash settled LTI

(2)

Other long term

benefits

(3)

Equity settled STI

Equity settled LTI

Total

(1) Non-monetary benefits include travel entitlements and expatriate benefits such as relocation.

(2) The table above has been restated since the 2016 financial year disclosures to include the expense value of cash based long term incentives which had previously been disclosed in the equity and deferred cash tables.

(3) Other long term benefits include movements in annual leave where the accrual was greater than 20 days. Long term benefits for Mr Schuster includes the accrued value (recognised over a two year period from his commencement) for a one-off commencement bonus of $200,000 which was paid following his commencement as CEO Velocity Frequent Flyer and may be clawed back should the CEO Velocity Frequent Flyer be deemed a bad leaver or resign his position within two years of commencement.

(4) The relevant accounting standard requires that certain payments be treated as termination benefits, although not so regarded for the purposes of Division 2 Part 2D.2 of the Corporations Act. The Group confirms that benefits provided are compliant with the Corporations Act.

(5) Cash salary and fees for Mr Borghetti include Director fees of $37,500 (2016: $37,500) relating to services provided in his capacity as director of VAIH, which he has elected to donate to charity. Short term benefits for Mr Borghetti in the current and prior financial year include cash payments made to compensate for the impact that the Entitlement Offer launched on 6 July 2016 had on SEOP 20 as an unvested employee option plan. 60% of the total payment ($49,834) was paid in July 2016 with the remaining 40% ($33,223) paid in July 2017 in line with the vesting schedule of SEOP 20.

Equity and deferred cash tables

Equity instruments held by Executives

Options and performance rights over equity instruments of Virgin Australia Holdings Limited

The movement during the reporting period in the number of options and performance rights over ordinary shares in Virgin Australia Holdings Limited held directly, indirectly or beneficially, by each KMP, including their related parties, is as follows.

Other KMP(3)

(1) These options and performance rights are exercised at nil amounts per option and performance right. There are no amounts unpaid on the shares issued as a result of the exercise of the options in the 2017 financial year.

(2) Other changes represent options and performance rights that lapsed or were forfeited during the year.

(3) No other Executive held options or performance rights over ordinary shares in the Company in the current or prior period.

Equity and deferred cash tables (continued)

LTI – Cash-settled performance plan compensation granted during the 2017 financial year and previous plans

Grants under the cash-settled performance plan made during the 2017 financial year and previous grants yet to vest are detailed below.

During the reporting period, $2,557,281 (2016: $153,000) awards were paid as compensation. Details of awards provided as LTI compensation, vested and lapsed during the period in which each individual was considered to be KMP, are detailed in the table below. Nil awards lapsed and $655,000 were forfeited during the financial year. The minimum payment under each of the LTI plans is nil.

2017

Value of cash-settled LTI

Date granted

Performance plan

Balance at

beginning of year

Allocated in year

Vested in year

Forfeited in year

Balance at end

of year

Forfeited in year

$’000

$’000

$’000

$’000

$’000

%

Financial year in which

grant vests

Remaining value to

be allocated in future

financial years

Maximum potential

future allocation

available for

outperformance

$’000

$’000

Equity and deferred cash tables (continued)

Options and rights granted as compensation

All options and rights refer to options or rights over ordinary shares in Virgin Australia Holdings Limited, which are exercisable on a one for one basis and are provided at no cost to the recipient. Details of options granted as LTI and rights granted as STI, exercised and lapsed, including vesting profiles, during the period in which each individual was considered to be KMP, are detailed in the table below.

The Velocity Frequent Flyer LTI relates to a right to receive a variable number of Co-Investment Participation Notes (CPNs) in Velocity Frequent Flyer Holdco Pty Ltd. The CPNs convert into ordinary shares in Velocity Frequent Flyer Holdco Pty Ltd on a pre-defined Exit event. 5,000 CPN rights and 40,000 Profit Participation Notes (PPN) rights were granted to CEO Velocity Frequent Flyer on 14 December 2015 and no rights have vested or lapsed during the year. The fair value per right net of face value paid at the time of grant is $0.57 for CPNs and $36.03 for PPNs with $nil exercise price.

No options or rights have been granted since the end of the financial year.

Number of unvested options /

rights

2017

Date granted

Option plan / right plan

Balance at beginning

of year

Granted in year

Vested in year

Lapsed in year

Balance at end of year

Exercised in year

Vested and

exercisable

Fair value per option

/ right at grant date

(1)

Exercise price per

option / right

Vested in year

Lapsed in year

(2)

Value of options /

rights granted in year

Financial years in which

grant vests

Expiry date

’000

’000

’000

’000

’000

‘000

’000

$

$

%

%

$’000

(1) The fair value of options at grant date under SEOP 20 is independently calculated using a Monte Carlo simulation, the valuation is undertaken in a risk-neutral framework and takes into consideration share price volatility, dividend yield, the risk free rate, the withdrawal rate and the probability that performance hurdles are met along with constants such as the strike price, option term and vesting periods. The fair value of rights under KEPP 13 at grant date is independently calculated using a discounted cash flow technique taking into consideration the share price and dividends forgone over the vesting period.

(2) The percentage forfeited and lapsed during the year represents the reduction from the maximum number of options / rights available for vesting due to performance or service conditions not being achieved.

(3) Of the options which vest, 60% vested on 30 June 2016 (share price of $0.24 on exercise) and 40% vested on 30 June 2017. Options that have vested are exercisable no later than 12 months after vesting, after which time they will lapse.

(4) No other Executive was awarded options or rights over ordinary shares in the Company in the current or prior period.

(5) Of the performance rights which vest, 58% vested on 1 July 2014, 28% vested on 1 July 2015 and 14% vested on 1 July 2016. All performance rights granted under KEPP 13 have vested and were converted into shares immediately on vesting.

Additional information

Movements in shares

The movement during the reporting period in the number of ordinary shares in Virgin Australia Holdings Limited held directly, indirectly or beneficially, by each KMP including their related parties, is as follows:

Received on exercise of

Balance at Commenced performance Ceased Balance at

1 July 2016 as KMP rights / options Purchases Sales as KMP 30 June 2017

(1) No other Directors or Executive held shares in the Company in the current or prior period.

Insurance of officers

During the financial year, the Group paid premiums in respect of Directors’ and officers’ liability insurance contracts which cover former Directors and officers, including Executive officers of the entity and Directors, Executive officers and secretaries of its controlled entities. The Directors have not included the amount of the premium paid in respect of the Directors’ and officers’ liability insurance contracts as such disclosure is prohibited under the terms of the insurance contract.

Loans to KMP and their related parties

For the 2017 financial year, there were no loans made, guaranteed, secured or outstanding in relation to KMP or their related parties (2016: nil).

Other transactions with KMP

A number of KMP hold positions in other subsidiaries of the parent entity that result in them having control or significant influence over the financial and operating policies of those entities. A number of these entities transacted with the Group in the reporting period. The terms and conditions of those transactions were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-KMP related entities on an arm’s-length basis. Refer to note G4 to the consolidated financial statements.

Directors’ report (continued)

Remuneration report - audited (continued)

Directors’ report (continued)

Remuneration report - audited (continued)

Remuneration report - audited (continued)

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Share options

Unissued shares under option

As at the date of this report, there are no unissued shares of the Company under option.

Shares issued as a result of the exercise of options

During the financial year ended 30 June 2017, the Company issued 447,427 ordinary shares as a result of the exercise of options, for which no exercise or issue price was payable. The amount paid and unpaid on each of those issued shares is nil.

Environmental regulation

The Group’s operations are subject to carbon emissions reporting, noise restrictions and other similar environmental regulations. The directors believe that the Group has adequate systems in place to appropriately manage the Group’s environmental impacts and reporting requirements.

Indemnification and insurance of officers and auditors

The Company has agreed to indemnify the directors and officers of the Company against all liabilities to another person (other than the Company or a related body corporate) that may arise from their position as a director or an officer of the Company and its controlled entities, except where the liability arises out of conduct involving a lack of good faith.

The Company has directors’ and officers’ liability insurance contracts in place, for all current and former officers of the Company (including directors and the company secretary). The directors have not included the details of the nature of the liabilities covered or the amount of the premium paid in respect of the directors’ and officers’ liability insurance contracts, as such disclosure is prohibited under the terms of the insurance contract.

Non-audit services

During the year ended 30 June 2017, KPMG, the Group’s auditor, performed certain other services in addition to its statutory duties as auditor.

The directors have considered the non-audit services provided during the year ended 30 June 2017 and are satisfied that the provision of those non-audit services is compatible with, and did not compromise, the general standard of independence for auditors imposed by the Corporations Act 2001 for the following reasons:

· all non-audit services were subject to the corporate governance procedures adopted by the Group and have been reviewed by the Audit and Risk Management Committee to ensure that they do not impact the impartiality and objectivity of the auditor; and

· none of the non-audit services provided undermined the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Group, acting as an advocate for the Group or jointly sharing risks and rewards.

Details of the amounts paid or payable to KPMG and its related practices for audit and non-audit services provided, during the year ended 30 June 2017, are set out in note G5 to the consolidated financial statements (located on page 100 of this document).

The lead auditor’s independence declaration, as required under section 307C of the Corporations Act 2001, is set out on page 42 and forms part of the directors’ report.

Rounding

The Group is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 dated 24 March 2016 and in accordance with that instrument, amounts in the consolidated financial statements and directors’ report have been rounded to the nearest one hundred thousand dollars, unless otherwise stated. This report is made in accordance with a resolution of the directors:

Elizabeth Bryan John Borghetti

Director Director

Sydney

This report is made on 20 September 2017

Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001

To: The directors of Virgin Australia Holdings Limited

I declare that, to the best of my knowledge and belief, in relation to the audit of Virgin Australia Holdings Limited for the financial year ended 30 June 2017 there have been:

(i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and (ii) no contraventions of any applicable code of professional conduct in relation to the audit.

KPMG

John Wigglesworth

Partner

Sydney, 20 September 2017

KPMG, an Australian partnership and a member firm of the KPMG network of independent member

firms affiliated with KPMG International Cooperative Liability limited by a scheme approved (“KPMG International”), a Swiss entity. under Professional Standards Legislation.

Directors’ report (continued)

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Financial Report

For the year ended 30 June 2017

This financial report covers the Virgin Australia Holdings Limited Group, consisting of Virgin Australia Holdings Limited ACN 100 686 226 and its controlled entities. The financial report is presented in Australian dollars.

Consolidated financial statements

For the year ended 30 June 2017

Contents

Consolidated statement of profit or loss 46

Consolidated statement of profit or loss and other comprehensive income 47

Consolidated statement of financial position 48

Consolidated statement of changes in equity 49

Consolidated statement of cash flows 51

Notes to the consolidated financial statements

A. Basis of preparation 52

B. Results 55

B1. Operating segments 55

B2. Earnings per share 58

B3. Revenue 59

B4. Expenses 60

B5. Taxation 61

B6. Reconciliation of net loss to net cash from operating activities 63

C. Working capital and other assets and liabilities 64

C1. Receivables 64

C2. Inventories 64

C3. Other financial assets 65

C4. Other assets 65

C5. Payables 66

C6. Provisions 66

C7. Unearned revenue 68

D. Tangible and intangible assets 68

D1. Assets classified as held for sale 68

D2. Property, plant and equipment 69

D3. Intangible assets 71

D4. Impairment testing 72

E. Capital structure and financial risks 74

E1. Capital management 74

E2. Cash and cash equivalents 74

E3. Interest-bearing liabilities 75

E4. Share capital 76

E5. Dividends 77

E6. Reserves 77

E7. Financial risk management 78

E8. Fair value measurements 84

E9. Offsetting financial assets and liabilities 85

Consolidated financial statements (continued)

For the year ended 30 June 2017

Contents (continued)

F. Group structure 86

F1. Business combinations 86

F2. Investments accounted for using the equity method 86

F3. Controlled entities 87

F4. Investments in unconsolidated structured entities 89

F5. Non-controlling interests 89

F6. Deed of Cross Guarantee 90

F7. Parent entity disclosures 92

G. Other items 92

G1. Commitments 92

G2. Contingent liabilities 94

G3. Share-based payments 94

G4. Related parties 98

G5. Auditor’s remuneration 100

G6. Events subsequent to reporting date 100

Directors’ declaration 101

Independent auditor’s report 102

Consolidated statement of profit or loss

For the year ended 30 June 2017

2017 2016

Note $m $m

The consolidated statement of profit or loss should be read in conjunction with the accompanying notes.

Consolidated statement of profit or loss and other comprehensive income

For the year ended 30 June 2017

2017 2016

Note $m $m

The consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes.

Consolidated statement of financial position

As at 30 June 2017

2017 2016

Note $m $m

The consolidated statement of financial position should be read in conjunction with the accompanying notes.

Consolidated statement of changes in equity

For the year ended 30 June 2017

Consolidated statement of changes in equity

continued

(

)

For the year ended 30 June 2017

Consolidated statement of cash flows

For the year ended 30 June 2017

2017 2016

Note $m $m

The consolidated statement of cash flows should be read in conjunction with the accompanying notes.

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A. Basis of preparation

This section sets out the basis upon which the consolidated financial statements have been prepared as a whole.

The consolidated financial statements were authorised for issue by the Board of Directors (Board) on 20 September 2017.

(a) Reporting entity

Virgin Australia Holdings Limited (VAH) (the Company) is a for-profit company incorporated and domiciled in Australia. It is primarily involved in the airline industry, both domestic and international. The consolidated financial statements of the Company as at and for the year ended 30 June 2017 comprise the Company and its subsidiaries (the Group), and the Group’s interests in associates.

(b) Basis of accounting and statement of compliance

The consolidated financial statements are general purpose financial statements which have been prepared in accordance with Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial statements comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.

The consolidated financial statements are presented in Australian dollars, which is the functional currency of the Company. The consolidated financial statements have been prepared on the basis of historical costs, except where assets and liabilities are stated at fair value in accordance with relevant accounting policies.

The Group is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 dated 24 March 2016 and in accordance with that instrument, amounts in the consolidated financial statements have been rounded to the nearest one hundred thousand dollars, unless otherwise stated.

(c) Net current liability position

The Group’s current liabilities exceeded its current assets as at 30 June 2017 by $560.8 million (2016: $1,066.1 million) including a current liability for unearned revenue of $1,074.2 million (2016: $990.4 million). Unearned revenue includes revenue received in advance which has been deferred in the statement of financial position until carriage is performed. The consolidated financial statements have been prepared on a going concern basis, based on the Group’s cash flows for the current year and estimated profits and cash flows for future years. The Group has a cash and cash equivalents balance at 30 June 2017 of $1,396.1 million (2016: $1,123.8 million) and has an unrestricted cash balance at 30 June 2017 of $985.8 million (2016: $728.9 million). Capital management is detailed in note E1. Management of liquidity risk is detailed in note E7.

(d) Accounting policies

Accounting policies have been applied consistently by all of the Group’s entities and to all periods presented in the consolidated financial statements. The following accounting policies apply to the consolidated financial statements as a whole. Specific significant accounting policies are described in the note to which they relate.

Foreign currency transactions and balances

Foreign currency transactions are initially recorded in the functional currency at the spot rate at the date the transaction first qualifies for recognition. Subsequently, foreign currency monetary balances are translated to the functional currency at the spot rates of exchange on the reporting date and the resultant exchange differences are recognised in profit or loss. Non-monetary balances that are measured in terms of historical cost are not re-translated. Non-monetary balances that are measured at fair value are translated at the date the fair value was determined with the gain or loss treated in line with the gain or loss recognised on changes to the fair value of the item.

Foreign operations

The Group has a number of foreign operations which operate in an economic environment in which the predominant currency is not Australian dollars and which apply a functional currency other than Australian dollars. The assets and liabilities of these operations are translated from their functional currency to Australian dollars at the exchange rates at the reporting dates. The income and expenses are translated to Australian dollars at the exchange rate at the date of the transaction or the average exchange rate for the month if that is a reasonable approximation of the exchange rates on the transaction dates for that month. All resulting exchange differences are recognised in other comprehensive income and accumulated in the foreign currency translation reserve. When an operation is disposed of, the cumulative amount in the foreign currency translation reserve relating to that operation is reclassified to profit or loss as part of the gain or loss on disposal. Exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur are reclassified to other comprehensive income in the consolidated financial statements. These exchange differences are reclassified to profit or loss on disposal of the foreign operation.

A. Basis of preparation (continued)

(e) Impact of new standards issued but not yet effective

The following accounting standards have been issued but are not yet effective and may impact the Group in the period of initial application. They are available for early adoption in the current reporting period but have not yet been applied in preparing the consolidated financial statements.

AASB 15 Revenue from Contracts with Customers (AASB 15)

AASB 15 replaces existing revenue recognition guidance, including AASB 118 Revenue, AASB 111 Construction Contracts and Interpretation 13 Customer Loyalty Programmes. It requires an entity to recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

AASB 15 is effective for annual reporting periods beginning on or after 1 January 2018 with a number of transition options available. The Group will apply AASB 15 in the financial year beginning on 1 July 2018 and is in the process of assessing which transition option will be applied. The Group has an implementation plan in place and is in the process of finalising its assessment of the quantitative impact of the standard.

The key impacts of the standard are discussed below. Airline passenger revenue

Under the Group's application of the current accounting standards, the calculation of unearned passenger revenue in relation to ticket sales requires the use of estimates and judgements, including an assessment of historical passenger non-attendance rates to determine the probability that the passenger's contractual rights will not be exercised.

AASB 15 requires that revenue is recognised only when it is highly probable that it will not result in a significant reversal in the future and that revenue is recognised in proportion to the pattern of rights exercised by the passenger or when the likelihood of the passenger exercising their remaining rights becomes remote. This will result in no revenue being recognised prior to carriage being performed. The application of the standard is expected to result in a deferral of the recognition of revenue in profit or loss. The Group does not expect this to have a material impact.

Other ancillary revenue

Other ancillary revenue comprises revenue earned from the provision of airline related services including booking change fees, baggage charges and other additional services provided to passengers. Under the current accounting standards, ancillary revenues are recognised at the time the service is provided or when carriage is performed.

AASB 15 requires ancillary revenues that are not separate performance obligations to be recognised when carriage is performed. A separate performance obligation arises if the passenger could benefit from the additional service in the absence of the flight. The Group has concluded that some of its ancillary revenues would not be separate performance obligations and consequently, the application of the standard will result in a deferral of the recognition of certain items of revenue in profit or loss. AASB 15 also enables the deferral of incremental costs in relation to these ancillary revenues until the recognition of the associated revenue. The Group does not expect this to have a material impact. Loyalty program revenue - group qualifying services

Members of the Velocity Frequent Flyer program accumulate loyalty points by travelling on qualifying Group airline services. The obligation to provide awards to members is accounted for by deferring a portion of the flight ticket sales revenue. The amount deferred is the fair value, which is the amount for which the points could be sold separately. The residual amount is then allocated to the ticket and ancillary revenue.

AASB 15 does not allow the residual value approach and instead requires the stand-alone selling price of each performance obligation to be calculated separately and apportioned over the total ticket price. This will alter the allocation of ticket revenue between airline passenger revenue, other ancillary revenue and loyalty program revenue. The Group is currently assessing the impact of this change. Loyalty program revenue - third party participation

The Group receives participation fee revenue from third parties for the rights to have loyalty points allocated to members of the Velocity Frequent Flyer program. The fair value of the points is currently deferred as unearned revenue to recognise the Group's obligation to provide awards to members. The residual revenue represents marketing services provided by the Group and is recognised immediately in profit or loss.

AASB 15 requires that the participation fee revenue be allocated to the respective performance obligations proportionately based on the standalone selling prices of each component. This is likely to require estimates to be made of the stand-alone selling prices of each component of third party participation revenue to enable the correct apportionment of revenue to each performance obligation. This is expected to result in differences in the amount recognised immediately in profit or loss and the amount deferred to unearned revenue. The Group is currently assessing the impact of this change.

A. Basis of preparation (continued)

(e) Impact of new standards issued but not yet effective (continued)

AASB 16 Leases (AASB 16)

AASB 16 replaces AASB 117 Leases and Interpretation 4 Determining whether an Arrangement contains a Lease. Under current accounting standards, leases under which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases, with an asset and liability recognised in the consolidated statement of financial position. All other leases are classified as operating leases, with the costs of the lease recognised over the term of the lease in profit or loss. Refer to note G1 for the Group's accounting policy in relation to leases. By contrast, AASB 16 requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, excluding low value assets. A right-of-use (ROU) asset is recognised, representing the lessee's right to use the underlying asset, and is depreciated in accordance with AASB 116 Property, Plant and Equipment. A lease liability is also recognised, representing the lessee's obligation to make lease payments. Repayments in relation to the lease liability are allocated between the principal portion, which reduces the lease liability, and an interest portion which is recognised in the consolidated statement of profit or loss.

AASB 16 will have significant implications for the measurement of key financial metrics, debt covenants, systems, processes and controls. There will also be additional disclosure requirements. The Group has an implementation plan in place with the project scheduled for completion in the 2018 financial year.

Refer to note G1 for a summary of the Group's operating lease commitments. The present value of the payments in relation to the operating leases underlying these commitments would give rise to ROU assets and lease liabilities being recognised under AASB 16.

AASB 16 is effective for annual reporting periods beginning on or after 1 January 2019 with a number of transition options available. Early application is only permitted if AASB 15 has been applied or is applied at the same time. The Group is in the process of finalising its assessment of the quantitative impact of the standard. The Group has not reached a conclusion on whether the standard will be adopted early, nor has it concluded on the transition method to be applied.

AASB 9 Financial Instruments (AASB 9 (2014))

The Group adopted AASB 9 Financial Instruments (2013, 2010 and 2009) from 1 July 2014.

AASB 9 (2014) amends AASB 9 (2013) to include a new expected credit loss model for calculating impairment on financial assets. AASB 9 (2014) is effective for annual reporting periods beginning on or after 1 January 2018 with early adoption permitted. The Group will apply AASB 9 (2014) in the financial year beginning on 1 July 2018. The standard is not expected to have a material impact on the Group.

A. Basis of preparation (continued)

(f) Critical accounting estimates and judgements

The preparation of the consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates are reviewed on an ongoing basis and any revisions to estimates are recognised prospectively.

Key judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are described in the following notes:

B3 - Revenue – loyalty program revenue, non-attendance rates and credit vouchers

B5 - Taxation – deferred tax amounts

C3 - Other financial assets – impairment of maintenance reserve deposits

C4 - Other assets – sale and leaseback transactions

C6 - Provisions – maintenance provisions and onerous contracts

C7 - Unearned revenue – unearned passenger and loyalty program revenue

D1 - Assets classified as held for sale – fair value of assets classified as held for sale

D2 - Property, plant and equipment – residual values and estimated useful lives

D3 - Intangible assets – residual values and estimated useful lives

D4 - Impairment testing – determination of cash-generating unit and estimation of recoverable amount

E7 - Financial risk management – impairment of financial assets

E8 - Fair value measurements – estimation of fair value

F3 - Controlled entities – basis of control

F4 - Investments in unconsolidated structured entities – basis of control

B. Results

This section sets out the results and performance of the Group.

B1. Operating segments

Management and the Board use the segment results to assess the financial performance of the individual segments within the Group.

The following summary describes the operations in each of the Group’s reportable segments which are determined based on the key business activities of the Group:

· Virgin Australia Domestic: operations using a mix of Boeing B737 aircraft, Airbus A320 and A330 aircraft, ATR aircraft, Embraer E190 aircraft, and Fokker F100 aircraft. This comprises Australian domestic flying, including regional network and cargo operations.

· Virgin Australia International: operations using a mix of Airbus A330, Boeing B777 and B737 aircraft. This comprises Trans-Pacific, Abu Dhabi, Trans-Tasman, Pacific Island and South East Asia flying, including international cargo operations.

· Velocity: operations of the Group’s loyalty program.

· Tigerair Australia: operations using a narrow body fleet of Airbus A320 and Boeing B737 aircraft. This comprises Australian domestic flying targeting the budget leisure market, international flying and cargo operations.

Information regarding the results of each operating segment is detailed in the tables which follow. Performance is measured based on Segment EBIT (earnings before impairment losses on assets classified as held for sale; impairment losses on other assets; onerous contract expenses; business and capital restructure and transaction costs; share of net profit of equity-accounted investee; time value movement on cash flow hedges; unrealised ineffectiveness on cash flow hedges and non-designated derivatives; net finance costs and income tax benefit) as included in the internal management reports that are reviewed by the chief operating decision maker, being the Board.

Segment EBITDAR is defined as Segment EBIT excluding costs associated with aircraft rentals and depreciation and amortisation.

Inter-segment pricing is determined on an arm’s length basis or a cost plus margin basis, depending on the nature of the revenue or expense and the financial impact on the segment of recognising the revenue or expense.

B1. Operating segments (continued)

(a) Reportable segments

Virgin Virgin Corporate

Australia Australia Tigerair and

Domestic International Velocity Australia Eliminations Consolidated

Impairment losses on assets classified as held for sale (7.8)

Impairment losses on other assets (65.9) Onerous contract expenses (29.6)

Business and capital restructure and transaction costs (141.9)

Share of net profit of equity-accounted investee 2.1

Time value movement on cash flow hedges(1)(2) (43.5)

Unrealised ineffectiveness on cash flow hedges and non-designated derivatives(1) 0.7

(121.8)

Net finance costs (167.8)

(1) The addition of these two items reconciles to time value movement and ineffectiveness on cash flow hedges included within operating expenditure as disclosed in the consolidated statement of profit or loss.

(2) Time value represents the risk premium payable on a purchased option over and above its current exercise value (intrinsic value) based on the probability it will increase in value before expiry.

B1. Operating segments (continued)

(a) Reportable segments (continued)

Virgin Virgin Corporate

Australia Australia Tigerair and

Domestic International Velocity Australia Eliminations Consolidated

(1) The addition of these two items reconciles to time value movement and ineffectiveness on cash flow hedges included within operating expenditure as disclosed in the consolidated statement of profit or loss.

(2) Time value represents the risk premium payable on a purchased option over and above its current exercise value (intrinsic value) based on the probability it will increase in value before expiry.

B1. Operating segments (continued)

(b) Geographical segments

Ticket sales revenue from domestic services within Australia is attributed to the Australia geographic region. Passenger and other services revenue from inbound and outbound services between Australia and overseas is allocated proportionately to the area in which point of sale occurs. Certain other revenue amounts are not allocated to a geographical region as it is impractical to do so.

For the financial years ended 30 June 2017 and 30 June 2016, the principal assets of the Group comprised the aircraft fleet. These assets are used flexibly across the Group’s worldwide route network. Accordingly, there is no suitable basis for allocating such assets and the related liabilities between geographic areas.

B2. Earnings per share

Basic earnings per share (EPS) is calculated by dividing the profit or loss attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the period.

Diluted EPS adjusts the basic EPS for the effects of any instruments that could potentially be converted into ordinary shares. Potential ordinary shares shall be treated as dilutive when, and only when, their conversion to ordinary shares would decrease earnings per share or increase loss per share from continuing operations. The average market value of the Company’s shares for the purpose of calculating the dilutive effect of share options and performance rights is based on quoted market prices for the period that the options and performance rights were outstanding. At 30 June 2017, 0.6 million options and performance rights (2016: 2.4 million) were excluded from the diluted weighted average number of ordinary shares calculation due to their anti-dilutive effect.

B3. Revenue

Revenue is recognised to the extent it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable.

(a) Airline passenger revenue Airline passenger revenue

Airline passenger revenue comprises revenue from passenger ticket sales. Revenue is recognised in profit or loss when carriage is performed. Airline passenger revenue received in advance is carried forward in the consolidated statement of financial position as unearned revenue based on expected future carriage.

The calculation of unearned passenger revenue requires the use of estimates and judgements including an assessment of historical trends of passenger non-attendance rates which are reviewed at each reporting date. The reassessment of historical trends of non-attendance rates on unearned passenger revenue obligations resulted in no changes to revenue in the current year (2016: nil).

In addition, the Group is a party to various alliance arrangements. Revenue under these arrangements is recognised in profit or loss when the Group performs the carriage or otherwise fulfils all relevant contractual commitments.

Loyalty program revenue

The Group receives participation fee revenue from third parties for the rights to have loyalty points allocated to members of the Velocity Frequent Flyer program. Members of the Velocity Frequent Flyer program also accumulate loyalty points by travelling on qualifying Group airline services. The obligation to provide awards to members is accounted for by deferring the participation fee revenue and a portion of the flight ticket sales revenue. The amount deferred is the fair value, which is the amount for which the points could be sold separately (taking into account nonperformance risk) and includes an estimate based on historical breakage trends. The receipt of cash from third parties in excess of the fair value of the redemption is recognised immediately in profit or loss. For airline redemptions, revenue is recognised in profit or loss in accordance with the accounting policy for airline passenger revenue above. For non-airline redemptions relating to third parties, revenue is recognised in profit or loss as ancillary revenue when points are redeemed.

The calculation of unearned revenue in the consolidated statement of financial position requires the use of estimates and judgements based on assumptions regarding the fair value of reward points. The fair value of the reward points is reduced to reflect points that are expected to lapse under the rules of the Velocity Frequent Flyer program. Assumptions are based on historical trends experienced within the program. The reassessment of the unused points liability in regards to the Velocity Frequent Flyer program resulted in an increase in program revenue of $2.3 million in the current year (2016: increase of $17.2 million).

(b) Other ancillary revenue

Credit vouchers

Revenue from the redemption of credit vouchers is recognised in profit or loss as other ancillary revenue when carriage is complete, or when the credit voucher is no longer expected to be redeemed by the passenger based on an analysis of historical non-redemption rates, or upon expiry.

The calculation of credit vouchers that are no longer expected to be redeemed requires the use of estimates and judgements including an assessment of expected redemption rates based on historical issued and expired credit vouchers which are reviewed at each reporting date. The reassessment of expected redemption rates resulted in no changes to revenue in the current year (2016: nil).

Other

Other ancillary revenue comprises revenue earned from the provision of other airline related services (including charter revenue, freight revenue, on-board sales and other product revenue) and revenue from unutilised carriage. Other ancillary revenue is recognised in profit or loss at the time the service is provided or when carriage is performed.

B4. Expenses

This section sets out certain specific expenses included within the following profit or loss line items.

(a) Aircraft operating lease expenses and other expenses from ordinary activities

(1) Other operating lease rentals includes $31.8 million (2016: $22.8 million) of contingent rents.

Other expenses from ordinary activities includes costs for aircraft, crew, maintenance and insurance in relation to wet leases of $32.5 million (2016: $0.3 million).

(b) Labour and staff related expenses

The Group contributes to several defined contribution superannuation plans. A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Such contributions are charged to profit or loss in the periods during which services are rendered by employees. Prepaid contributions are recognised as an asset to the extent that a cash refund or reduction in future payments is available. The amount recognised as an expense for the year ended 30 June 2017 was $76.9 million (2016: $71.7 million).

(c) Net finance costs

Finance income is recognised in profit or loss as it accrues, using the effective interest rate method.

Finance costs comprise interest paid or payable on borrowings calculated using the effective interest rate method, amortisation of borrowing costs and unwinding of the discount on provisions and other liabilities.

Finance costs that relate to qualifying assets are capitalised to the cost of the assets. If funds are borrowed specifically for the acquisition, construction or production of a qualifying asset, the finance costs capitalised are those incurred in relation to that borrowing, net of any interest earned on those borrowings. If funds are borrowed generally, finance costs are capitalised using a weighted average capitalisation rate and amortised over the terms of the agreement. Finance costs were capitalised at a weighted average rate of 3.04% (2016: 3.07%).

(d) Impairment losses on other assets

Impairment losses of $65.9 million were recognised during the year on assets associated with the onerous contracts and on other obsolete assets. Refer to note C6 for further information on the onerous contract provision.

B5. Taxation

Income tax expense or benefit

Income tax expense or benefit comprises current and deferred tax. It is recognised in profit or loss except to the extent that it relates to a business combination or items recognised directly in equity or other comprehensive income. Current tax

Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to the tax payable or receivable in respect of previous years. It is measured using tax rates and tax laws enacted or substantively enacted at the reporting date.

Deferred tax

Deferred tax is recognised for all taxable temporary differences arising from the difference between the carrying amount of assets and liabilities and their corresponding tax base. It is measured using tax rates and tax laws that are expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted at the reporting date.

Deferred tax is not recognised for temporary differences:

· on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;

· relating to investments in subsidiaries and associates, and interests in joint arrangements, where the Group is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future; or

· arising on initial recognition of goodwill.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different taxable entities but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.

Deferred tax assets are recognised for deductible temporary differences and unused tax losses to the extent that it is probable that taxable profit will be available against which they can be utilised. Estimates and judgements are required to determine the amount of deferred tax assets that can be recognised at each reporting date, based upon the likely timing and level of future taxable profits.

At 30 June 2017, the Group had $2,346.3 million (2016: $2,067.7 million) of tax losses carried forward which have no expiry date. A deferred tax asset of $703.9 million (2016: $620.3 million) has been recognised in respect of these losses. The Group has concluded, based on convincing evidence, that it is probable that sufficient taxable profits will be available to utilise these tax losses, based on detailed financial estimates and sensitivity analyses approved by the Board. These estimates include consideration of macroeconomic factors, current industry trends, and long term industry analysis of the key Australian domestic, Asian and US markets. It includes the implementation of Board approved strategic initiatives including cost savings programs, expansion of shareholder alliances into key Asian markets and continued growth of the Velocity operating segment.

As at 30 June 2017, deferred tax assets have not been recognised in respect of $318.4 million (2016: $317.7 million) of net tax losses relating to Tigerair Australia because it is not considered probable that future taxable profit will be available against which these tax losses can be realised. These losses have no expiry date.

Tax consolidation

VAH and its Australian controlled entities are part of a tax consolidated group (TCG) under Australian tax law. Tigerair Australia is a separate TCG. Entities within each TCG have entered into tax funding and tax sharing arrangements with the head entity in each TCG. Under the terms of the agreements, the head entity and the other entities within each TCG have agreed to pay (or receive) an amount to (or from) the head entity, based on the current tax liability or current tax asset of the relevant entity.

Each entity in each TCG measures its current and deferred taxes as if it continues to be a separate taxable entity in its own right. In addition to its own current and deferred tax amounts, the head entity in each tax consolidated group recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the TCG to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised.

B5. Taxation (continued)

(a) Reconciliation of income tax benefit

(1) The Australian Taxation Office (ATO) issued a private ruling that altered when participation fees received for the Group’s loyalty program are recognised for tax purposes. The amended assessment results in an income tax benefit of $41.5 million relating to taxable income attributable to periods preceding the statutory limit on tax return amendments.

(b) Deferred tax

The composition of the Group’s net deferred tax asset recognised in the consolidated statement of financial position and the net deferred tax benefit/(expense) recognised in the consolidated statement of profit or loss and consolidated statement of profit or loss and other comprehensive income is as follows:

Consolidated statement

Consolidated statement of Consolidated statement of of profit or loss and other

financial position profit or loss comprehensive income