For personal use only - ASX · Bangkok Airways Continental Airlines Delta Air Lines Etihad Frontier Airlines Hahn Air ... aircraft flying between Australia and Abu Dhabi. This alliance,

V I R G I N B L U E H O L D I N G SA N N U A L R E P O R T 2 0 1 0

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AUSTRALIA

COOK ISLANDS

VANUATU

PAPUA NEW GUINEA

FĲI

TONGA

SAMOA

BALI

SOLOMON ISLANDS

NEW ZEALAND

U.S.A

SOUTH AFRICA

THAILAND

Albury

Mildura

Ballina/Byron Bay

Whitsunday Coast

Hamilton Island

Mackay

Fraser Coast/Hervey Bay

Sunshine Coast/Maroochydore

Gold Coast

Port Macquarie

Newcastle

Canberra

Sydney

Rockhampton

Brisbane

Albury

Mildura

Newman

Port Moresby

Johannesburg

Los Angeles

Launceston

Hobart

Adelaide

Perth

Ballina/Byron Bay

Townsville

Whitsunday Coast

Hamilton Island

Mackay



Gold Coast

Port Macquarie

Newcastle

Cairns

Canberra

Sydney

Rockhampton

Melbourne

Brisbane

Darwin

Broome

Karratha

Port Hedland

Christchurch

Dunedin

Wellington

Auckland

Nadi

Nuku'alofa

Port Vila

Apia

Denpasar

Honiara Rarotonga

Hamilton

Queenstown

Phuket

Christmas Island

Cocos Island

Ayers Rock

V AUsTRALiAinterline Alaska Airlines and Horizon Air Bangkok Airways Continental Airlines Delta Air Lines Etihad Frontier Airlines Hahn Air Malaysia Airlines South African Airways Thai Airways US Airways Virgin America Virgin AtlanticCode-share Delta Air Lines Etihad Virgin Blue/Pacific Blue

ViRgiN BLUEinterline Aerolineas Argentinas Aircalin Air Austral Air Mauritius Air Tahiti Nui Cathay Pacific/Dragonair China Southern Delta Air Lines Emirates Etihad Garuda Indonesia Hawaiian Airlines Malaysia Airlines Qatar Airways Royal Brunei South African Airways Thai Airways Vietnam Airlines Virgin Atlantic

Code-share

Airlines PNG Delta Air Lines Etihad Skywest V Australia Virgin Atlantic

AUSTRALIA

COOK ISLANDS

VANUATU

PAPUA NEW GUINEA

FĲI

TONGA

SAMOA

BALI

SOLOMON ISLANDS

NEW ZEALAND

U.S.A

SOUTH AFRICA

THAILAND

Albury

Mildura

Ballina/Byron Bay

Whitsunday Coast

Hamilton Island

Mackay



Gold Coast

Port Macquarie

Newcastle

Canberra

Sydney

Rockhampton

Brisbane

Albury

Mildura

Newman

Port Moresby

Johannesburg

Los Angeles

Launceston

Hobart

Adelaide

Perth

Ballina/Byron Bay

Townsville

Whitsunday Coast

Hamilton Island

Mackay



Gold Coast

Port Macquarie

Newcastle

Cairns

Canberra

Sydney

Rockhampton

Melbourne

Brisbane

Darwin

Broome

Karratha

Port Hedland

Christchurch

Dunedin

Wellington

Auckland

Nadi

Nuku'alofa

Port Vila

Apia

Denpasar

Honiara Rarotonga

Hamilton

Queenstown

Phuket

Christmas Island

Cocos Island

Ayers Rock

AUSTRALIA

COOK ISLANDS

VANUATU

PAPUA NEW GUINEA

FĲI

TONGA

SAMOA

BALI

SOLOMON ISLANDS

NEW ZEALAND

U.S.A

SOUTH AFRICA

THAILAND

Albury

Mildura

Ballina/Byron Bay

Whitsunday Coast

Hamilton Island

Mackay



Gold Coast

Port Macquarie

Newcastle

Canberra

Sydney

Rockhampton

Brisbane

Albury

Mildura

Newman

Port Moresby

Johannesburg

Los Angeles

Launceston

Hobart

Adelaide

Perth

Ballina/Byron Bay

Townsville

Whitsunday Coast

Hamilton Island

Mackay



Gold Coast

Port Macquarie

Newcastle

Cairns

Canberra

Sydney

Rockhampton

Melbourne

Brisbane

Darwin

Broome

Karratha

Port Hedland

Christchurch

Dunedin

Wellington

Auckland

Nadi

Nuku'alofa

Port Vila

Apia

Denpasar

Honiara Rarotonga

Hamilton

Queenstown

Phuket

Christmas Island

Cocos Island

Ayers RockAUSTRALIA

COOK ISLANDS

VANUATU

PAPUA NEW GUINEA

FĲI

TONGA

SAMOA

BALI

SOLOMON ISLANDS

NEW ZEALAND

U.S.A

SOUTH AFRICA

THAILAND

Albury

Mildura

Ballina/Byron Bay

Whitsunday Coast

Hamilton Island

Mackay



Gold Coast

Port Macquarie

Newcastle

Canberra

Sydney

Rockhampton

Brisbane

Albury

Mildura

Newman

Port Moresby

Johannesburg

Los Angeles

Launceston

Hobart

Adelaide

Perth

Ballina/Byron Bay

Townsville

Whitsunday Coast

Hamilton Island

Mackay



Gold Coast

Port Macquarie

Newcastle

Cairns

Canberra

Sydney

Rockhampton

Melbourne

Brisbane

Darwin

Broome

Karratha

Port Hedland

Christchurch

Dunedin

Wellington

Auckland

Nadi

Nuku'alofa

Port Vila

Apia

Denpasar

Honiara Rarotonga

Hamilton

Queenstown

Phuket

Christmas Island

Cocos Island

Ayers Rock

AUSTRALIA

COOK ISLANDS

VANUATU

PAPUA NEW GUINEA

FĲI

TONGA

SAMOA

BALI

SOLOMON ISLANDS

NEW ZEALAND

U.S.A

SOUTH AFRICA

THAILAND

Albury

Mildura

Ballina/Byron Bay

Whitsunday Coast

Hamilton Island

Mackay



Gold Coast

Port Macquarie

Newcastle

Canberra

Sydney

Rockhampton

Brisbane

Albury

Mildura

Newman

Port Moresby

Johannesburg

Los Angeles

Launceston

Hobart

Adelaide

Perth

Ballina/Byron Bay

Townsville

Whitsunday Coast

Hamilton Island

Mackay



Gold Coast

Port Macquarie

Newcastle

Cairns

Canberra

Sydney

Rockhampton

Melbourne

Brisbane

Darwin

Broome

Karratha

Port Hedland

Christchurch

Dunedin

Wellington

Auckland

Nadi

Nuku'alofa

Port Vila

Apia

Denpasar

Honiara Rarotonga

Hamilton

Queenstown

Phuket

Christmas Island

Cocos Island

Ayers Rock

are proud partners with

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AUSTRALIA

COOK ISLANDS

VANUATU

PAPUA NEW GUINEA

FĲI

TONGA

SAMOA

BALI

SOLOMON ISLANDS

NEW ZEALAND

U.S.A

SOUTH AFRICA

THAILAND

Albury

Mildura

Ballina/Byron Bay

Whitsunday Coast

Hamilton Island

Mackay



Gold Coast

Port Macquarie

Newcastle

Canberra

Sydney

Rockhampton

Brisbane

Albury

Mildura

Newman

Port Moresby

Johannesburg

Los Angeles

Launceston

Hobart

Adelaide

Perth

Ballina/Byron Bay

Townsville

Whitsunday Coast

Hamilton Island

Mackay



Gold Coast

Port Macquarie

Newcastle

Cairns

Canberra

Sydney

Rockhampton

Melbourne

Brisbane

Darwin

Broome

Karratha

Port Hedland

Christchurch

Dunedin

Wellington

Auckland

Nadi

Nuku'alofa

Port Vila

Apia

Denpasar

Honiara Rarotonga

Hamilton

Queenstown

Phuket

Christmas Island

Cocos Island

Ayers Rock

Contents Preview 2The Chairman’s Report 4Outlook and Operating Performance 6The Chief Executive’s Report 8Environment 10Our Work in the Community 12Directors 14Executive Committee 16Financial Statements 2010 20Directors’ Report 22Lead Auditor’s Independence Declaration 39Income Statement 40Statement of Comprehensive Income 41Statement of Financial Position 42Statement of Changes in Equity 43Statement of Cash Flows 44Notes to the Financial Statements 45Directors’ Declaration 85Independent Auditor’s Report 86ASX Additional Information 88

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2

Preview

EBITDAR ($ millions)

2008

2007

2006^

2005^

2004

547.7

291.5

566.4

409.5

2003

2002

285.6

107.6

421.7

CARBON FOOTPRINT(g CO2 -e/RPK)

2008

2007

2006^

2005^

2004 94.83

97.81

97.36

92.84

97.39

2003 99.94

2009 147.4

2010

2009 99.20

2010 98.91

472.1

PASSENGERS CARRIED(millions)

2008

2007

2006^

2005^

2004

15.3

10.5

16.7

19.7

10.1

2003

2002

6.6

3.2

TOTAL REVENUE($ millions)

2008

2007

2006^

2005^

2004 1362.3

2546.6

1392.5

2169.1

2334.8

2003 924.3

2002 390.9

2009 18.2

2010

2009 2635.4

2010 2981.8

18.6

RPKs/ASKs(millions)

20023,1693,898

^ Notes1 2005 figures over 18 months2 2006 figures over 9 months

Available Seat Kilometres (ASKs)

Revenue Passenger Kilometres (RPKs)

2009

2007

2008

2006^

2005^

2004

2003

17,563

12,094

11,584

7,194

21,800

23,067

18,764

9,078

14,024

30,042

15,703

21,642

23,308

27,816

201026,894

34,012

OPERATING STATISTICS 2010 2009 Change

Yield – Group 10.06¢ 10.84¢ –7.1%

CASK (exc fuel) – 6.21¢ 6.53¢ –4.9%Group Underlying*

Available Seat Kilometres 34.0bn 27.8bn +22.3%

Revenue Passenger Kilometre 26.9bn 21.8bn +23.4%

Passenger Load Factor % 79.8% 79.1% +0.7pts

FINANCIAL HIGHLIGHTS $ million 2010 2009 Change

Operating Expenses 2,895 2,621 10.5%

Total Revenue 2,982 2,635 13.1%

Underlying EBIT* 87 14 +521.4%

Net (loss)/profit after tax 34.3 (226.2) -* (excludes – ineffective cash flow hedges and non designated derivatives, V Australia start up costs

and profit/loss on disposal of property plant and eqiupment).

FINANCIAL POSITION $ million

Total Assets

Total Liabilities

Total Equity

2010

3,872

2,939

933

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Yield – Group 10.06¢ 10.84¢ –7.1%







Total Revenue 2,982 2,635 13.1%





Total Assets

Total Liabilities

Total Equity

2010

3,872

2,939

933


Yield – Group 10.06¢ 10.84¢ –7.1%







Total Revenue 2,982 2,635 13.1%





Total Assets

Total Liabilities

Total Equity

2010

3,872

2,939

933

RPKs/ASKs(millions)

20023,1693,898

^ Notes1 2005 figures over 18 months2 2006 figures over 9 months

Available Seat Kilometres (ASKs)

Revenue Passenger Kilometres (RPKs)

2009

2007

2008

2006^

2005^

2004

2003

17,563

12,094

11,584

7,194

21,800

23,067

18,764

9,078

14,024

30,042

15,703

21,642

23,308

27,816

201026,894

34,012

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VIRGIN BLUE HOLDINGS LIMITED ANNUAL REPORT 20104

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5VIRGIN BLUE HOLDINGS LIMITED ANNUAL REPORT 2010

In the 2010 financial year, our core short-haul business achieved a very solid $128 million underlying earnings before interest and tax expense.

After taking into account the establishment costs of V Australia’s first full year of business and the trying operating conditions, the group net profit before tax result of $34.3 million provides grounds for cautious optimism. Although we should recognise that volatility is still evident in the global economy.

This result is a testament to the fundamental resilience of the business and also to the high standards of service maintained by Virgin Blue’s staff. Our service levels have underpinned strong customer satisfaction and loyalty.

Our balance sheet is well capitalised with a net cash holding of more than $800 million at 30 June, providing us with ample ability to support the exciting plans of our new CEO.

Strategically, we are setting Virgin Blue on a new course. The ‘Game Change’ program will improve the experience for all of our customers and provide them with a truly global network.

The focus is on enhancing the Group’s product offering, building a global network, and aiming to grow our share of the corporate and government market.

To this end we are upgrading the network to increase capacity on critical routes, rationalising less profitable ones and introducing wide-body services on the transcontinental routes.

Internationally, we have negotiated an alliance that, subject to the necessary approvals, will see Etihad Airways and Virgin Blue Group codesharing across their respective networks and V Australia aircraft flying between Australia and Abu Dhabi. This alliance, together with the planned Delta and Air New Zealand alliances, will position us to broaden and grow our customer base through a strong global network proposition.

This positioning of the Group will also enhance the benefits of improved market conditions, the very early signs of which may be emerging this year.

On 1 September, we welcomed Ms Sam Mostyn to our Board and look forward to her contribution as the company progresses through the next exciting phase of its development.

In closing, I want to take this opportunity to thank my fellow board members, John’s predecessor, the management team and all of our people. They have contributed enormously to maintaining our record for service excellence and to providing a strong platform for the new era under John Borghetti’s leadership.

Finally, we thank you for your continued loyalty as shareholders through this period of transformation and look forward to sharing the benefits of Virgin Blue’s renewal and an improvement in the operating environment.

The Chairman’s Report

In a year of significant change for Virgin Blue, the company returned to profit after the aviation sector had experienced a major downturn during the prior year, due to the effects of the global financial crisis, and we farewelled our founding CEO Brett Godfrey and welcomed the very experienced and capable John Borghetti.

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Outlook and Operating Performance

OutlookSince the appointment of John Borghetti as Managing Director and CEO in May 2010, Virgin Blue has developed a go-forward strategy. This strategy will focus on improving the value of our core domestic business, withdrawing from loss making routes, lessening our reliance on the leisure market by improving our market share of the corporate and government markets and improving yield and revenue while retaining our focus on costs.

To achieve this, a new organisational structure has been implemented, network and yield management capabilities have been enhanced and the Group has commenced redeveloping the product offering. Management has been strengthened and restructured to clearly define accountability and to drive increased efficiency and growth in yield and revenue. Our focus on costs and development of alliance relationships will also contribute to the delivery of our strategy.

Despite poor market conditions through to the third quarter, the Asia-Pacific region led the first signs of recovery in the fourth quarter. However, conditions continue to be volatile and competitive activity continues to put downward pressure on yields. The soft growth seen at the end of the fiscal year, at this stage, is not sufficient to suggest a consistent across the board improvement in market conditions.

The first and subsequent phases of the network strategy puts the Group in a strong position to manage capacity increases and ensure Revenue Passenger Kilometres (RPKs) are closely aligned with passenger load factors, maximising yield growth potential in a highly competitive market place.

If market conditions continue to be volatile, and the early signs of recovery seen at the end of fiscal year 2010 do not result in a consistent and sustainable upward trend, we do have flexibility to adjust capacity through lease returns and rescheduling of aircraft deliveries.

The 2010 financial result demonstrates that the business is robust and well positioned to fully exploit the benefits to be delivered by the new strategy as the operating environment improves.

This new strategy will allow the company to preserve its strong market position in the most profitable segments of the leisure sector while taking advantage of structural change in the contestable domestic corporate and government market to increase Virgin Blue’s current share during fiscal years 2011 and 2012.

Operating Performance – GroupReported Net Profit before Tax was $34.3 million. Underlying EBIT for the Group was $87.2 million. Total revenue increased 13.1% to $2,981.8 million. Revenue Passenger Kilometres (RPKs) were 26.9 billion, up 23.4% on the prior year. The passenger load factor increased marginally 0.7pts to 79.8%.

Yields for domestic and long haul operations increased by 2.9% and 4.8% respectively but the weighted average Group yield fell 7.1% to 10.06 cents, reflecting a 14 percentage point increase in long haul flying.

While operating expenses were $2,895 million, up 10.5% on the prior year, against a 22.3% increase in production as measured by Available Seat Kilometres (ASKs), and underlying CASK (excluding fuel) fell by 4.9%.

> Fuel costs increased $33.2 million, or 4.4%, reflecting the 22.3% increase in ASKs and an 18.3% decrease in the average price paid for jet fuel, as well as continuing efficiency savings through the fuel management program.

> Commissions and marketing costs were up by 6.8% to $195.3 million, due to increased marketing spend in the more competitive environment during the year and raising the profile of V Australia during its first year of operation.

> Aircraft ownership costs (lease costs and depreciation) increased 22.6% to $356.9 million, consistent with the increase in the fleet from 81 to 87 aircraft during the year and the first full-year operation of the B777 fleet.

> Labour and staff related costs increased 7.5% to $639.8 million compared to the 23.4% increase in production, reflecting ongoing cost saving and efficiency initiatives.

> Net financing costs decreased 12.1% to $56.2 million in the year, reflecting lower interest costs and an increase in cash balances.

Short haul operationsUnderlying EBIT for the Short Haul business was $127.6 million, up from $67.7 million in the prior year.

Total short haul revenue increased 4.3% to $2,697 million. The passenger load factor increased marginally to 79.8%, up 0.6pts. With 14 new routes launched in the year, five in the domestic market and nine internationally, Virgin Blue’s network footprint increased significantly, positioning the company well for the future.

Short haul yield remained broadly consistent with the prior year, in a highly competitive market place and against a 5.7% increase in capacity.

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Active yield management helped increase domestic yield 2.9%, while taking into account the increased stage length and competition in the New Zealand domestic market, international short haul yield declined by 13.3%. In response, phase one of the network review terminated under-performing routes including direct Adelaide–Hobart and Brisbane–Launceston flights and the domestic New Zealand operation, which generated significant losses from inception.

Cost management during the year, and a reduction in fuel prices, was very effective in delivering a reduction in underlying CASK of 2.7% with further savings targeted for FY2011.

A Strategic Initiatives Office has been established to oversee the strategic change management program in FY2011 and onward.

Long haul operationsV Australia delivered an underlying EBIT loss of $42.8 million for the reporting period, reflecting a significant improvement in performance in contrast to many long haul carriers globally.

Total revenues were $324.3 million for the period and overall load factor for the same period was a solid 80.3%, demonstrating the extremely positive market response to V Australia’s product and service offering. Yield improved 4.8% over the prior period.

The outlook for V Australia is encouraging following the network review, with aircraft redeployed to higher yielding long haul routes.

In addition, the second phase of the network review will involve V Australia withdrawing from Fiji, South Africa and Phuket; routes which have not been profitable and which, strategically, don’t integrate well into or service our domestic network.

The strategy to develop a comprehensive virtual global network is progressing. The planned Delta Air Lines joint venture will allow us to strengthen our competitive offering and to collaborate on future routes, product planning, code sharing and frequent flyer benefits. In addition, it enables us to extend our network without incurring large capital expenditure. It will open up more than 200 new destinations in the US for our network, making the airline more competitive for both the leisure and corporate markets.

Under the planned alliance with Etihad Airways, Virgin Blue Group customers will be able to access Etihad’s network of 65 destinations. All Virgin Blue services will be available to Etihad customers, opening up 45 destinations.

Balance Sheet and Cash FlowDuring the reporting period Virgin Blue continued its focus on capital management to improve liquidity and strengthen the balance sheet. Improved operating cash flow, lower net investment in aircraft and the equity raising during the year saw the cash balance at year-end increased $338.8 million to $814.7 million.

Net cash flow from operating activities was $369.2 million, significantly higher than the $101.1 million recorded in the prior year, reflecting the stronger operating performance of the business.

Capital expenditure in the year was $550.8 million primarily comprising aircraft investment. The fleet grew by eight aircraft, including seven narrow bodies and one wide body B777-300ER. Three of the seven narrow body aircraft purchased were later refinanced via a sale and leaseback agreement. Two leased B737s were returned in the year on expiry of their lease terms.

DividendGiven the Group’s continued focus on capital management, for investment and growth, the Board has determined not to pay a Final Dividend. Subject to the improvement in the trading outlook continuing, a full review of the dividend policy will be undertaken during the coming year.

OUR CARBON FOOTPRINTGreenhouse gases are emitted as a consequence of our airline operations including jet fuel burn, ground electricity and fuel usage. Due primarily to the expansion of our V Australia operations our total emissions have increased. Our total direct greenhouse gas emissions in 2009/10 for all our airlines were approximately 2,697,950 tonnes CO2-e.

Emissions per Revenue Passenger Kilometre have decreased by about 1% over the last seven years.

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The Chief Executive’s Report

Financial Year 2010 was a difficult year for global aviation. In Australia, the uncertainties of the GFC, changing interest rates and the slowing of the retail sector together with increased competition at the leisure end of the market, made trading conditions challenging.

That said, we were one of the few airlines globally without red ink on our end of year report card. Our domestic business had a particularly strong base and was profitable at the end of the year.

Since becoming Chief Executive Officer and Managing Director of the Virgin Blue Group of Airlines in May 2010, my team and I have spent a great deal of time taking a forensic look at our business and setting the new course for the future.

We have a “Game Change” program which has already seen significant changes to our network.

Our “Game Change” program is based on five pillars:

1. Ensure our capacity is closely aligned to profitability

2. Establish a “virtual” global network through strategic airline alliances

3. Grow our share of the Australian corporate business from 10 per cent to 20 per cent

4. Maintain our strong presence in the leisure market 5. Enhance our already strong brand in Australia and

in overseas markets

Ensure capacity aligned with profitabilityWe have announced the withdrawal from heavy loss-making routes such as domestic New Zealand, South Africa and our Boeing 777-300 services from short haul leisure destinations such as Fiji and Phuket.

Global network through strategic alliancesThe recently announced alliance with Etihad Airways is the latest step in this strategy, complementing the trans-Pacific and trans-Tasman alliance with Delta Airlines and Air New Zealand respectively. Both these alliances are awaiting regulatory approvals.

On 23 September 2010, the Australian Competition and Consumer Commission granted interim approval for our alliance with Etihad Airways. The Etihad alliance will result in V Australia operating to two strategic hubs – Los Angeles and Abu Dhabi – with a vast global network beyond.

This alliance will allow one stop, seamless connection to more than 108 destinations worldwide.

The Delta alliance will provide more than 200 seamless connections to the United States of America.

The alliance on the trans-Tasman with Air New Zealand will allow connections between 31 Australian domestic destinations and 26 New Zealand domestic destinations and more than 130 additional frequencies per week across the Tasman.

Growing share of the corporate government market and maintaining our leisure marketThe Virgin Blue Group of Airlines has a strong position in the leisure sector which we intend to hold. We have an exciting opportunity to grow the corporate and government sector in the coming year and to that end, there will be some exciting product and services announcements in months to come. Our announcement to fly Airbus A330-200 aircraft on the east – west routes is just the beginning.

BrandThe Virgin Blue Group of Airlines has appointed renowned brand and identity designer Hans Hulsbosch as Creative Director overseeing the transformation of the Virgin Blue brand, which will include the Group’s new livery and corporate identity.

Hans, along with our Marketing team, have been tasked with taking the brand to a new level of modern sophistication, keeping with the brand’s contemporary young spirit. It will be unmistakably Virgin with a fresh and innovative feel that also knows how to have a little bit of fun.

The new brand will take the airline into its next decade as it moves from a low cost carrier to a modern carrier that appeals to both the leisure and corporate market.

Importantly, all these improvements can be achieved for relatively low add-on cost to programs already committed.

Although much of the focus of this report has been about how we plan to move the Virgin Blue Group to the next level in this new era of air travel, these plans would not be able to succeed without a robust operating platform and low cost base.

Nor would these plans succeed without the most critical element of any business - people.

In our people, we have a competitive advantage above all others. The Virgin Blue Team has continued to maintain our reputation for outstanding service and I am profoundly impressed by their enthusiasm and receptiveness for new ideas and the way forward.

Our people will continue to make a difference.

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Permagard treatments applied to the Virgin Blue fleet every year, result in an estimated saving of one million litres of water by not needing to wash the aircraft and a saving of about two million litres of fuel through decreased drag and improved fuel efficiency.

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Environment

Aviation is crucial to the global economy and part of the way we live today – linking families, communities and businesses. The challenge for us is to manage and reduce the environmental impacts associated with air travel while maintaining this crucial function.

Climate change is recognised as a significant issue for our community and our airline and we are committed to addressing this issue through all areas of our operations. We fully support the airline industry’s goal - via the International Air Transport Association - of carbon neutral growth from 2020 and a 50% reduction in emissions (over 2005 levels) by 2050.

Nearly 98% of Virgin Blue’s carbon emissions are due to aircraft fuel consumption. As such, our dedicated Fuel and Emissions Management Team is focussed on a continuous effort to improve fuel efficiency and reduce emissions through a range of initiatives to seek operational improvements, adopt new technologies and work with the industry to improve navigation and airport infrastructure.

We support Sir Richard Branson’s ongoing leadership in the need to address greenhouse gas emissions and have been working with our sister airlines, Virgin Atlantic and Virgin America, on possible future mitigation projects.

We were the first airline to voluntarily report our emissions under the then Greenhouse Challenge Plus program. In 2007, we became the first Government-certified airline carbon offset program in the world.

Virgin Blue’s successful “Fly Carbon Neutral” offset program has been operating since March 2007 and the one millionth seat to have its carbon emissions offset was flown in late July 2009. In the last year approximately 4% of our total emissions have been offset.

Through our membership of the Aviation Global Deal (AGD) Group we support an industry wide approach to managing emissions. During the 2010 Financial Year the AGD Group has continued to provide input and guidance to the United Nations, the International Civil Aviation Organisation and other international bodies considering a new greenhouse framework.

The use of low carbon sustainable aviation biofuels is a means to achieve significant emissions reductions. Accordingly, we were a founding member of the Australasian chapter of the Sustainable Aviation Fuel Users Group, which includes 19 global airlines and aircraft manufacturer, Boeing.

It is tasked with encouraging the commercialisation of sustainable aviation biofuels. In early 2010, the group commissioned the CSIRO to lead a study to develop a “Sustainable Aviation Fuels Road Map” defining pathways and challenges to accelerate the commercialisation of a sustainable aviation biofuels industry in Australia and New Zealand. With input from a diverse range of stakeholders, the Road Map is intended as a guiding tool for industry and government decision makers on strategic policy and future investment. It is due for release later this year.

Virgin Blue is also pursuing other avenues to progress the development of commercially viable biofuels, such as being a partner in a project led by the University of Queensland to undertake a techno-economic and life-cycle analysis of a potential Queensland-based sustainable aviation fuel industry from three distinct biomass sources – sugar cane, pongamia and algae.

In June 2010, Virgin Blue was proud to be a sponsor of the World Environment Day Awards organised by the United Nations Association of Australia, in Melbourne.

We have also reduced waste produced in-flight by working with catering suppliers on strategies to eliminate and reduce food and drink packaging. This also provides a benefit of reducing weight on-board thus reducing fuel burn.

With support from the Australian Food and Grocery Council, we have introduced public area recycling bins at our Brisbane passenger terminal.

Over the past few months we have been updating our Sustainability Strategy - Flying into a Greener Future. This document will outline our sustainability vision and set goals and targets over a five year time frame.

For further information on our Sustainability Strategy visit the Sustainability page on our website at - virginblue.com.au/AboutUs/CorporateResponsibility/Sustainability/index.htm

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Our Work in the Community

Red Jet Foundation Red Jet, the official charity foundation of the Virgin Blue Group of Airlines, was established in 2006 with the encouragement and support of Virgin Blue team members and management.

Through the 2010 Financial Year, Red Jet committed support to several charities and projects nominated by Virgin Blue team members under the ongoing theme ‘Indigenous peoples, natural environment’. These charities include:

> The Australian Indigenous Mentoring Experience (AIME)

> Engineers Without Borders - Kooma Traditional Land Renewable Energy Project

> Royal Children’s Hospital Foundation - Indigenous Children’s Health Screening Van

> Link-Up (Qld) Aboriginal Corporation

During the reporting period, we were also proud to assist the Victorian Bushfire Reconstruction and Recovery Authority and victims of the 2009 Victorian bushfires; the worst in Australia’s history. We provided free flights to enable affected families to enjoy respite holidays. As a result of our support, 302 households enjoyed 714 return flights out of a total allocation of 1,000 donated flights.

Red Jet also provided in-kind support (flights, excess baggage waivers) on an ad-hoc basis to a number of causes including:

> Day of Difference Foundation > Australian Indigenous Leadership Centre > Interplast Australia and New Zealand> Spinal Cord Injury Australia (Walk-On Project)> Vision Australia (Blind Courage Tour)

‘Change for Charity’ collections aboard V Australia flights were also introduced in November 2009. The Silver Lining Foundation was selected as the first beneficiary. The charity aims to provide training and employment opportunities for Indigenous youth in outback Queensland. By the end of April 2010, V Australia Guests provided more than $19,000 to be used to purchase capital equipment for the program.

Further details of our community work can be found online at www.virginunite.com/redjet

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Virgin Blue’s commitment to sustainable Indigenous Australian employment

Virgin Blue is committed to achieving workforce diversity by providing an equal employment environment where people from all backgrounds can work together and reach their full potential.

We aim to foster a working environment that provides opportunities for all employees to be enriched by an understanding and respect of Indigenous cultures and values.

Virgin Blue is doing its part to help through its Indigenous Employment Strategy which seeks to address a recognised under representation of Aboriginal and Torres Strait Islander people within our workforce by implementing a range of appropriate recruitment, career development and retention initiatives.

The core focus is to ensure Virgin Blue attracts, develops and retains skilled, flexible and motivated Indigenous employees.

In September 2009, Virgin Blue became a signatory to the Australian Employment Covenant (AEC); a national industry-led initiative with the aim of breaking the cycle of unemployment and poverty among Indigenous Australians.

We have also developed other key partnerships to assist in building relationships and skills development of young Indigenous Australians; and ultimately to provide career opportunities within our business. Two such partnerships are those established with the Australian Indigenous Leadership Centre (AILC) and the Australian Indigenous Mentoring Experience (AIME).

The AILC is a not-for-profit company established in 2001 to foster Indigenous leadership. As a Registered Training Organisation (RTO 88105), it offers accredited courses in Indigenous

Leadership, as well as non-accredited short courses in specific leadership skills. We are providing return airfares to facilitate travel for AILC students and to assist with the creation of a National Indigenous Leaders Network and to build on support provided for future students.

AIME is a mentoring program that partners university students in a one-on-one relationship with Indigenous high school students. In 2010, AIME is working with 1,000 Indigenous high school students across the East Coast of Australia, with more than 1,000 university students involved as Mentors. In July, we helped raise awareness of AIME’s inaugural National Hoodie Day across our network to mark the commencement of a four year sponsorship of the organisation.

In addition, we have also initiated a three-year purchasing program with not-for-profit company, the Australian Indigenous Minority Supplier Council (AIMSC). AIMSC provides a direct business-to-business purchasing link between corporate Australia, government agencies and Indigenous-owned businesses. By committing to purchase goods and services from Indigenous-owned enterprises we help them to continue to offer ongoing employment.

During the 2010 Financial Year, we welcomed nine new indigenous team members to the Virgin Blue Group of Airlines in a variety of roles including Cabin Crew, Guest Services and Graduates.

We remain committed to providing career development opportunities supporting Aboriginal and Torres Strait Islanders in achieving their career aspirations. While we are encouraged by our outcomes to date, a sustained effort over the next three to five years is required to achieve embedded improvement. Our commitment to this journey is absolute.

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MR ROBERT ThOMAs B.Econ, MSDIA, SF Fin

Independent Non-Executive Director Chairman Audit and Financial Risk Committee Member Remuneration, Nomination and Governance Committee

Age 65.

Appointed 8 September 2006.

MR JOhN BORghETTiManaging Director and Chief Executive Officer

Age: 55.

Appointed 8 May 2010.

MR NEiL ChATfiELd FCPA, FAICD

Independent Non-Executive Chairman Chairman Remuneration, Nomination and Governance Committee Member Audit and Financial Risk Committee

Age 56.

Appointed 11 May 2006. Appointed Company Chairman 14 June 2007.

ThE hON. MARk VAiLE

Former Deputy Prime Minister of Australia Independent Non-Executive Director

Age 54.


MR dAVid BAxBy B.Com (Acct), LLB (Hons)

Non-Executive Director Member Remuneration, Nomination and Governance Committee

Age 37.


MR kEiTh ROBERTs M. Com (Hons) B. Bus.

Alternate Director

Age 34.

Appointed as alternate director for Mr David Baxby and Mr Patrick McCall on 28 November 2008.

* Patrick McCall, Stephen Murphy and Sam Mostyn were not present at the time of the photoshoot

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On 1 September 2010, we welcomed Ms Sam Mostyn to our Board and look forward to her contribution as the company progresses through the next exciting phase of its development.

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Executive Committee

RiChARd TANNERGroup Executive PeopleRichard Tanner is responsible for the Group’s Leadership Advisors, Workplace Relations, Remuneration and Services, Recruitment, Staff Travel and the company’s central training function, The Academy.

ANdREW dAVidGroup Executive OperationsAndrew David is responsible for Engineering Operations, Ground Operations, Flight Operations, Group Flight Standards, Operations Planning, Safety Systems, Pacific Blue and V Australia Operations.

dANiELLE kEighERyGroup Executive Corporate CommunicationsDanielle Keighery is responsible for the Group’s Corporate Communications, Public and Media Relations, In-flight Media, and Community Sponsorships.

JANE MCkEON Group Executive Government RelationsJane McKeon has responsibility for the Group’s Government Affairs and Industry Representation.

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kEiTh NEATEChief Financial OfficerKeith Neate oversees all Group Investor Communications, Finance, Information Technology, Business Transformation, Property, Forecasting, Internal Audit, Risk Office and Fleet.

MARTiN dALEyGroup Executive Product & Guest ServicesMartin Daley has responsibility for all aspects of customer service and product development across the Group including: Product, Group Service Training, Cabin Crew (Domestic and International), Premium Guest Services and Lounges.

LiZ sAVAgEGroup Executive CommercialLiz Savage has strategic oversight of the Group’s commercial operations including: Marketing and Sponsorships, Sales, Revenue Management, Network Management, Velocity and Customer Relationship Management, eCommerce, Alliance Management, Ancillary Revenues, and holiday arm Blue Holidays.

MERREN MCARThURGroup Executive Corporate AdvisoryMerren McArthur oversees all Group Special Projects, Strategic Alliances, Corporate Governance, Legal, Environmental / Sustainability and our in-house Economist.

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ThE COMPANiEs ThAT LOOk AfTER ThEiR PEOPLE ARE ThE COMPANiEs ThAT dO REALLy WELL.SIR RICHARD BRANSON

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19VIRGIN BLUE HOLDINGS LIMITED ANNUAL REPORT 2010 19

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Contents Directors’ Report 22

Lead Auditor’s Independence Declaration 39

Income Statement 40

Statement of Comprehensive Income 41

Statement of Financial Position 42

Statement of Changes in Equity 43

Statement of Cash Flows 44

Notes to the Financial Statements 45

Directors’ Declaration 85

Independent Auditor’s Report 86

ASX Additional Information 88

This financial report covers Virgin Blue Holdings Limited Group, consisting of Virgin Blue Holdings Limited and its controlled entities. The financial report is presented in Australian dollars.

Virgin Blue Holdings Limited is a company limited by shares, incorporated and domiciled in Australia. Details of its registered office and principal place of business are on page 45 and the inside back cover.

Through the use of the internet, we have ensured that our corporate reporting is timely, complete and available globally at minimum cost to the Company. All press releases, financial reports and other information are available at our Investor Relations Centre on our website: www.virginblue.com.au

V I R G I N B L U E H O L D I N G Sf i N A N C i A L s T A T E M E N T s 2 0 1 0

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directors’ Report

The directors present their report together with the financial report of Virgin Blue Holdings Limited Group, being the Company, its controlled entities and the Group’s interests in associates, for the financial year ended 30 June 2010 and the auditor’s report thereon.

1. DirectorsThe directors of the Company at any time during or since the end of the financial year are:

Name, qualifications and position Experience Appointment Date

Mr Neil ChatfieldFCPA, FAICDIndependent Non-Executive ChairmanChairman Remuneration, Nomination and Governance CommitteeMember Audit and Financial Risk Committee

Neil is an established executive and non-executive director with experience across a range of industries. He has extensive experience in financial management, capital markets, mergers and acquisitions and risk management, and was most recently an Executive Director and Chief Financial Officer of Toll Holdings Limited. Other directorships of ASX listed companies are Seek Ltd since 2005, Whitehaven Coal Limited since 2007, Transurban Group and Grange Resources Ltd since 2009. Age 56.

Appointed 11 May 2006. Appointed Company Chairman 14 June 2007.

Mr John BorghettiManaging Director and Chief Executive Officer

John has more than 37 years experience in the aviation sector having previously held a number of senior positions at Qantas, including the role of Executive General Manager for six years prior to leaving the company in May 2008. He is a director of Care Australia and The Australian Ballet and was previously a director of Piper Aircraft and an Investment Committee Member of Investec Global Aircraft Fund. Age: 55.


Mr Patrick McCallB.Sc EconNon-Executive DirectorMember Audit and Financial Risk Committee

Virgin Group Managing Partner Health, Wellness, Space and Rail and holds a number of other directorships in the Virgin Group. Previously an investment banker at SBC Warburg/SGWarburg. Age 45.


Mr David BaxbyB.Com (Acct), LLB (Hons)Non-Executive DirectorMember Remuneration, Nomination and Governance Committee

Head of Aviation for Virgin Group and CEO of Virgin Management Asia-Pacific for the past six years. David holds a number of other directorships within the Virgin Group including Virgin Atlantic Limited, Virgin Holidays Limited, Virgin America Inc, Virgin Active Australia and Air Asia X. Prior to Virgin, David was an investment banker for ten years with Goldman Sachs JBWere. Age 37.


The Hon. Mark VaileFormer Deputy Prime Minister of AustraliaIndependent Non-Executive Director

Member of the Australian Parliament from 1993 to 2008. Former Deputy Prime Minister (2005-2007), Minister for Trade (1999-2006), Minister for Transport and Aviation (1997-1998, 2006-2007) and Minister for Agriculture (1998-1999). Other positions include Chairman of CBD Energy Limited, Aston Resources Limited and Palisade Regional Infrastructure Fund, and Director of Stamfordland Limited. Age 54.


Mr Robert ThomasB.Econ, MSDIA, SF FinIndependent Non-Executive DirectorChairman Audit and Financial Risk Committee Member Remuneration, Nomination and Governance Committee

Robert has more than 35 years experience in the securities industry. Robert is the Chairman of Tower Australia Ltd and the Stockbrokers Association of Australia. He is a Director of Heartware International Ltd, O’Connell Street Associates Pty Ltd, Grahger Capital Securities and REVA Medical Limited, is the President of the Library Council of NSW and is a member of the Nomura Australia Advisory Board and the Monash Research Advisory Council. Age 65.


Ms Sam MostynIndependent Non-Executive Director

Sam is the Director of the Institute for Sustainable Solutions at the University of Sydney and has previously held senior executive positions at IAG, Optus and Cable & Wireless Plc. Sam is also Chair of the Stakeholder Advisory Council of the CSIRO’s Climate Adaptation Flagship, President of the Australian Museum Trust, a Board Member of Australian Volunteers International, the Sydney Theatre Company and the NSW Climate Change Council and is an AFL Commissioner. Age 45.


Mr Stephen MurphyAlternate Director

Chief Executive Officer of Virgin Group, Chairman of Virgin Atlantic Limited, holds a number of other directorships in the Virgin Group and Director of Brussels Airlines SA. Previously held senior finance positions in Mars, Unilever and The Quaker Oats Company. Age 54.

Appointed as alternate director for Mr David Baxby and Mr Patrick McCall on 30 September 2004.

Mr Keith RobertsM. Com (Hons) B. Bus.Alternate Director

Australian Country Head of Virgin Management Asia Pacific. Prior to joining Virgin in March 2008, Keith was a management consultant at Bain and Company for 9 years. His time at Bain included working with airlines in South Africa and Latin America. Age 34.

Appointed as alternate director for Mr David Baxby and Mr Patrick McCall on 28 November 2008.

Former Managing Director and Chief Executive Officer, Mr Brett Godfrey (appointed 27 May 2002), resigned from his position as Chief Executive Officer on 7 May 2010, and resigned from his position as Director on 6 July 2010.

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2. Company SecretaryMs Merren McArthur (BA LLB) was appointed company secretary on 25 July 2008. Ms McArthur joined Virgin Blue in May 2008 as General Counsel. She has more than 20 years experience in corporate and commercial law in both private practice, as a partner in a national law firm, and in a number of senior in-house roles.

3. Directors’ meetingsThe number of directors’ meetings (including meetings of committees of directors) and number of meetings attended by each of the directors of the Company during the financial year are:

DirectorBoard

Meetings

Audit & Financial Risk

Committee Meetings

Remuneration, Nomination & Governance Committee Meetings

A B A B A BMr N Chatfield 16 16 4 4 8 8Mr J Borghetti 2 2 - - - -Mr B Godfrey 14 16 - - - -Mr P McCall 11 16 2 4 - -Mr D Baxby 16 16 - - 8 8Mr M Vaile 15 16 - - - -Mr R Thomas 15 16 4 4 8 8Mr K Roberts 5 5 1 1 - -

A: Number of meetings attended

B: Number of meetings held during the time the director held office during the year

- : Not a member of the committee

Mr S Murphy was not required to attend any Board or committee meetings during the year. Mr K Roberts attended five board meetings and one audit committee meeting as alternate for Mr P McCall.

4. Corporate Governance StatementThis statement outlines the main corporate governance policies and practices in place through the financial year, which comply with the ASX Corporate Governance Council recommendations, unless otherwise stated.

4.1 Board of Directors

Role of the BoardThe role of the Board is to provide strategic guidance for the Group and effective oversight of management. The Board has also established a framework of control and a set of procedures and delegations of authority to the Chief Executive Officer and other senior executives.

The Board operates in accordance with the Company’s Constitution and Board Charter. The Board’s functions are set out in the Group’s Board Charter and include:

> setting the direction, strategies and financial objectives of the Company;

> appointing, reviewing the performance of, and removing the Chief Executive Officer;

> monitoring senior management’s performance;> monitoring internal control and accountability systems;> identifying, analysing and monitoring safety and risk

management issues;> approving and monitoring major capital expenditure, capital

management, acquisitions and divestitures;> monitoring compliance with regulatory requirements and

ethical standards; and> approving and monitoring financial and other reporting.

The Board has delegated responsibilities for operation and administration of the Company to the Chief Executive Officer and executive management. Responsibilities are delineated by formal authority delegations.

A copy of the Board Charter and Statement of Delegated Authority is available on the Company’s website.

Independent professional advice and access to company informationEach director has the right of access to all relevant Company information and to the Company’s executives and, subject to prior consultation with the Chairperson, may seek independent professional advice from a suitably qualified advisor (including legal advice) at the Company’s expense. Except in extraordinary cases (where the director will have notified the other Board members in writing), a copy of any such advice received is to be made available to other Board members.

Composition of the BoardAt the date of this report, the Board comprises seven directors, six of whom are non-executive directors (including four independent non-executive directors) and the Managing Director. Each of the directors is a senior and experienced executive with skills and experience necessary for the proper supervision and leadership of Virgin Blue. As a team, the Board brings together a broad range of qualifications, in both the international and Australian markets, with considerable experience and expertise in aviation, transport, finance, accounting, marketing and public company affairs. Details regarding the Group’s directors, including their relevant skills, experience, expertise and terms of office can be found at page 22.

The composition of the Board is as follows:

(a) two directors of the Company have been elected after being nominated by Virgin Group and act as its representatives;

(b) four directors of the Company are independent, non-executive directors; and(c) the remaining director is the Managing Director, who is also

the Chief Executive Officer.

The Board considers that, fundamentally, the independence of directors is based on their capacity to put the best interests of the Company and its shareholders ahead of all other interests, so that directors are capable of exercising objective independent judgement. Capacity to act independently and the skill sets and experience of individual directors to complement the skills and experience of the Board overall are critical criteria in candidate selection. The capacity for individual directors to add value to the Board is very important.

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directors’ Report (continued)

4.1 Board of Directors (continued)

Composition of the Board (continued)When evaluating candidates, the Board will have regard to the potential for conflicts of interest, whether actual or perceived, and the extent or materiality of these in the ongoing assessment of director independence. In this respect the Board has regard to the definition of “independence” in the ASX Corporate Governance Principles and Recommendations. The Board does not believe that the existence of one or more of the relationships in the definition will necessarily result in the relevant director not being classified as independent, particularly given the criteria outlined above, and that the Company will seek to implement additional safeguards to ensure independence. An overall review of these considerations is conducted by the Board to determine whether individual directors are independent.

Additional policies, such as directors not being present during discussions or decision making in matters in which they have or could be seen to potentially have a material conflict of interest, as well as directors being excluded from taking part in the appointment of third party service providers where the director has an interest, provide further separation and safeguards to independence. The Board has considered materiality thresholds in relation to independence, but has determined not to establish fixed thresholds, believing that, if taken in isolation and out of context, these can be misleading and inconclusive.

The Company recognises that the ASX Corporate Governance Principles and Recommendations recommend that a listed company should have a majority of directors who are independent and that the chairperson should be an independent director. Following the appointment of an additional independent director on 1 September 2010, the Board is currently comprised of a majority of independent directors. The Board as comprised during the 2010 financial year had an equal number of independent and non-independent directors, and the Chairman is an independent director. The Company believes that the Board, as composed during the 2010 financial year, had the necessary skills and motivation to ensure that the Company continued to perform, notwithstanding that its overall composition did not meet ASX guidelines on independence.

The Board conducted an externally facilitated performance evaluation during the 2010 financial year and will conduct an annual self-assessment of its performance and the performance of its committees.

Board committeesThe Board has established two committees of directors, the Audit and Financial Risk Committee and the Remuneration, Nomination and Governance Committee, to carry out certain tasks. Each committee has a documented charter approved by the Board, copies of which can be found on the Company’s website.

The Board does not believe that additional committees are appropriate or necessary for the Company in its current

form. For example, the Board has not created a separate formal nomination committee, but will revisit that decision from time to time as the Company continues to grow. One of the tasks often delegated to a nomination committee, that of establishing systems for performance appraisal and evaluation, has, however, been delegated to the Remuneration, Nomination and Governance Committee instead.

The Board has also decided against the establishment of a separate risk management committee. Given the nature of the Company’s operations, the Board believes that risk management is a core responsibility of the entire Board. Further information in relation to the Company’s Risk Management Policy is set out below.

4.2 Audit and Financial Risk CommitteeThe Audit and Financial Risk Committee has a documented charter, approved by the Board. The Audit and Financial Risk Committee’s Charter is available on the Company’s website. All members of the Audit and Financial Risk Committee must be non-executive directors.

The Chairman of the Audit and Financial Risk Committee is an independent director (who is not Chairman of the Board), and under the terms of the Audit and Financial Risk Committee Charter, has a casting vote. In addition, the majority of the members of the Audit and Financial Risk Committee are independent directors.

The role of the Audit and Financial Risk Committee is to verify and safeguard the integrity of the Company’s financial reporting and to provide advice and assistance to the Board to allow the Board to:

> fulfil its audit, accounting and reporting obligations;> monitor external auditors’ performance (including the

independence of external auditors);> comply with legal and regulatory requirements;> comply with the Company’s Risk Management Policy;> monitor compliance with applicable accounting standards

and other requirements relating to the preparation and presentation of financial results;

> fulfil its responsibilities relating to financial statements, internal accounting and financial control systems; and

> monitor internal auditor’s performance.

The Audit and Financial Risk Committee is empowered to investigate any matter brought to its attention and has direct access to any employee, the independent auditors or any other independent experts and advisors as it considers appropriate in order to ensure that its responsibilities can be carried out effectively.

The internal and external auditors, the Chief Executive Officer and the Chief Financial Officer are invited to audit committee meetings at the discretion of the committee.

The Audit and Financial Risk Committee reviews the performance of the external auditors on an annual basis and normally meets with them during the year to:

> discuss the external audit and internal audit plans, identifying any significant changes in structure, operations, internal controls or accounting policies likely to impact the financial statements and to review the fees proposed for the audit work to be performed;

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> review the half-year and preliminary final report prior to lodgement with the ASX, and any significant adjustments required as a result of the auditor’s findings, and to recommend Board approval of these documents, prior to announcement of results;

> review the draft annual and half-year financial report, and recommend board approval of the financial report; and

> review the results and findings of the auditor, the adequacy of accounting and financial controls, and to monitor the implementation of any recommendations made.

The Chief Executive Officer and the Chief Financial Officer declared in writing to the Board that the financial records of the Company for the financial year have been properly maintained, that the Company’s financial reports for the financial year ended 30 June 2010 comply with Australian accounting standards and present a true and fair view of the Company’s consolidated financial condition and operational results. This statement is required annually and is made in accordance with section 295A of the Corporations Act 2001.

Details of names and relevant qualifications of those directors appointed to the Audit and Financial Risk Committee, the number of meetings the Audit and Financial Risk Committee held during the financial year ended 30 June 2010, and the names of the attendees can be found at pages 22 to 23.

4.3 Remuneration, Nomination and Governance Committee

The role of the Remuneration, Nomination and Governance Committee is to provide advice and assistance to the Board by:

> recommending to the Board appropriate compensation policies and packages applicable to the Board members and the senior executives of the Company and monitoring their implementation;

> establishing systems designed to enhance corporate and individual performance;

> recommending to the Board a system of performance appraisal for directors and the Board as a whole; and

> recommending to the Board a system for the effective introduction of new directors and senior executives.

The names of the members of the Remuneration, Nomination and Governance Committee and their attendance at meetings are disclosed at pages 22 to 23.

The Remuneration, Nomination and Governance Committee’s Charter is available on the Company’s website.

4.4 Remuneration policyThe purpose of the Company’s remuneration policy is to ensure each compensation package properly reflects the person’s duties, responsibilities and level of performance, and that compensation is competitive in attracting and motivating people of the highest quality. The compensation structures implemented by the Board are designed to attract suitably qualified candidates, reward the achievement of strategic objectives and achieve the broader outcome of creation of value for shareholders.

Non-executive directors are remunerated by way of fees and do not participate in schemes designed for the compensation

of executives. They do not receive options or bonus payments and are not provided with retirement benefits other than statutory superannuation.

Further details of compensation of directors and key executives can be found in the Remuneration Report at page 26.

4.5 Risk management policy

Risk management systemThe Board believes that it has ultimate responsibility to ensure that the Company’s risk management systems are both in place and effective. To discharge that responsibility, the Board has issued a Risk Management Policy, a copy of which is available on the Company’s website. The purpose of this Risk Management Policy is to establish a formalised system which facilitates:

> identification and analysis of key strategic, operational, financial and compliance risks; and

> implementation of the necessary controls and policies to manage these risks.

In addition, the Board and management have designed a detailed risk management framework, which integrates risk management into all of the activities undertaken within the business.

The Company is continuously identifying ways to ensure that information gathering is improved and that it is conducted in a coordinated and effective manner so that risk controls can be successfully implemented and managed. As a result, risk management forms an integral part of all decision making and an essential part of every employee’s training so that there is accountability for actions, including compliance with policies and procedures.

Awareness of, and compliance with, regulation and legislation is also critical to the ongoing sustainability of the business. A compliance, risk and business systems department has been established to coordinate risk management within the Company and to assist each department in undertaking its own internal audit and risk assessment.

The Chief Executive Officer and the Chief Financial Officer have declared, in writing to the Board, that the financial reporting risk management and associated compliance and controls have been assessed and found to be operating efficiently and effectively. The operational and other risk management compliance and controls have also been assessed and found to be operating efficiently and effectively. All assessments covered the whole financial period up to the signing of the annual financial report for all material operations of the Group.

Financial reportingThe Chief Executive Officer and the Chief Financial Officer have declared, in writing to the Board, that the Company’s financial reports are founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the Board.

Monthly actual results are reported against budgets approved by the Board and revised forecasts for the year are prepared regularly.

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4.5 Risk management policy (continued)

Internal auditThe internal auditors assist the Board in ensuring compliance with internal controls and risk management programs by regularly reviewing the effectiveness of the above-mentioned compliance and control systems. The Audit Committee is responsible for approving the program of internal audit visits to be conducted each financial year and for the scope of the work to be performed. The Audit and Financial Risk Committee is responsible for recommending to the Board the appointment and dismissal of the Internal Audit Manager.

Environmental regulationThe Group’s operations are subject to noise pollution and other similar environmental regulations. The directors believe that the Group has adequate systems in place for the management of its environmental requirements and are not aware of any breach of those environmental requirements as they apply to the Group.

4.6 Ethical standards

Ethical policiesVirgin Blue has adopted two policies, a Guide to Business Conduct which applies to all directors, staff and contractors working for Virgin Blue and a Code of Conduct which applies to directors and senior executives.

The Guide to Business Conduct formalises Virgin Blue’s belief that business objectives are best achieved through acting at all times fairly, honestly and with integrity. It contains policy statements and summaries of what is expected of staff and contractors in many key areas of business conduct. The Code of Conduct further reflects the commitment of Virgin Blue to ethical standards and practices. This Code deals with issues specific to directors and senior executives. Copies of both the Guide to Business Conduct and the Code of Conduct are available on the Company’s website.

Securities trading policyThe Company has implemented a policy on securities trading which binds all directors, officers and employees of the Group. In addition to ensuring that all employees and directors are aware of the legal restrictions on trading in the Company’s securities while in possession of unpublished price-sensitive information, the policy also restricts the times when directors, officers and employees may deal in the Company’s securities. These times are restricted to the period of six weeks after either the release of the Company’s half-yearly and final results to the ASX or after the Company’s Annual General Meeting has been held. A copy of the Securities Trading Policy is available on the Company’s website.

4.7 Communication with shareholders and the market

The Company’s commitment to communicating with its shareholders is embodied in its Market Disclosure and Communication Policy, which contains policies and procedures designed to ensure accountability at senior management level for compliance with disclosure obligations. Importantly, the policy addresses the Company’s responsibility to ensure

its market announcements are made in a timely manner, are factual, do not omit material information and are expressed in a clear and objective manner that allows investors to assess the impact of the information when making investment decisions.

The full annual report is provided on the Company’s website to all shareholders (unless a shareholder has specifically requested to receive a physical copy) including relevant information about the operations of the Group during the year, changes in the state of affairs and details of future developments. The half-yearly report contains summarised financial information and a review of operations of the Group during the period. The half-year reviewed financial report is provided on the Company’s website to all shareholders.

In addition to the distribution of the Annual Report, information is communicated to shareholders via the Investor Information section of the Company’s website.

Further, the Company will require its external auditor to attend the Annual General Meeting and be available to answer any shareholder questions about the conduct of the audit and the preparation and content of the Auditor’s Report. A copy of the Company’s Market Disclosure and Communication Policy is available on the Company’s website.

4.8 DiversityThe Company is aware that in June 2010, the ASX Corporate Governance Council amended its principles and recommendations to include a recommendation that companies establish a diversity policy covering gender, age, ethnicity and cultural background within the organisation, including the Board and senior management. The policy should include, where appropriate, measurable objectives which will be disclosed in the Annual Report. Virgin Blue is proud of its history of diversity and supports the recommendations. The Company will formalise its approach to diversity and will include its policy on its website once completed.

5. Remuneration Report – audited

5.1 IntroductionThis report summarises the director and executive remuneration policies and practices, including detailed remuneration outcomes for the 2010 financial year, of the Group. It has been prepared in accordance with the remuneration reporting requirements under section 300A of the Corporations Act 2001, and details the remuneration arrangements for:

> Board Members and Senior Executives of the Company and Group (“the Directors and Senior Executives”); and

> Key Management Personnel (KMP) according to Accounting Standard AASB 124 Related Party Disclosures. The key management personnel of the Company and the Group includes the Directors as per page 22 above and the Senior Executives who had authority and responsibility for planning, directing and controlling the activities of the Company and the Group during the current financial year.

The information in the Remuneration Report has been audited as required by section 308(3C) of the Corporations Act 2001.

Remuneration is referred to as compensation throughout this Report.

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5.2 Board oversight of remunerationThe Remuneration, Nomination and Governance Committee is responsible for making recommendations to the Board on compensation policies and packages applicable to the Directors and Senior Executives. The broad objective of the Compensation Policy is to implement a compensation package that properly reflects the person’s duties and responsibilities and level of performance; and that compensation is competitive in attracting, retaining and motivating people of the highest quality.

The compensation structures explained below are designed to attract suitably qualified candidates, reward the achievement of strategic objectives, and achieve the broader outcome of creation of value for shareholders. The compensation structures take into account:

> the capability and experience of the Directors and Senior Executives;

> the Directors’ and Senior Executives’ ability to control the relevant business segment’s performance;

> the Group’s performance including: - the Group’s earnings; - the growth in share price and returns on shareholder

wealth; and> the amount of incentives within each Directors’ and Senior

Executives’ compensation.

Compensation packages include a mix of fixed and variable compensation, and short-term, medium-term and long-term performance-based incentives.

5.3 Overview of executive compensation arrangements

The following diagram illustrates the structure of executive compensation arrangements:

FIxED COMPENSATION

Cash Set with reference to role, market and experience.

PE

RFO

RM

AN

CE

LIN

KE

D C

OM

PE

NS

ATI

ON Short-term

Incentive (STI)Cash Group and individual objectives for

the current financial year.

Medium-term Incentive (MTI)

Shares Group and individual objectives over a two year period. Plan has been discontinued effective 30 June 2010.

Long-term Incentive (LTI)

Options Senior Executive Option Plan

Performance hurdle:

Total shareholder returns or earnings per share.

CEO Co-Investment Scheme

Performance hurdle:

Company share price.

Fixed compensationThe Chief Executive Officer (“CEO”) and Senior Executives’ fixed compensation includes:

> cash salary;> benefits the Senior Executive has elected to receive in lieu

of salary (inclusive of any fringe benefits tax); and> superannuation.

The level of fixed compensation paid to the CEO and each Senior Executive is based on the person’s skills and experience, the requirements for their role and their relevant labour market in terms of the particular industry and geographical location. In setting fixed remuneration, the CEO’s and Senior Executive’s total potential remuneration is taken into consideration to ensure an appropriate balance between fixed and variable remuneration.

Compensation levels are reviewed annually by the Remuneration, Nomination and Governance Committee through a process that considers individual and overall performance of the Group. In addition, external consultants provide analysis and advice to ensure the Directors’ and Senior Executives’ compensation is competitive in the marketplace.

Performance-linked compensation Performance-linked compensation includes short-term, medium-term and long-term incentives and is designed to reward Executive Directors and Senior Executives for meeting or exceeding their financial and personal objectives.

Short-term incentive (STI)STIs may be awarded to the CEO and Senior Executives based on their annual performance as evaluated under the Group’s performance management system. STIs are paid in cash or as superannuation contributions.

The STI for all Executive Directors and Senior Executives considers performance metrics linked to measurable gains in the achievement of the Group’s corporate objectives. Typically, the performance objectives comprise elements relating to individual performance, the performance of the relevant department and the performance of the Group. Accordingly, the specific STI objectives vary from executive to executive both in terms of their nature and the weighting of these objectives in accordance with the Group’s priorities. Group metrics relate to financial, people, guest, safety, strategy and risk measures approved by the Board. The measures are chosen as they directly align the individual’s reward to the objectives of the Group and to its strategy and performance.

At the end of the financial year the Board and CEO assess the actual performance of the Group, the relevant department and the individual against the objectives set at the beginning of the financial year. For Senior Executives, up to 70% of an individual’s fixed compensation is available to be paid as an STI. This method aims to provide an objective assessment of the Senior Executive’s performance.

For the CEO, up to 100% of the CEO’s fixed compensation is available to be paid as an STI. Where the CEO achieves less than 100%, the Board at its sole discretion may, having regard to those targets that are achieved in full or part, make a payment of an amount that the Board determines is reasonable.

The performance evaluation for the year ended 30 June 2010 has not occurred at the date of this report. The performance evaluation, when it does occur, will take place in accordance with the process described above.

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5.3 Overview of executive compensation arrangements (continued)

Medium-term incentive (MTI)The MTI is designed to reward and retain Senior Executives in the Group Executive Committee for performance over a two year period. The MTI is awarded on the basis of achievement against pre-determined objectives linked to both individual and company performance, as described for the STI above.

Two allocations of MTI have been granted to executives for:

> the two year performance period ended 30 June 2009; and> the two year performance period ended 30 June 2010.

The calculation of the MTI involves the following steps:

> The Board approves the maximum amount of MTI payable to each executive;

> At the end of the performance period, the Board and CEO assess the extent to which the pre-determined objectives were met, and determine the proportion of the maximum amount to be paid;

> The amount to be paid is divided by a pre-determined volume weighted average price of shares of Virgin Blue Holdings Limited; and

> The calculated amount represents the number of shares in Virgin Blue Holdings Limited allocated to each executive.

To be eligible to receive the MTI, the Executive Committee member must have been a current employee of Virgin Blue and actively performing their duties as at the end of the performance period.

At the date of this report, the final amounts earned by executives for the performance period ended 30 June 2009 has been determined, but shares have not yet been issued. The final amounts earned by executives for the performance period ended 30 June 2010 have not been determined at the date of this report.

The MTI scheme will not continue beyond its current cycle.

Long-term incentive (LTI)Senior Executives may be issued options under the Senior Executive Option Plan (SEOP). The CEO may also participate in SEOP and the CEO Co-Investment Scheme (CEOCIS). It is proposed to purchase shares on-market to satisfy any performance rights issued to the CEO on satisfaction of the performance hurdle applicable to the CEOCIS. The Executive Performance Rights Plan which operated up to 30 June 2009 is no longer active. The ability to exercise the options issued under SEOP or CEOCIS is conditional on the achievement of specified performance hurdles based on one or more of the following factors: increase in the Company share price, total shareholders return exceeding that of a comparator group of companies or increase in earnings per share as detailed below.


SEOP Issue 4 SEOP Issues 5 to 7 SEOP Issue 9Issue date 31 January 2005 SEOP 5: 8 December 2005

SEOP 6: 1 May 2006

SEOP 7: 8 December 2006

SEOP 9: 21 November 2007

Performance period Four tranches, vesting equally over four years. Performance period commences on issue date and ends on the 12 month anniversary date for the next four years.

Four tranches, vesting equally over four years. Performance period commences on issue date and ends on the 12 month anniversary date for the next four years.

Three years from 1 July 2007 to 30 June 2010.

Performance hurdle 1st tranche - Share price of the Company is 10% or more above the Company share price on the date that the options were issued ($1.96).

Subsequent tranches - Share price of the Company is 10% or more above the targeted share price for the previous year.

Total shareholder return (growth plus dividend) of the Company over the performance period is equal to or better than the percentage increase of the ASX 200 index.

Increase in earnings per share of the Company over the performance period is greater than 20.9%.

Exercise price SEOP 4: $1.96 SEOP 5: $1.55

SEOP 6: $1.77

SEOP 7: $2.19

Nil

Exercise period Performance date to expiry date. Performance date to expiry date. 22 November 2010 to 30 June 2011.

Expiry conditions Immediately if not vested on vesting date.

Options in a given tranche vest if the performance hurdle is met. If the hurdle is not met, the options can vest later if the hurdle is subsequently met for 30 continuous trading days at any time between the performance date and the expiry date.

Immediately if not vested on vesting date.

Expiry date 31 January 2010. All options lapsed on this date.

5 years after issue date 30 June 2011

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SEOP Issue 10 SEOP Issue 11 CEOCISIssue date 22 April 2009 1 April 2010 2 March 2010

Performance period Three years from 1 July 2008 to 30 June 2011.

Three years from 1 July 2009 to 30 June 2012.

8 May 2010 to 30 June 2013.

Performance hurdle Fully diluted earnings per share at 30 June 2011 is as projected in the 3 year business plan approved by the Board in October 2008.

The performance hurdle was amended on 26 November 2009 as described on page 36, to recognise the effect of the Company equity raising which occurred in September 2009.

100% of the options will vest on 30 June 2012 if the cumulative increase in earnings per share of the Company for the three years ended 30 June 2012 is 20 cents per share or more. 50% to 99% of the options will vest, on a linear scale, if the increase in earnings per share over that three year period is between 12 cents and 19 cents. No options will vest if the increase in earnings per share over the performance period is less than 12 cents.

Subject to Board discretion in certain circumstances, the participant must also be employed by the Group in a General Manager’s role or higher throughout the performance period.

The 20 day weighted average share price of the Company at 30 June 2013 is 25% higher than the 20 day weighted average share price of the company at 8 May 2010 ($0.61).

Exercise price Nil Nil Nil

Exercise period 28 November 2011 to 30 June 2012. Between the date on which the Group’s 2012 results are announced and 30 June 2013.

30 June 2013 to 30 June 2014.

Expiry conditions Immediately if not vested on vesting date.



Expiry date 30 June 2012 30 June 2013 30 June 2014

The Virgin Blue Holdings Limited share price at 30 June 2010 was $0.31.

In addition to the option plans described above, the service contract of the CEO allows him to participate in an LTI plan, subject to the plan being approved by the shareholders at the Company’s Annual General Meeting in November 2010. The terms of this plan, should it be approved by shareholders, are as follows:

CEO Commencement LTIIssue date 2 March 2010

Performance period 8 May 2010 to 7 May 2013.

Performance hurdle Growth in the Company’s total shareholder return (“TSR”) over the performance period exceeding that of the median of the ASX 200 Index (excluding financial sector and resource companies). For testing purposes, both the base TSR on 8 May 2010 and TSR on the testing date will be determined using the 20 day volume weighted average price of the Company’s shares. Satisfaction of the performance hurdle will be tested at 7 May 2013 and in respect of any options that remain unvested at that time, again on 31 December 2013. If the Company’s TSR growth ranking against the comparator group of companies is below the 50th percentile, none of the options will vest, at 50%, 50% of the options will vest, between the 51st and 74th percentile, an additional 2% of the options vest for each 1 percentile ranking above 50% and if the Company’s TSR growth is 75% or above the performance of the comparator group of companies, all options will vest.

Exercise price Nil

Exercise period 8 May 2013 to 30 June 2014.

Expiry conditions There is one additional testing date on 31 December 2013 in relation to options that did not vest on 7 May 2013.

Expiry date 30 June 2014

The LTI is focused on corporate performance and creating shareholder value over a multi-year period. However, long-term incentives are also used to balance short-term performance objectives with long-term shareholder value.

While short-term incentives reward past performance, the Board considers it essential that executives and senior management, as the group which has responsibility for achievement of sustained performance and strategy, have reward incentives linked to longer-term Company performance and to creating value for shareholders.

TSR was chosen as a performance hurdle as it is an indicator of shareholder wealth creation. TSR includes share price

growth, dividends and other capital adjustments. Earnings per share and Company share price were chosen as performance hurdles as they are indicators of the Company’s growth in earnings and are aligned to shareholder wealth objectives.

In assessing whether the share price performance hurdles have been met the Board obtains the closing Company share price as quoted on the ASX on the date that options vest. With respect to CEOCIS, the relevant share price is the Company’s 20 day weighted average share price on the vesting date. The closing or weighted average share price (as applicable) is compared with the performance conditions required by each option issue.

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5.3 Overview of executive compensation arrangements (continued)

Long-term incentive (LTI) (continued)In assessing whether the earnings per share performance condition has been met, the Board calculates the earnings per share of Virgin Blue Holdings Limited based on the audited financial results of the Company over the vesting period. Calculated earnings per share is then compared with the required performance condition of the option issue.

On 25 August 2010 the Group introduced a policy that prohibits Senior Executives granted share-based payments as part of their remuneration from hedging economic exposure to unvested options that have been issued pursuant to a Group employee share or option plan.

Consequences of performance on shareholder wealthIn considering the Group’s performance and benefits for shareholders’ wealth, the Remuneration, Nomination and Governance Committee have regard to the following indices in respect of the current financial period and the previous four financial periods:


12 months to

30 June 2010

$

12 months to

30 June 2009

$

12 months to

30 June 2008

$

12 months to 30 June

2007 $

9 months to 30 June 2006

$

Net profit / (loss) after tax 21,300,000 (160,000,000) 97,700,000 215,800,000 84,500,000

Dividends paid - - 41,700,000 21,000,000 259,800,000

Change in share price - (0.16) (1.99) 0.96 (0.07)

Return of capital - - - - -

Net profit is considered as one of the financial performance targets in setting the STI and MTI. Dividends, changes in share price and return of capital are included in the TSR calculation which is one of the performance criterion assessed for the LTI. The other performance criteria assessed for the LTI is growth in earnings per share, which again takes into account the Group’s net profit.

The Remuneration, Nomination and Governance Committee considers that the above performance-linked compensation structure is appropriate. Up to and including the 2007 financial year, the Group had consistent growth in profits since start-up, and most of the Senior Executives and CEO achieve a level of performance which qualifies them for the majority of the performance incentives. The Remuneration, Nomination and Governance Committee consider that the performance-linked compensation structure has the appropriate incentives to generate favourable Group performance in future financial years.

Service contractsIt is the Group’s policy that service contracts for Senior Executives are unlimited in term but capable of termination with between three and six months notice and that the Group retains the right to terminate the contract immediately, by making payment equal to the Senior Executive’s fixed compensation component in lieu of notice.

The Group has entered into service contracts with each Senior Executive that enables Senior Executives to receive on termination of their employment their statutory entitlements of accrued annual and long service leave.

The service contract outlines the components of compensation paid to the Senior Executives but does not prescribe how compensation levels are modified year to year. Compensation levels are reviewed each year to take into account cost-of-living changes, any change in the scope of the role performed by the Senior Executive and any changes required to meet the principles of the remuneration policy.

Chief Executive OfficerMr John Borghetti, CEO, has a contract of employment which commenced 8 May 2010. The contract specifies the duties and obligations to be fulfilled by the CEO and provides that the Board and CEO will, early in each financial year, consult and agree objectives for achievement during that year.

The service contract with the CEO is unlimited in term, but is capable of termination by the CEO on six months notice, or by the Group on 12 months notice. The Group may make a payment in lieu of notice, calculated on base salary at the time, or require the CEO to serve out the notice period on an active or passive basis. On occurrence of a Fundamental Change (if the CEO ceases to be the most senior executive in the Group, there is substantial diminution in his role and responsibilities or the Company ceases to be listed on a recognised stock exchange), the CEO is entitled to terminate his contract of employment with 30 days notice, and receive a payment equal to 12 months’ fixed remuneration.F

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Non-executive directorsNon-executive directors’ fees are set based on advice from independent external advisors with reference to fees paid to other non-executive directors of comparable companies and the length of time since fees were last increased. On 1 March 2009, the Board decreased directors’ fees by 10%. Prior to that date, directors’ fees had last been increased on 1 October 2007.

Effective 1 March 2010, the Board resolved to increase directors’ fees. As a result of this resolution, directors’ base fees during the year were as follows:

Board

Audit and Financial

Risk Committee

Remuneration, Nomination

and Governance Committee

To 28 February 2010

Chairman $117,675 $18,000 $9,000

Members $72,675 $10,800 $4,500

From 1 March 2010

Chairman $175,000 $25,000 $15,000

Members $85,000 $10,000 $10,000

From 1 March 2010, the Board Chairman’s base fees are inclusive of any fees for Committee memberships.Non-executive directors do not receive performance related compensation.

Change of Chief Executive OfficerMr Brett Godfrey retired as CEO on 7 May 2010 and resigned as a director of Virgin Blue Holdings Limited on 6 July 2010. His intention to step down as CEO during 2010 was announced to the market in July 2009. At the Board’s request, Mr Godfrey agreed to remain with the Company through to the end of 2010 in order to ensure an effective transition to a new CEO. In consideration for this extended notice period, the Board agreed to vary the terms of his employment agreement.

Under the terms of the CEO Appointment Agreement, as varied, Mr Godfrey is entitled to a termination payment of $1.8 million as soon as practicable after termination, if the Group achieves a performance of greater than 60% against its Corporate Scorecard for the year ended 30 June 2010, and the Board is satisfied that Mr Godfrey discharged his duties in providing an effective transition to his successor, Mr Borghetti. This termination payment has been provided for in the financial statements of the Group for the year ended 30 June 2010.

The amended CEO Appointment Agreement entitles Mr Godfrey to participate in:

>. STI for the period 1 July 2009 to 30 June 2010, up to a maximum value of $450,000; and

> MTI for the performance periods ended 30 June 2009 and 30 June 2010, up to a maximum value of $450,000 each year. Mr Godfrey will receive a cash payment for MTI, rather than an equivalent number of shares.

Under the terms of that agreement, Mr Godfrey is not entitled to participate in LTI remuneration for his employment during the 2009 and 2010 financial years (previously valued at $900,000 per annum). To recognise his founder status, following his retirement as CEO Mr Godfrey was granted certain travel entitlements on a space available basis on any Group airline.

Mr Godfrey will continue to be available to the Group as an advisor for a period of 12 months from 1 January 2011, providing advice where required. The service contract with the Group can be terminated by Mr Godfrey with one month’s notice.

Mr Godfrey is not eligible to participate in STI or MTI or to receive any new grants of LTI during this period. However, it will constitute service with the Group for the purpose of any previously granted options made while Mr Godfrey was CEO. Therefore, options granted under SEOP 9 and SEOP 10 remain on foot, with performance hurdles tested at 30 June 2010 and 30 June 2011 respectively.

Group Executive OperationsDuring the course of the financial year, incentive arrangements were agreed with Mr Andrew David, who was at that time Chief Operating Officer, in consideration of his agreement to remain with the Group in his then current role during a time of significant transition for the Group. Since that time, an organisational restructure has occurred resulting in the position of Chief Operating Officer being made redundant and replaced by a role entitled Group Executive Operations with materially reduced responsibilities (for further information in relation to the organisational restructure, refer to section 5.4 below). At the Group’s request, Mr David has agreed to remain employed in his current position of Group Executive Operations until 31 December 2010 and effect an orderly transfer of responsibilities to his successor in consideration of a retention payment (in addition to his salary) of $248,193 payable by the Company on 1 January 2011. Mr David will leave the Company on 31 August 2011.

Mr David remains entitled to participate in the following remuneration schemes:

> STI for the periods 1 July 2010 to 30 June 2011 and 1 July 2011 to 31 August 2011;

> LTI under SEOP Issues 10 and 11.In lieu of any entitlement to options under the LTI for the period 1 July 2010 to 30 June 2013, the Company has agreed that Mr David will receive a cash payment of $250,000 on 31 August 2011.

On Mr David’s cessation of employment with the Company, he is entitled to a redundancy payment under the Group’s Redundancy Policy and his staff travel entitlements will remain in place until 31 August 2012.

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5.4 Directors’ and executive officers’ compensation Details of the compensation of directors and the key management personnel (as defined by AASB 124 Related Party Disclosures) of Virgin Blue Holdings Limited and the Virgin Blue Holdings Limited Group are set out in the following tables.

The key management personnel of the Company and the Group includes the directors as per page 22 above and the following Senior Executives who had authority and responsibility for planning, directing and controlling the activities of the Company and the Group during the current and prior financial year:

Key management personnel during:

Name Position 2010 2009Mr K Neate Chief Financial Officer Yes Yes

Mr A David Chief Operating Officer Yes Yes

Mr R Tanner General Manager, People Yes Yes

Mr S Swift Executive General Manager – V Australia Yes Yes

Ms M McArthur General Counsel and Company Secretary Yes Yes

Ms E Savage Chief Commercial Officer From 22 March 2010 No

Ms D Keighery General Manager, Public Affairs From 17 May 2010 No

Mr S Pichler Chief Commercial Officer No To 31 March 2009

All key management personnel are employed by Virgin Blue Airlines Pty Limited, with the exception of Mr S Swift, who was employed by Virgin Blue International Airlines Pty Limited. Mr S Swift resigned effective 16 July 2010. Mr A David will terminate from his current position on 31 December 2010 and will leave the Group on 31 August 2011.

Changes to key management personnel subsequent to year endOn 30 June 2010, the CEO announced changes to the senior management structure. The direct reports of the CEO will form the Group Executive of Virgin Blue Holdings Limited. The Group Executive represents the key management personnel of the Group, from 1 July 2010. The members of the Group Executive at 1 July 2010 were:

Name PositionMr K Neate Chief Financial Officer

Mr A David Group Executive Operations

Mr R Tanner Group Executive People

Ms M McArthur Group Executive Corporate Advisory and Company Secretary

Ms E Savage Group Executive Commercial

Ms D Keighery Group Executive Corporate Communications

Mr M Daley Group Executive Product and Guest Services

Ms J McKeon Group Executive Government Relations (anticipated commencement of September 2010)


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2010 Directors’ and executive officers’ compensation Details of the nature and amount of each major element of compensation of each director of the Company, other key management personnel of the Company and Group, and each of the five named Company executives and relevant Group executives who received the highest compensation for the financial year ended 30 June 2010 are:

Financial year 2009/2010

Short-term employee benefits

Post-employ-ment

Share-based payments

Termi-nation

benefits Total

STI bonus vested during year

STI bonus

forfeited during year

Propor-tion of

compen-sation perfor-mance related

Value of options

as a propor-tion of

compen-sation

Relevant date

Cash salary & fees $’000

STI cash bonus

(B) $’000

Super-annu-ation

benefits $’000

Options value (C)

$’000

MTI share bonus $’000

Termi-nation

benefits $’000 $’000 % % % %

DirectorsNon-executive

Mr N Chatfield 135 - 12 - - - 147 - - - -

Mr P McCall 56 - 5 - - - 61 - - - -

Mr D Baxby 76 - 7 - - - 83 - - - -

Mr R Thomas 89 - 8 - - - 97 - - - -

Mr M Vaile 70 - 6 - - - 76 - - - -

Alternate

Mr S Murphy - - - - - - - - - - -

Mr K Roberts 24 - 2 - - - 26 - - - -

Executive

Mr J Borghetti Appointed 8 May 2010 140 - 7 109(E) - - 256 - - 43% 43%

Mr B Godfrey Resigned 6 July 2010(D) 875 - 25 (518) - 1,800 2,182 - - 59% (24%)

Other key management personnel

Mr K Neate(A) 425 - 25 213 85 - 748 - - 40% 28%

Mr A David(A) 575 - 25 271 85 - 956 - - 37% 28%

Mr R Tanner(A) 275 - 25 145 64 - 509 - - 41% 28%

Mr S Swift(A) Resigned 16 July 2010 275 - 25 155 64 - 519 - - 42% 30%

Ms M McArthur(A) 356 - 25 259 64 - 704 - - 46% 37%

Ms E Savage Appointed 22 March 2010 152 - 7 - - - 159 - - - -

Ms D Keighery Appointed 17 May 2010 37 - 3 - - - 40 - - - -

Notes in relation to the tables of directors’ and executive officers’ compensation are set out on page 35.

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5.4 Directors’ and executive officers’ compensation (continued)

Financial year 2008 / 2009

Short-term employee benefits

Post-employ-ment

Share-based payments Total

STI bonus vested during year

STI bonus

forfeited during year

Propor-tion of

compen-sation perfor-mance related

Value of options

as a propor-tion of

compen-sation

Relevant date

Cash salary &

fees $’000

STI cash bonus

(B) $’000

Super-annu-ation

benefits $’000

Options value (C)

$’000

MTI share bonus $’000 $’000 % % % %

DirectorsNon-executive

Mr N Chatfield 133 - 12 - - 145 - - - -

Mr P McCall 82 - 7 - - 89 - - - -

Mr D Baxby 76 - 7 - - 83 - - - -

Mr P Little Resigned 22 August 2008 - - - - - - - - - -

Mr R Watson Resigned 11 July 2008 8 - 1 - - 9 - - - -

Mr R Thomas 89 - 8 - - 97 - - - -

Mr B McInerney Resigned 22 August 2008 - - - - - - - - - -

Mr T Mallon Resigned 22 August 2008 13 - 1 - - 14 - - - -

Mr J Ludeke Resigned 22 August 2008 - - - - - - - - - -

Mr M Vaile Appointed 22 September 2008 55 - 5 - - 60 - - - -

Alternate

Mr S Murphy - - - - - - - - - -

Mr K Roberts Appointed 28 November 2008(F) - - - - - - - - - -

Executive

Mr B Godfrey 826 281 100 402 281 1,890 62% 38% 51% 21%

Other key management personnel

Mr K Neate(A) 413 189 54 114 63 833 63% 37% 43% 13%

Mr S Pichler(A) Resigned 31 March 2009 413 240 59 6 60 778 60% 40% 39% 1%

Mr A David(A) 550 252 72 139 63 1,076 63% 37% 42% 13%

Mr R Tanner 275 124 36 69 47 551 62% 38% 42% 12%

Mr S Swift(A) 275 128 36 81 48 568 64% 36% 44% 14%

Ms M McArthur 350 - 32 27 - 409 - - 6% 6%

Other executives

Mr P Gunter (A) 298 122 38 132 - 590 75% 25% 42% 22%

Notes in relation to the tables of directors’ and executive officers’ compensation are set out on page 35.


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Notes in relation to the tables of directors’ and executive officers’ compensation(A) Denotes one of the five highest compensated

executives of the Company and Group, as required to be disclosed under the Corporations Act 2001.

(B) The STI cash bonus disclosed in the Financial Year 2008/2009 table above represents the bonuses awarded to Senior Executives for their performance in the year ended 30 June 2008. The STI cash bonus was calculated in September 2008, and paid in October 2008.

No STI cash bonus has been disclosed in the Financial Year 2009 / 2010 table above. The STI bonus for the performance year ended 30 June 2009 was not paid in cash. Rather, the amount awarded to each executive was paid by way of options, and was included in their entitlement for SEOP 11 options. The resulting expense is recorded as part of the “Options value” in the Financial Year 2009 / 2010 table above. SEOP 11 will vest on 30 June 2013, if the performance criteria are met.

The STI bonus pool for the performance year ended 30 June 2010 has been accrued but allocation to individual executives has not been calculated at the date of this report.

(C) The fair value of the options is calculated at the date of grant using a Black-Scholes, binomial or Monte Carlo model (depending on the terms and conditions of the option plan) and allocated to each reporting period evenly over the period from grant date to vesting date. The value disclosed is the portion of the fair value of the options allocated to this reporting period. In valuing the options, market conditions have been taken into account. Refer to note 33 of the financial statements for further details regarding the fair value of options.

SEOP 9, which was granted on 21 November 2007 and was due to vest on 30 June 2010, did not in fact vest as the performance hurdle described on page 28 was not achieved. Amounts previously expensed in relation to SEOP 9 have been reversed in the 2010 financial year and results in a reduction in total 2010 remuneration for the impacted individuals, consistent with the accounting policy outlined in note 3(o)(v) of the financial report.

(D) Resigned from position as Chief Executive Officer on 7 May 2010. Resigned as a director on 6 July 2010.

(E) Includes an expense recognised in accordance with AASB 2 Share-based Payment for options allocated to Mr Borghetti, which are subject to approval by shareholders at the Company’s Annual General Meeting in November 2010.

(F) Mr Keith Roberts was appointed as alternate director for Mr David Baxby and Mr Patrick McCall.

Insurance of officersDuring the financial year, the Group paid premiums of $694,000 (2009: $458,000) 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.

5.5 Equity Instruments

MTI – Shares granted as compensation As at the date of this report, the number of shares to be allocated to each executive under the MTI schemes for the performance periods ended 30 June 2009 and 30 June 2010, have not been determined. No shares were granted to executives as compensation during the current period.

LTI - Options granted as compensationAll options refer to options over ordinary shares of Virgin Blue Holdings Limited, which are exercisable on a one-for-one basis under various option plans. Options are provided at no cost to the recipients. Non-executive directors are not entitled to options.

During the reporting period, no (2009: nil) options vested and no (2009: nil) shares were issued on the exercise of options previously granted as remuneration.

The expiry dates and expiry conditions of options are described on pages 28 to 29. In addition to these expiry conditions, the options will expire on termination of the participant’s employment with the Group. Details of the performance criteria attached to each of the options are included in the long-term incentives discussion above and in note 33 to the financial statements. For options granted in the current financial year, the earliest vesting date is 30 June 2012 and the earliest exercise date is the announcement of the Group’s annual results for the financial year ended 30 June 2012 (2009: 28 November 2011).

Details of options granted as compensation, exercised and forfeited during current and prior years, including vesting profiles are as follows. No options have been granted since the end of the financial year.F

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5.5 Equity Instruments (continued)

LTI - Options granted as compensation (continued)

Number of options

2010 Date GrantedOption Plan

Balance at

begin-ning of year ‘000

Granted in year ‘000

For-feited in year ‘000

Balance at end of year ‘000

Fair value per

option at grant

date $

Exer-cise price per

option $

% vested in year

% for-

feited in year

(A)

Value of options granted in year

(B) $’000

Value of options

for-feited in year

(C) $’000

Financial years in which grant

vests Expiry Date

Executive Director

Mr J Borghetti 2 Mar 2010 CEOCIS - 659 - 659 $0.47 $0.00 - - 310 - 30 Jun 2013 30 Jun 2014

Mr B Godfrey 21 Nov 2007 SEOP 9 408 - (408) - $2.16 $0.00 - 100% - (881) 30 Jun 2010 30 Jun 2011

22 Apr 2009 SEOP 10 1,669 - - 1,669 $0.29 $0.00 - - - - 30 Jun 2011 30 Jun 2012

Other key management personnel of the Company and Group

Mr K Neate 8 Dec 2005 SEOP 5 1,043 - - 1,043 $0.40 $1.55 - - - - 30 Jun 2010 7 Dec 2010

21 Nov 2007 SEOP 9 102 - (102) - $2.16 $0.00 - 100% - (220) 30 Jun 2010 30 Jun 2011

22 Apr 2009 SEOP 10 417 - - 417 $0.29 $0.00 - - - - 30 Jun 2011 30 Jun 2012

1 Apr 2010 SEOP 11 - 1,448 - 1,448 $0.69 $0.00 - - 993 - 30 Jun 2012 30 Jun 2013

Mr A David 31 Jan 2005 SEOP 4 189 - (189) - $0.49 $1.96 - 100% - (93) 30 Jun 2008 31 Jan 2010

8 Dec 2005 SEOP 5 1,035 - - 1,035 $0.40 $1.55 - - - - 30 Jun 2010 7 Dec 2010

21 Nov 2007 SEOP 9 113 - (113) - $2.16 $0.00 - 100% - (245) 30 Jun 2010 30 Jun 2011

22 Apr 2009 SEOP 10 464 - - 464 $0.29 $0.00 - - - - 30 Jun 2011 30 Jun 2012

1 Apr 2010 SEOP 11 - 1,766 - 1,766 $0.69 $0.00 - - 1,211 - 30 Jun 2012 30 Jun 2013

Mr R Tanner 21 Nov 2007 SEOP 9 70 - (70) - $2.16 $0.00 - 100% - (152) 30 Jun 2010 30 Jun 2011

22 Apr 2009 SEOP 10 287 - - 287 $0.29 $0.00 - - - - 30 Jun 2011 30 Jun 2012

1 Apr 2010 SEOP 11 - 1,025 - 1,025 $0.69 $0.00 - - 703 - 30 Jun 2012 30 Jun 2013

Mr S Swift(D) 8 Dec 2005 SEOP 5 675 - - 675 $0.40 $1.55 - - - - 30 Jun 2010 7 Dec 2010

21 Nov 2007 SEOP 9 70 - (70) - $2.16 $0.00 - 100% - (152) 30 Jun 2010 30 Jun 2011

22 Apr 2009 SEOP 10 287 - - 287 $0.29 $0.00 - - - - 30 Jun 2011 30 Jun 2012

1 Apr 2010 SEOP 11 - 1,025 - 1,025 $0.69 $0.00 - - 703 - 30 Jun 2012 30 Jun 2013

Ms M McArthur 22 Apr 2009 SEOP 10 287 - - 287 $0.29 $0.00 - - - - 30 Jun 2011 30 Jun 2012

1 Apr 2010 SEOP 11 - 1,025 - 1,025 $0.69 $0.00 - - 703 - 30 Jun 2012 30 Jun 2013

Ms L Savage and Ms D Keighery were not granted any options during the current financial year.

Notes in relation to the table of options granted as compensation(A) The % forfeited in the year represents the reduction from

the maximum number of options available to vest due to the performance or service conditions not being achieved.

(B) The value of options granted in the year is the fair value of the options calculated at grant date using a Black-Scholes, binomial or Monte Carlo model. The total value of the options granted is included in the table above. This amount is allocated to compensation over the vesting period.

(C) The value of options that lapsed during the year represents the benefit forgone and is calculated as the number of options at the date the options lapsed multiplied by the fair value of the options calculated at grant date using a Black-Scholes, binomial or Monte Carlo model.

(D) Mr S Swift resigned effective 16 July 2010. All options outstanding at 30 June 2010 lapsed on 16 July 2010.

Modification of terms of equity-settled share-based payment transactionsOn 26 November 2009, performance conditions for SEOP 10 were amended to recognise the effect of the equity raising completed in September 2009 (see note 24).

Prior to the amendment, the options would vest on 30 June 2011 if the fully diluted earnings per share of the Company at 30 June 2011 was as projected in the three year business plan approved by the Board in October 2008. There were 7,172,770 options issued under SEOP 10 available for vesting on the date of the modification. The options had no exercise price. The market price of the Company shares on the date of the modification was $0.51.

As as result of the amendment, the fully diluted earnings per share hurdle was revised downwards, proportionate with the number of new shares issued, and the expected interest earned on the cash received through the equity raising. The vesting date and period remain unchanged.

The fair value of the modified options was calculated using the same methodology as described above. There was no change in the value of the options as a result of the modification to the performance conditions.

6. Principal activitiesThe principal activity of the Group during the course of the financial year was the continued strategic development and operation of its short haul and long haul airlines.

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7. Review and results of operationsNet profit after income tax for the year ended 30 June 2010 was $21.3 million compared with a $160.0 million loss for the prior year ended 30 June 2009.

In the year to 30 June 2010, EBITDAR (earnings before interest, tax, depreciation, amortisation and aircraft rentals) increased to a profit of $472.1 million, when compared to an EBITDAR of $147.4 million for the year ended 30 June 2009. EBIT (earnings before interest and tax) increased from a loss of $162.3 million to a profit of $90.5 million during the same period.

Basic earnings per share, as shown in the financial statements was 1.0 cents per share and on a diluted basis, as shown in the financial statements, was 1.0 cents per share.

8. State of affairsIn the opinion of the directors there were no significant changes in the state of affairs of the Group that occurred during the financial year under review.

9. DividendsNo dividends were paid or declared by the Company since the end of the previous financial period. No final dividend has been declared or paid for 2010.

10. Likely developments and business strategiesThe directors have no comments on likely developments in the operation of the Group, the expected results of operations or business strategies because it would be likely to result in unreasonable prejudice to the Company.

11. Directors’ interestsThe relevant interest of each director in shares, debentures, interests in registered schemes and rights or options over such instruments issued by the companies within the Group and other related bodies corporate, as notified by the directors to the Australian Securities Exchange in accordance with section 205G(1) of the Corporations Act 2001, at the date of this report is as follows:

DirectorOrdinary shares

Options over ordinary shares

Mr J Borghetti 869,107 658,544

Mr N Chatfield 930,392 -

Mr P McCall - -

Mr D Baxby 40,000 -

Mr R Thomas 435,920 -

Mr M Vaile 30,000 -

Ms S Mostyn - -

Mr S Murphy - -

Mr K Roberts 12,000 -

12. Unissued shares under optionAt the date of this report, unissued ordinary shares of the Company under option are:

Option Plan Number of shares

Exercise price Expiry date

Senior Executive Option Plan (SEOP)

- Issue 5 4,979,825 $1.55 7 December 2010

- Issue 6 337,500 $1.77 30 April 2011

- Issue 7 3,183,216 $2.19 7 December 2011

- Issue 10 6,963,664 $0.00 30 June 2012

- Issue 11 16,911,506 $0.00 30 June 2013

32,375,711

CEO Co-Investment Scheme (CEOCIS) 658,544 $0.00 30 June 2014

Total unissued ordinary shares under option 33,034,255

13. Shares issued on exercise of options The Company has not issued ordinary shares as a result of the exercise of options during or since the end of the financial year.

14. 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 secretaries). 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. The premium paid for directors’ and officers’ liability insurance contracts is disclosed in the Remuneration Report on page 35.

In respect to non-audit services, KPMG, the Company’s auditor, has the benefit of an indemnity to the extent KPMG reasonably relies on information provided by the Company which is false, misleading or incomplete. No amount has been paid under any of these indemnities during 2009/10 or to the date of this Report.

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15. Non-audit servicesDuring the year KPMG, the Company’s auditor, has performed certain other services in addition to their statutory duties.

The Board has considered the non-audit services provided during the year and is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons:

> All non-audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed by the Audit Committee to ensure they do not impact the integrity and objectivity of the auditor.

> The non-audit services provided do not undermine 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 Company, acting as an advocate for the Company or jointly sharing risks and rewards.

Details of amounts paid to the auditor of the Company, KPMG, and its related practices for audit and non-audit services provided during the year are set out below:

Consolidated2010 $’000

2009 $’000

Audit services:

KPMG Australia:

- Audit and review of financial reports 934,162 652,500

Services other than statutory audit:

KPMG Australia:

- Taxation services 31,873 83,993

- Other assurance, accounting assistance and other services 388,150 291,160

420,023 375,153

16. Lead auditor’s independence declaration under section 307C of the Corporations Act 2001

The lead auditor’s independence declaration is set out on page 39 and forms part of the Directors’ Report for the financial year ended 30 June 2010.

17. Events subsequent to reporting dateOn 16 August 2010, Virgin Blue Holdings Limited announced the first phase of a Group network review. From 18 October 2010, it is planned Pacific Blue will cease to fly New Zealand domestic operations with capacity redeployed towards trans-Tasman, Pacific Islands and South East Asian routes.

On 26 August 2010, Virgin Blue Holdings Limited signed an agreement with Etihad Airways PSJC establishing a commercial agreement that will see V Australia launch direct services to Abu Dhabi in 2011, together with a codeshare on the Etihad network.

On 26 September 2010, the Virgin Blue Group experienced issues with the reservation system used by Virgin Blue, Pacific Blue and Polynesian Blue, for a 24 hour period. At the date of this report, the cause of this shut down is being investigated and the full financial impact is unknown.

Other than as described above, there has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group, in future financial years.

18. Rounding offThe Group is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, amounts in the financial report and Directors’ Report have been rounded off to the nearest one hundred thousand dollars, unless otherwise stated.

This report is made in accordance with a resolution of the directors:

John Borghetti Director

Dated at Brisbane this 29 September 2010.

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under s307C of the Corporations Act 2001Lead Auditor’s independence declaration

To: The directors of Virgin Blue Holdings Limited

I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 30 June 2010 there have been:

a) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and

b) no contraventions of any applicable code of professional conduct in relation to the audit.

KPMG

Robert S Jones Partner

Brisbane, 29 September 2010

KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.

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income statement

Consolidated

Note2010 $m

2009 $m

Revenue and income

Revenue 6 2,976.1 2,600.3

Other income 7 5.1 34.7

Share of net profits of associate accounted for using the equity method 0.6 0.4

2,981.8 2,635.4

Operating expenditure

Aircraft operating costs 188.8 141.1

Airport charges, navigation and station operations 591.2 535.3

Contract and other maintenance costs 135.4 140.0

Commissions and other marketing and reservations costs 195.3 182.8

Fuel and oil 782.1 748.9

Labour and staff related costs 639.8 595.2

Other expenses from ordinary activities 145.9 112.4

Depreciation and amortisation 203.8 183.7

Foreign exchange losses 21.6 25.1

Total operating expenses 2,903.9 2,664.5

Profit / (loss) before tax expense, finance costs, ineffective cash flow hedges and non-designated derivatives 77.9 (29.1)

Ineffective cash flow hedges and non-designated derivatives 8 12.6 (133.2)

Profit / (loss) before related income tax expense and net finance costs 90.5 (162.3)

Finance costs 8 (83.9) (90.5)

Finance income 27.7 26.6

Net financing costs (56.2) (63.9)

Profit / (loss) before income tax expense 34.3 (226.2)

Income tax expense / (benefit) 9 13.0 (66.2)

Net profit / (loss) attributable to the members of Virgin Blue Holdings Limited 21.3 (160.0)

Earnings per share for profit attributable to the ordinary equity holders of the Company:

Basic earnings per share – profit / (loss): 10 1.0 cents (11.6 cents)*

Diluted earnings per share – profit / (loss): 10 1.0 cents (11.6 cents)*

*In accordance with the requirements of AASB 133 Earnings per share, current and prior year earnings per share have been adjusted for the effect of new shares allotted in August 2009 and September 2009 pursuant to the Company’s institutional and retail placement.

The above Consolidated Income Statement is to be read in conjunction with the accompanying notes to the Financial Statements.

For the year ended 30 June 2010

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statement of Comprehensive income

Consolidated2010 $m

2009 $m

Profit / (loss) for the period 21.3 (160.0)

Other comprehensive income

Exchange differences on translation of foreign operations 26.9 (12.8)

Effective portion of changes in fair value of cash flow hedges (20.2) (259.5)

Net change in fair value of cash flow hedges transferred to profit or loss 111.9 29.8

Income tax on other comprehensive income (10.5) 53.8

Other comprehensive income for the period net of income tax 108.1 (188.7)

Total comprehensive income for the period attributable to equity holders of Virgin Blue Holdings Limited 129.4 (348.7)

The above Consolidated Statement of Comprehensive Income is to be read in conjunction with the accompanying notes to the Financial Statements.

For the year ended 30 June 2010

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Consolidated

Note2010 $m

2009 $m

Current assets

Cash and cash equivalents 11 814.7 475.9

Trade and other receivables 12 141.1 122.3

Derivative financial instruments 13 36.9 11.9

Current tax assets - 1.7

Total current assets 992.7 611.8

Non-current assets

Receivables 12 0.3 -

Investments accounted for using the equity method 14 7.3 6.7

Other financial assets 15 58.4 49.0

Derivative financial instruments 13 - 1.9

Property, plant and equipment 16 2,753.9 2,645.7

Intangible assets 17 53.3 51.1

Deferred tax assets 18 6.0 0.7

Total non-current assets 2,879.2 2,755.1

Total assets 3,871.9 3,366.9

Current liabilities

Trade and other payables 19 323.8 268.7

Interest-bearing liabilities 20 251.5 233.3

Provisions 21 82.4 75.1


Unearned revenue 22 616.3 493.2

Total current liabilities 1,308.9 1,158.9

Non-current liabilities

Payables 19 - 0.1

Interest-bearing liabilities 20 1,536.3 1,546.1

Provisions 21 49.9 42.5


Deferred tax liabilities 23 34.6 5.0

Unearned revenue 22 0.6 1.1

Total non-current liabilities 1,629.7 1,630.9

Total liabilities 2,938.6 2,789.8

Net assets 933.3 577.1

Equity

Share capital 24 632.5 407.7

Reserves 25 (3.8) (113.9)

Retained profits 304.6 283.3

Total equity 933.3 577.1

The above Consolidated Statement of Financial Position is to be read in conjunction with the accompanying notes to the Financial Statements.

statement of financial PositionAs at 30 June 2010

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Attributable to equity holders of the Company

Consolidated Note

Share capital

$m

Foreign currency

translation reserve

$m

Hedging reserve

$m

Share-based payments reserve

$m

Retained earnings

$mTotal Equity

$m

Balance at 1 July 2008 406.2 (2.8) 64.3 14.3 443.3 925.3

Total comprehensive income for the period

Profit / (loss) - - - - (160.0) (160.0)


Foreign currency translation differences, net of tax - (27.9) - - - (27.9)

Effective portion of changes in fair value of cash flow hedges, net of tax - - (190.6) - - (190.6)

Net change in fair value of cash flow hedges transferred to profit or loss, net of tax - - 29.8 - - 29.8

Total other comprehensive income - (27.9) (160.8) - - (188.7)

Total comprehensive income for the period - (27.9) (160.8) - (160.0) (348.7)

Transactions with owners, recorded directly in equity

Share options exercised - - - (1.6) - (1.6)

Share-based payment transactions 33 1.5 - - 0.6 - 2.1

Total transactions with owners 1.5 - - (1.0) - 0.5

Balance at 30 June 2009 407.7 (30.7) (96.5) 13.3 283.3 577.1

Balance at 1 July 2009 407.7 (30.7) (96.5) 13.3 283.3 577.1

Total comprehensive income for the period

Profit / (loss) - - - - 21.3 21.3


Foreign currency translation differences, net of tax - 43.9 - - - 43.9

Effective portion of changes in fair value of cash flow hedges, net of tax - - (14.2) - - (14.2)

Net change in fair value of cash flow hedges transferred to profit or loss, net of tax - - 78.4 - - 78.4

Total other comprehensive income - 43.9 64.2 - - 108.1

Total comprehensive income for the period - 43.9 64.2 - 21.3 129.4

Transactions with owners, recorded directly in equity

Issue of ordinary shares for cash, net of tax 24 224.8 - - - - 224.8

Treasury shares issued - - - (0.1) - (0.1)

Share-based payment transactions 33 - - - 2.1 - 2.1

Total transactions with owners 224.8 - - 2.0 - 226.8

Balance at 30 June 2010 632.5 13.2 (32.3) 15.3 304.6 933.3

The above Consolidated Statement of Changes in Equity is to be read in conjunction with the accompanying notes to the Financial Statements.

statement of Changes in EquityFor the year ended 30 June 2010

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statement of Cash flowsFor the year ended 30 June 2010

Consolidated

Note2010 $m

2009 $m

Cash flows from operating activities

Cash receipts in the course of operations 3,371.9 2,849.9

Cash payments in the course of operations (2,920.3) (2,673.7)

Finance costs paid (84.4) (96.7)

Income taxes refunded 2.0 21.6

Net cash inflow from operating activities 31 369.2 101.1

Cash flows from investing activities

Interest received 27.7 26.6

Dividend received 2.3 -

Payments for other deposits (10.9) (24.1)

Payments for intangible assets (9.2) (7.8)

Payments for property, plant and equipment (550.8) (832.4)

Proceeds from sale of property, plant and equipment 269.8 276.0

Net cash outflow from investing activities (271.1) (561.7)

Cash flows from financing activities

Proceeds from borrowings 262.0 751.4

Repayment of borrowings (244.5) (417.5)

Proceeds from issue of shares 222.9 -

Loan to related party 1.5 0.7

Net cash inflow from financing activities 241.9 334.6

Net increase / (decrease) in cash and cash equivalents 340.0 (126.0)

Cash and cash equivalents at the beginning of the financial year 475.9 603.9

Effects of exchange rate changes on cash and cash equivalents (1.2) (2.0)

Cash and cash equivalents at the end of the financial year 11 814.7 475.9

The above Consolidated Statement of Cash Flows is to be read in conjunction with the accompanying notes to the Financial Statements.

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Notes to the financial statements For the year ended 30 June 2010

1. Reporting entityVirgin Blue Holdings Limited (the “Company”) is a company domiciled in Australia. The address of the Company’s registered office and principal place of business is 56 Edmondstone Road, Bowen Hills, QLD 4006. The consolidated financial statements of the Company as at and for the year ended 30 June 2010 comprise the Company and its subsidiaries (together referred to as the “Group” and individually as “Group entities”) and the Group’s interest in associates. The Group is primarily involved in the airline industry.

2. Basis of preparation

(a) Statement of complianceThe financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards (“AASBs”) (including Australian Interpretations) adopted by the Australian Accounting Standards Board (“AASB”) and the Corporations Act 2001. The consolidated financial report of the Group complies with International Financial Reporting Standards (“IFRSs”) and interpretations adopted by the International Accounting Standards Board.

The consolidated financial statements were approved by the Board of Directors on 29 September 2010.

(b) Basis of measurementThe consolidated financial statements have been prepared on the historical cost basis, as modified by the revaluation of financial assets and liabilities (including derivative instruments) at fair value through profit or loss.

(c) Functional and presentation currencyThese consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency and the functional currency of the majority of the Group.

The Group is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, all financial information presented in Australian dollars has been rounded to the nearest one hundred thousand dollars unless otherwise stated.

(d) Use of estimates and judgmentsThe preparation of 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 and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements is disclosed in note 4.

(e) Changes in accounting policies Starting as of 1 July 2009, the Group has changed its accounting policies in the following areas:

> Determination and presentation of operating segments (note 3(s)); and

> Presentation of financial statements (note 3(t)).

3. Significant accounting policiesThe accounting policies set out below have been consistently applied to all the periods presented in these consolidated financial statements and have been consistently applied by Group entities, except as explained in notes 2(e), 3(s) and 3(t), which address changes in accounting policies. Certain comparative amounts have been reclassified to conform with the current year’s presentation.

(a) Basis of consolidation

(i) SubsidiariesSubsidiaries are entities controlled by the Group. Controlled entities are all those entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.

Controlled entities are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group.

Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements.

(ii) AssociatesAssociates are all entities over which the Group has significant influence but not control over the financial and operating policies, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for in the consolidated financial statements using the equity method of accounting, after initially being recognised at cost. The Group’s investment in associates includes any notional goodwill (net of any accumulated impairment loss) identified on acquisition.

The Group’s share of its associates’ post-acquisition profits or losses is recognised in the Income Statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends receivable from associates reduce the carrying amount of the investment recorded in the consolidated financial statements.

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3. Significant accounting policies (continued)

(a) Basis of consolidation (continued)

(ii) Associates (continued)When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured long-term receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.

Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.

(b) Foreign currency

(i) Transactions and balancesForeign currency transactions are translated to the functional currency of respective Group entities at the rates of exchange ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period.

Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined.

Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on qualifying cash flow hedges, which are recognised directly in equity. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

Foreign currency gains and losses are reported on a net basis.

(ii) Foreign operationsThe results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

> assets and liabilities are translated at exchange rates at the reporting date;

> income and expenses are translated at average exchange rates (unless that is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and

> all resulting exchange differences are recognised in other comprehensive income.

On consolidation, exchange differences arising from the translation of any net investment in foreign entities are taken to shareholders’ equity in the Foreign Currency Translation Reserve.

When a foreign operation is sold or borrowings repaid a proportionate share of such exchange differences are recognised in the Income Statement as part of the gain or loss on sale.

Foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are also considered to form part of a net investment in a foreign operation and are recognised directly in the Foreign Currency Translation Reserve.

(c) Revenue recognitionRevenue is measured at the fair value of the consideration received or receivable. Revenue is recognised for the major business activities as follows:

Scheduled revenueScheduled revenue comprises revenue from passenger ticket sales. Revenue is recognised when carriage (uplift) is performed. Scheduled revenue received in advance, together with any commission expense thereon, is carried forward in the Statement of Financial Position as unearned passenger revenue.

Other revenueOther revenue comprises revenue earned from the provision of other airline related services (including freight revenue, on-board sales and other product revenue), and government mandated charges. Other revenue is recognised in profit or loss at the time the service is provided.

Interest revenueInterest revenue is recognised in profit or loss as it accrues on an effective interest rate basis.

DividendsRevenue from dividends and distributions from controlled entities are recognised by the parent entity when they are declared by the controlled entities.

(d) Government grantsGrants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions.

Government grants relating to costs are deferred and recognised in profit or loss over the period necessary to match them with the costs that they are intended to compensate.

Government grants relating to the purchase of property, plant and equipment are included in non-current liabilities as deferred income and are credited to profit or loss on a straight-line basis over the expected lives of the related assets.

Notes to the financial statements (continued) For the year ended 30 June 2010

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(e) Finance costsFinance costs are expensed as incurred unless they relate to qualifying assets. Qualifying assets are assets which take a substantial period of time to get ready for their intended use or sale. If borrowed specifically for the acquisition, construction or production of a qualifying asset, the amount of finance costs capitalised are those incurred in relation to that borrowing, net of any interest earned on those borrowings. Where funds are borrowed generally, finance costs are capitalised using a weighted average capitalisation rate.

(f) Income tax The income tax expense for the period comprises tax payable on the current period’s taxable income based on the notional income tax rate for each jurisdiction, adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses.

Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted for each jurisdiction. The relevant tax rates are applied to the cumulative amounts of deductible and temporary differences to measure the deferred tax asset or liability. An exception is made for certain temporary differences arising from the initial recognition of an asset or a liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss.

Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity 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.

Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity.

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 tax 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.

(i) Tax consolidation legislationVirgin Blue Holdings Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation from an implementation date of 1 April 2003.

The head entity, Virgin Blue Holdings Limited, and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand-alone taxpayer in its own right.

In addition to its own current and deferred tax amounts, Virgin Blue Holdings Limited also 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 tax consolidated group.

(ii) Nature of tax funding arrangements The head entity, in conjunction with other members of the tax consolidated group, has entered into a tax funding arrangement which sets out the funding obligations of members of the tax consolidated group in respect of tax amounts. The tax funding arrangements require payments to / (from) the head entity equal to the current tax liability / (asset), and any tax loss (deferred tax asset) assumed by the head entity for each subsidiary member, calculated as if each subsidiary member continues to be a stand-alone tax payer in its own right.

Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the group.

Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities.

The tax funding agreement also provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement as payment of any amounts under the tax sharing agreement is considered remote.

(g) Goods and services taxRevenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included.

The net amount of GST recoverable from, or payable to, the Australian Taxation Office (“ATO”) is included as a current asset or liability in the Statement of Financial Position.

Cash flows are included in the Statement of Cash Flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows.

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(h) Earnings per shareBasic earnings per share (“EPS”) is calculated by dividing the net profit attributable to members of the Company for the reporting period, after excluding any costs of servicing equity, by the weighted average number of ordinary shares of the Company, adjusted for any bonus elements in ordinary shares issued during the period.

Diluted EPS adjusts the figures used in the determination of basic EPS to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares.

(i) Financial instruments

(i) Non-derivative financial assetsThe Group initially recognises loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument.

The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability.

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

The Group has the following non-derivative financial assets: financial assets at fair value through profit or loss and loans and receivables.

Financial assets at fair value through profit or lossAn instrument is classified as at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through profit or loss if the Group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Group’s documented risk management or investment strategy. Upon initial recognition, attributable transaction costs are recognised in profit or loss when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognised in profit or loss.

Loans and receivablesLoans and receivables are financial assets with fixed or determinable payments that are not quoted in an active

market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest rate method, less any impairment losses.

Loans and receivables comprise trade and other receivables.

Cash and cash equivalents includes cash on hand, deposits held at call within financial institutions and other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

(ii) Non-derivative financial liabilities The Group initially recognises debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the Statement of Financial Position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

The Group has the following non-derivative financial liabilities: loans and borrowings and trade and other payables.

Such financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortised cost using the effective interest rate method.

(iii) Share capital – Ordinary sharesOrdinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are recognised as a deduction in equity, net of any tax effects.

In the Group’s financial statements, the transactions of the Group sponsored Key Employee Performance Plan Trust are treated as being executed directly by the Company (as the Trust acts as the Company’s agent). Accordingly, shares in the Company held by the Trust are recognised as Treasury shares and deducted from equity.

(iv) Derivative financial instruments, including hedge accounting

The Group holds derivative financial instruments to hedge (including economically hedge) its foreign currency, fuel price and interest rate risk exposures.

On initial designation of the hedge, the Group formally documents the relationship between the hedging instruments and hedged items, including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at the inception of the hedge relationship as well as on an


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ongoing basis, whether the hedging instruments are expected to be “highly effective” in offsetting the changes in the fair value of cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80-125 percent. For a cash flow hedge of a forecast transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported net income.

Derivatives are recognised initially at fair value; attributable transactions costs are recognised in profit or loss when incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.

Cash flow hedgesChanges in the fair value of the derivative hedging instrument designated as a cash flow hedge are recognised directly in other comprehensive income to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised in profit or loss.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in other comprehensive income and presented in the hedging reserve in equity remains there until the forecast transaction affects profit or loss. When the hedged item is a non-financial asset, the amount recognised in other comprehensive income is transferred to the carrying amount of the asset when the asset is recognised. In other cases, the amount recognised in other comprehensive income is transferred to profit or loss in the same period that the hedged item affects profit or loss.

(j) Property, plant and equipmentProperty, plant and equipment is stated at historical cost less accumulated depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from other comprehensive income of any gains/losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are recognised in profit or loss as incurred.

Items of property, plant and equipment are depreciated using the straight-line method over their estimated useful lives, taking into account estimated residual values, with the exception of finance lease assets which are depreciated over the term of the relevant lease, or where it is likely the Group will obtain ownership of the asset, the life of the asset.

Assets are depreciated from the date of acquisition or, in respect of internally constructed assets, from the time an

asset is completed and held ready for use. Depreciation methods, useful lives and residual values, are reviewed at each reporting date. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

The depreciation and amortisation rates used for each class of asset for the current and comparative periods are as follows:

> Buildings 2.5% - 10%> Aircraft and aeronautic related assets: - Modifications to leased aircraft 20% - Rotables and maintenance parts 7.25% - Airframe, engines and landing gear 10% – 25% - Major cyclical maintenance 10% - 80%> Plant and equipment 20%> Computer equipment 33.3%Gains and losses on disposal of an item of property, plant or equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognised net within “other income” in profit or loss.

Repairs and maintenance – owned aircraftRoutine maintenance costs, including annual airframe checks, are written off to profit and loss as incurred.

Major cyclical maintenance on owned aircraft is capitalised to the carrying value of the aircraft as incurred and amortised over the period to the next scheduled heavy maintenance. Any remaining carrying amount of the cost of the previous inspection is derecognised.

Repairs and maintenance – operating leased aircraftRoutine maintenance costs including annual airframe checks are written off to profit and loss as incurred.

Provision is made for the estimated future costs of major cyclical maintenance of leased airframes, engines, landing gear and auxiliary power units by making charges to profit or loss, calculated by reference to the current rectification cost and the number of hours or cycles operated during the period. The Group is presently obligated to these aircraft rectification requirements pursuant to the operating lease agreements. The costs of major cyclical maintenance are written off against the provision when incurred.

Leasehold improvementsThe cost of improvements to or on leasehold properties is amortised over the unexpired period of the lease or the estimated useful life of the improvement to the Group, whichever is the shorter. Leasehold improvements held at the reporting date are being amortised over 3 to 5 years (2009: 3 to 5 years).

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(k) Intangibles

(i) Goodwill

Goodwill represents the excess of the purchase consideration plus incidental costs over the net fair value of the identifiable assets of an entity or operation acquired at the date of acquisition.

Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates.

Goodwill acquired in business combinations is not amortised. Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Goodwill is allocated to cash-generating units for the purpose of impairment testing (refer to note 3(m) below). Each of those cash-generating units represents the Group’s investment in each region of operation by each primary reporting segment. The two identified cash-generating units are Short haul and Long haul operations.

(ii) Other intangible assetsOther intangible assets include software, patents and trademarks. These items have a finite useful life and are measured at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight-line method to allocate the cost of the intangible asset over the estimated useful lives, which is three years (2009: three years). Amortisation methods, useful lives and residual values are reviewed at each reporting date.

(iii) Subsequent expenditureSubsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss as incurred.

(l) LeasesLeases under which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Other leases are classified as operating leases.

(i) Finance leases

Finance leases are capitalised. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Capitalised lease assets are amortised over the term of the relevant lease, or where it is likely the Group will obtain ownership of the asset, the life of the asset.

Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of

the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

(ii) Operating leasesPayments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased property. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease.

(iii) Sale and leaseback transactionsA sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset. If the sale and leaseback transaction results in a finance lease, any excess of sales proceeds over the carrying amount are deferred and amortised over the lease term.

If a sale and leaseback transaction results in an operating lease, and the transaction is established at fair value, any profit or loss is recognised immediately. If the sale price is below fair value, any profit or loss is recognised immediately except that, if the loss is compensated for by future lease payments at below market price, it is deferred and amortised in proportion to the lease payments over the period for which the asset is expected to be used. If the sale price is above the fair value, the excess over fair value is deferred and amortised over the period for which the asset is expected to be used. If the fair value at the time of a sale and leaseback transaction is less than the carrying amount, a loss equal to the amount of the difference between the carrying amount and the fair value shall be recognised immediately.

(m) Impairment

(i) Financial assets (including receivables) A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Individually significant financial assets are tested for impairment on an individual basis. All individually significant financial assets found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Financial assets that are not individually significant are assessed collectively in groups that share similar credit risk characteristics.

In assessing collective impairment the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between

Notes to the financial statements (continued)For the year ended 30 June 2010

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its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against receivables. Interest on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

(ii) Non-financial assetsThe carrying amounts of the Group’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purposes of assessing impairment, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”).

Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated have been aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to CGUs that are expected to benefit from the synergies of the combination.

An impairment loss is recognised if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

(n) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the

proceeds (net of transaction costs) and the redemption amount is recognised in the Income Statement over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

(o) Employee benefits

(i) Wages and salaries, annual leave and sick leaveLiabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months of the reporting date are recognised on an undiscounted basis in other payables in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised when the leave is taken and measured at the rates paid or payable.

(ii) Long service leaveThe provision for employee benefits to long service leave represents the present value of the estimated future cash outflows to be made resulting from employees’ services provided to reporting date.

The provision is calculated using expected future increases in wage and salary rates including related on-costs and expected settlement dates based on turnover history and is discounted using the rates attaching to national government bonds at reporting date which most closely match the terms of maturity of the related liabilities.

(iii) Employee bonus plansA liability for employee benefits in the form of bonus plans is recognised in provision for employee entitlements when there is no realistic alternative but to settle the liability and at least one of the following conditions is met:

> there are formal terms in the plan for determining the amount of the benefit;

> the amounts to be paid are determined before the time of completion of the financial report; or

> past practice gives clear evidence of the amount of the obligation.

Liabilities for bonus plans are expected to be settled within 12 months and are measured at the amounts expected to be paid when they are settled.

(iv) Superannuation planThe Group is required to make contributions to defined contribution employee 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 the Income Statements 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.

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(o) Employee benefits (continued)

(v) Share-based paymentsThe Group operates a number of employee option plans and share plans.

The fair values of options granted are recognised as an employee benefit expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the options.

The fair value at grant date is determined using a Black-Scholes, binomial or Monte Carlo option pricing model depending on the terms and conditions of each option, that takes into account the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option.

The fair value of the option granted excludes the impact of any service and non-market vesting conditions (for example, profitability and sales growth targets). Service and non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the entity revises its estimate of the number of options that are expected to become exercisable. The employee benefit expense recognised each period takes into account the most recent estimates, such that the amount ultimately recognised as an expense is based on the number of options that do not meet the related service and non-market performance conditions at the vesting date.

Upon exercise of options, the balance of the share-based payments reserve relating to those options is transferred to share capital.

The market value of shares issued to employees for no cash consideration under the employee share scheme is recognised as an employee benefits expense with a corresponding increase in equity when the shares vest.

When the Company grants options over its shares to employees of subsidiaries, the fair value at grant date is recognised as an increase in the investments in subsidiaries, with a corresponding increase in equity over the vesting period of the grant.

(p) ProvisionsA provision is recognised when there is a present legal, equitable or constructive obligation as a result of a past event, it is probable that a future sacrifice of economic benefits will be required to settle the obligation, the timing or amount of which is uncertain and the amount has been reliably estimated.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is

recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are determined by discounting expected future cash flows at a pre-tax rate that is specific to the liability. The unwinding of the discount is recognised as a finance cost.

(q) DividendsProvision is made for the amount of any dividend declared, determined or publicly recommended by the directors on or before the end of the year but not distributed at balance date.

(r) Loyalty program accountingThe Group receives revenue from the sale to third parties of rights to have Velocity reward points allocated to members of the Velocity Program. This revenue is deferred and recognised in profit or loss when the points are redeemed or lapse under the rules of the Velocity Program. Members of the Velocity Program also accumulate 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. This revenue is recognised in profit and loss when the points are redeemed.

(s) Segment reportingAs of 1 July 2009 the Group determines and presents operating segments based on the information that internally is provided to the Chief Executive Officer, who is the Group’s chief operating decision maker. This change in accounting policy is due to the adoption of AASB 8 Operating Segments. Previously operating segments were determined and presented in accordance with AASB 114 Segment Reporting. The new accounting policy in respect of segment operating disclosures is presented in note 5.

Comparative segment information has been re-presented in conformity with the transitional requirements of AASB 8. Since the change in accounting policy only impacts presentation and disclosure aspects, there is no impact on earnings per share.

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. All operating segments’ operating results are reviewed regularly by the Board to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

Segment results that are reported to the Board include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Other items comprise mainly corporate assets (primarily the Company’s headquarters), head office expenses, and income tax assets and liabilities.

Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill.


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(t) Presentation of financial statementsThe Group applies revised AASB 101 Presentation of Financial Statements (2007), which became effective as of 1 January 2009. As a result, the Group presents in the consolidated statement of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the consolidated statement of comprehensive income.

Comparative information has been re-presented so that it also is in conformity with the revised standard. Since the change in accounting policy only impacts presentation aspects, there is no impact on earnings per share.

(u) Determination of fair valuesA number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods.

(i) DerivativesThe fair value of financial instruments traded in active markets (such as publicly traded derivatives) is based on quoted market prices at the reporting date. The quoted market price used for financial assets held by the Group is the current bid price; the appropriate quoted market price for financial liabilities is the current ask price.

The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each reporting date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt instruments held. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining instruments. The fair value of interest-rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward exchange contracts and fuel contracts is determined using forward exchange market rates and fuel prices at the reporting date.

(ii) Trade and other receivables The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. This fair value is determined for disclosure purposes.

(iii) Non-derivative financial liabilitiesFair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date.

(iv) Share based payment transactionsRefer to note 3(o) for discussion of fair value calculations of employee shares and share options.

(v) Unearned revenueRefer to note 3(r) for discussion of fair value calculations of Loyalty program reward points, which is recorded as unearned revenue.

(v) New accounting standards and interpretations not yet adopted

The following standards, amendments to standards and interpretations have been identified as those which may impact the Group in the period of initial application. They are available for early adoption at 30 June 2010, but have not been applied in preparing this financial report:

> AASB 9 Financial Instruments includes requirements for the classification and measurement of financial assets resulting from the first part of Phase 1 of the project to replace AASB 139 Financial Instruments: Recognition and Measurement. AASB 9 will become mandatory for the Group’s 30 June 2014 financial statements. Retrospective application is generally required, although there are exceptions, particularly if the entity adopts the standard for the year ended 30 June 2012 or earlier. The Group has not yet determined the potential effect of the standard.

> AASB 124 Related Party Disclosures (revised December 2009) simplifies and clarifies the intended meaning of the definition of a related party and provides a partial exemption from the disclosure requirements for government-related entities. The amendments, which become mandatory for Group’s 30 June 2012 financial statements, are not expected to have any impact on the financial statements.

> AASB 2009-5 Amendments to Australian Accounting Standards arising from the Annual Improvements Process affects various AASBs resulting in minor changes for presentation, disclosure, recognition and measurement purposes. The amendments, which become mandatory for the Group’s 30 June 2011 financial statements, are not expected to have a significant impact on the financial statements.

> AASB 2009-8 Amendments to Australia Accounting Standards – Group Cash-settled Share-based Payment Transactions resolves diversity in practice regarding the attribution of cash-settled share-based payments between different entities within a group. As a result of the amendments AI 8 Scope of AASB 2 and AI 11 AASB 2 – Group and Treasury Share Transactions will be withdrawn from the application date. The amendments, which become mandatory for the Group’s 20 June 2011 financial statements, are not expected to have a significant impact on the financial statements.

> IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments addresses the accounting by an entity when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the financial liability. IFRIC 19 will become mandatory for the Group’s 30 June 2011 financial statements, with retrospective application required. The Group has not yet determined the potential effect of the interpretation.

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(v) New accounting standards and interpretations not yet adopted (continued)

> AASB 2010-13 Amendments to Australian Accounting Standards arising from the Annual Improvements Process affects various AASBs resulting in changes for presentation, disclosure, recognition and measurement purposes. The amendments, which become mandatory for the Group’s 30 June 2011 financial statements, are not expected to have a significant impact on the financial statements

> AASB 2010-14 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Process affects various AASBs resulting in changes for presentation, disclosure, recognition and measurement purposes. The amendments become mandatory for the Group’s 30 June 2012 financial statements. The Group has not yet determined the potential effect of the standard.

> AASB 1053 Application of Tiers of Australian Accounting Standards establishes a differential financial reporting framework, which consists of two tiers of reporting requirements for reporting entities preparing general purpose financial statements (GPFSs):

- Tier 1: Australian Accounting Standards (full IFRS recognition, measurement and disclosure)

- Tier 2: Australian Accounting Standards - Reduced Disclosure Requirements (full recognition and measurement but reduced disclosure).

The amendments, which become mandatory for the Group’s 30 June 2014 financial statements, are not expected to have a significant impact on the financial statements.

4. Critical accounting estimates and judgementsEstimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are discussed below.

(a) Estimated impairment of goodwill and other non-current assets

The Group tests annually whether goodwill has suffered any impairment in accordance with the accounting policy stated in note 3(k). The recoverable amounts of cash generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions. Refer to notes 16 and 17 for details of these assumptions and the potential impact of changes to the assumptions.

(b) Maintenance provisionsAs described in note 3(j), the Group provides for the estimated future costs of major cyclical maintenance of leased airframes, engines, landing gear and auxiliary power units, calculated by reference to the rectification costs and the number of hours or cycles operated during the period. These calculations require the use of assumptions regarding the timing of maintenance and the cost of repairs. The timing of future payments is estimated with reference to historical data, industry standards and manufacturers’ specifications. Refer to note 21 for further details regarding maintenance provisions.

(c) Financial instrumentsAs detailed in note 3(i), the Group enters into financial arrangements to manage exposures to interest rates, foreign currency and fuel price risk. Financial instruments are recognised as financial assets and financial liabilities of the entity. The fair value of these financial assets and financial liabilities must be estimated for recognition and measurement disclosure purposes. These calculations require valuation techniques using various methods and assumptions. Refer to note 29 for further details regarding financial instruments.

(d) Residual valuesThe estimate of the useful life and depreciable amount of aircraft requires the use of assumptions regarding the residual value of the aircraft at the estimated time of disposal. Residual value is estimated based on market estimates of future aircraft values and current expectations of the aircraft operations. As the market for aircraft is based on US dollars, residual value estimates are also affected by movements in the US dollar against the Australian dollar.

(e) Deferred points revenueAs described in note 3(r), the Group defers revenue relating to participation by members in the Velocity rewards program. This revenue is deferred and recognised in profit and loss when points are redeemed or lapse under the rules of the Velocity Rewards Program. The amount of revenue deferred is calculated using assumptions regarding the fair value of reward points.

5. Operating segments

(a) Business segmentsThe Group has two reportable segments, as described below, which offer different products and services and are managed separately. For each of the segments, the Board reviews internal management reports on a monthly basis. The following summary describes the operations in each of the Group’s reportable segments:

> Short haul operations – Operations using the short haul fleet of Boeing 737 aircraft and Embraer 170 and 190 aircraft. This comprises Australian domestic, New Zealand domestic, Trans-Tasman and Pacific Island flying.

> Long haul operations – Operations using the Boeing 777 aircraft. This comprises Trans-Pacific flying.

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Costs associated with the centralised management and governance of Virgin Blue, together with certain items which are not allocated to business segments, are reported in Corporate/Unallocated.

Information regarding the results of each business segment is included below. Performance is measured based on segment profit before income tax as included in the internal management reports that are reviewed by the Board. Segment profit is used to measure performance as management believes such information is the most relevant in evaluation the results of certain segments relative to other entities that operate within the airline industry. Inter-segment pricing is

determined on an arm’s length basis or a cost plus margin basis, depending on the nature of the revenue and the financial impact on the segment receiving the revenue. The accounting policies of the reportable segments are the same as described in notes 2 and 3.

Comparative segment information has been represented in conformity with the requirements of AASB 8 Operating Segments.

2010Short haul

$’mLong haul

$’m

Other items$’m

Elimin-ations$’m

Consolidated$’m

Sales and other income

External revenues 2,625.9 324.3 31.0 - 2,981.2

Inter-segment revenues 71.3 - 84.0 (155.3) -

Segment revenue 2,697.2 324.3 115.0 (155.3) 2,981.2

Share of net profit of associate - - 0.6 - 0.6

Segment underlying EBITDAR 451.0 8.4 (5.1) 8.8 463.1

Non-cancellable operating lease rentals (152.2) (19.9) - - (172.1)

Depreciation and amortisation (171.2) (31.3) (1.3) - (203.8)

Segment underlying EBIT 127.6 (42.8) (6.4) 8.8 87.2

Ineffective cash flow hedges and non-designated derivatives - - 12.6 - 12.6

Non-recurring items:

Net loss on sale of property, plant and equipment (4.7) (4.6) - - (9.3)

Segment EBIT 122.9 (47.4) 6.2 8.8 90.5

Net finance costs (56.2)

Profit before related income tax expense 34.3

Income tax expense 13.0

Profit for the year 21.3

Assets

Segment assets 2,643.5 493.9 819.8 (92.6) 3,864.6

Investments accounted for using the equity method - - 7.3 - 7.3

Total assets 2,643.5 493.9 827.1 (92.6) 3,871.9

Liabilities

Total liabilities 2,290.3 661.3 91.4 (104.4) 2,938.6

Capital expenditure

Payments for property, plant and equipment 392.3 157.3 1.2 - 550.8

The total liabilities of the Long haul segment exceed the total assets of that segment. The Long haul segment primarily comprises the operations of V Australia. Amounts owing by the V Australia operations to other Group subsidiaries in relation to the initial start-up funding of V Australia and the arrangement of aircraft financing will not be required to be repaid if such repayment would render the V Australia operations unable to pay its debts as and when they fall due, for at least the next 12 months.F

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5. Operating segments (continued)

(a) Business segments (continued)

2009Short haul

$’mLong haul

$’m

Other items$’m

Elimin-ations$’m

Consolidated$’m

Sales and other income

External revenues 2,543.4 69.1 22.5 - 2,635.0

Inter-segment revenues 41.5 - 82.1 (123.6) -

Segment revenue 2,584.9 69.1 104.6 (123.6) 2,635.0

Share of net profit of associate - - 0.4 - 0.4

Segment underlying EBITDAR 357.1 (50.9) 16.0 1.7 323.9

Non-cancellable operating lease rentals (114.6) (11.4) - - (126.0)

Depreciation and amortisation (174.8) (7.4) (1.5) - (183.7)

Segment underlying EBIT 67.7 (69.7) 14.5 1.7 14.2

Ineffective cash flow hedges and non-designated derivatives - - (133.2) - (133.2)

Non-recurring items

Net gain on sale of property, plant and equipment 16.8 13.8 - - 30.6

V Australia start-up and foreign exchange expenses - (73.9) - - (73.9)

Segment EBIT 84.5 (129.8) (118.7) 1.7 (162.3)

Net finance costs (63.9)

Loss before related income tax expense (226.2)

Income tax benefit (66.2)

Loss for the year (160.0)

Assets

Segment assets 2,512.6 388.9 573.2 (114.5) 3,360.2

Investments in associates - - 6.7 - 6.7

Total assets 2,512.6 388.9 579.9 (114.5) 3,366.9

Liabilities

Total liabilities 2,243.3 494.6 65.5 (13.6) 2,789.8

Capital expenditure

Payments for property, plant and equipment 459.0 372.4 1.0 - 832.4

(b) Geographical segmentsTicket sales revenue from domestic services within Australia is attributed to the Australia geographic region. Guest 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. Other operating income is not allocated to a geographical region as it is impractical to do so.

Australia$’m

New Zealand$’m

Pacific Islands

$’m

United States

$’mUnallocated

$’mConsolidated

$’m

2010External revenues 2,424.7 141.9 15.8 95.6 303.2 2,981.2

2009External revenues 2,182.5 134.7 14.8 14.9 288.1 2,635.0

For the year ended 30 June 2010 and 30 June 2009, the principal assets of the Group comprised the aircraft fleet, all of which were registered and domiciled in Australia. 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.


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Consolidated2010 $m

2009 $m

6. Revenue

Airline passenger revenue 2,706.6 2,362.6

Other revenue 269.5 237.7

2,976.1 2,600.3

7. Other income

Government grants 2.8 4.1

Dividends received 2.3 -

Net gain on disposal of property, plant and equipment - 30.6

5.1 34.7

Government grants of $2.8 million (2009: $4.1 million) were recognised as other income by the Group during the financial period. Refer to note 28 for details of conditions or contingencies attaching to these grants. The Group did not benefit directly from any other forms of government assistance.

8. Expenses Profit / (loss) before income tax expense includes the following specific expenses

(a) Finance costs

Finance costs

- interest and finance charges paid/payable 92.8 113.2

- less: capitalised finance charges (8.9) (22.7)

Finance costs expensed 83.9 90.5

Finance charges were capitalised to aircraft and aeronautic related assets at a weighted average rate of 4.80% (2009: 4.43%).

(b) Ineffective cash flow hedges and non-designated derivatives

Net (loss) / gain on ineffective cash flow hedges and non-designated derivatives

- realised (21.2) (84.4)

- unrealised 33.8 (48.8)

12.6 (133.2)

(c) Operating lease rentals

Aircraft operating lease rentals:

- minimum lease payments 172.1 126.0

- maintenance reserves payments 52.9 44.2

Other operating lease rentals 67.1 58.0

Total operating lease rentals 292.1 228.2

(d) Loss on disposal

Net loss on disposal of property, plant and equipment 9.3 -

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Consolidated

note2010 $m

2009 $m

9. Income tax expense

(a) Income tax expense

Current tax - -

Deferred tax 13.7 (66.4)

(Over) / under provided in prior years (0.7) 0.2

Income tax expense / (benefit) attributable to continuing operations 13.0 (66.2)

Deferred income tax (revenue) / expense included in income tax expense comprises:

(Increase) in deferred tax assets 18 (45.6) (43.4)

Increase / (decrease) in deferred tax liabilities 23 59.3 (23.0)

13.7 (66.4)

(b) Numerical reconciliation of income tax expense to pre-tax accounting profit

Profit / (loss) from continuing operations before income tax expense 34.3 (226.2)

Tax at the Australian tax rate of 30% (2009: 30%) 10.3 (67.9)

Tax effect of amounts which are not deductible / (taxable) in calculating taxable income:

- Non-assessable income (0.2) (0.1)

- Non-deductible expenditure 1.8 0.6

- Tax losses not brought to account 1.4 -

- Sundry items 0.4 1.4

13.7 (66.0)

(Over) / under provision in prior years (0.7) (0.2)

Income tax expense 13.0 (66.2)

(c) Income tax recognised in other comprehensive income

Consolidated

2010 2009

Before tax $m

Tax (expense) benefit

$mNet of tax

$mBefore tax

$m

Tax (expense) benefit

$mNet of tax

$m

Foreign currency translation differences for foreign operations 26.9 17.0 43.9 (12.8) (15.1) (27.9)

Cash flow hedges 91.7 (27.5) 64.2 (229.7) 68.9 (160.8)

118.6 (10.5) 108.1 (242.5) 53.8 (188.7)

Consolidated2010 $m

2009 $m

10. Earnings per share

(a) Reconciliation of earnings used in calculating earnings per share

Profit / (loss) attributable to ordinary shareholders 21.3 (160.0)

Basic earnings 21.3 (160.0)

Diluted earnings 21.3 (160.0)

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Consolidated2010

Number (m)2009

Number (m)

(b) Reconciliation of weighted average number of shares

Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 2,042.3 1,374.1*

Adjustments for calculation of diluted earnings per share:

- Effect of share options on issue - -

Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 2,042.3 1.374.1*

*Current and prior year earnings per share have been adjusted for the effect of new shares allotted in August 2009 and September 2009 pursuant to the Company’s institutional and retail placement (refer note 24).

(c) Information concerning the classification of securities

The average market value of the Company’s shares for the purposes of calculating the dilutive effect of share options was based on quoted market prices for the period that the options were outstanding.

During the year ended 30 June 2010, 32.7 million options (2009: 18.5 million) were excluded from the diluted weighted average number of ordinary shares calculation as their effect would have been anti-dilutive.

Consolidated2010 $m

2009 $m

11. Cash and cash equivalentsCash at bank and in hand 216.7 244.1

Deposits at call 598.0 231.8

Cash and cash equivalents in the Statement of Cash Flows 814.7 475.9

(a) Restricted cashThe amount of restricted cash included in cash and cash equivalents but not available for use is:

Restricted cash 355.4 307.6

Certain merchant acquiring relationships require restricted cash to be held to cover total forward sales for some forms of payment. Cash is also required to secure Standby Letters of Credit and Bank Guarantees.

(b) Interest rate riskThe Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note 29.

Consolidated2010 $m

2009 $m

12. Trade and other receivablesCurrent

Trade receivables 87.5 66.6

Less: Provision for doubtful receivables (0.1) (0.9)

87.4 65.7

Other receivables 37.6 34.7

Prepayments 16.1 21.9

141.1 122.3

Non-current

Trade receivables 0.3 -

The Group’s exposure to credit and currency risk and impairment losses related to trade and other receivables are disclosed in note 29.

13. Derivative financial instruments Current assets

Forward foreign exchange contracts – cash flow hedges 26.1 11.9

Fuel hedging contracts – cash flow hedges 10.8 -

36.9 11.9

Non current assets

Forward foreign exchange contracts – cash flow hedges - 1.9

- 1.9

Current liabilities

Fuel hedging contracts – cash flow hedges 31.7 76.3

Interest rate swap contracts – cash flow hedges 3.2 12.3

34.9 88.6

Non current liabilities

Fuel hedging contracts – cash flow hedges - 35.3

Interest rate swap contracts – cash flow hedges 8.3 0.8

8.3 36.1

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14. Investments accounted for using the equity method

(a) Carrying amountsInformation relating to associates is set out below:

Name of Company Ownership Interest Carrying Amount Consolidated

2010 %

2009 %

2010 $m

2009 $m

Unlisted

Polynesian Blue Limited 49% 49% 7.3 6.7

The principal activity of Polynesian Blue Limited is the operation of airline activities between Samoa and Australia / New Zealand. Polynesian Blue Limited is incorporated in Samoa.

During the year ended 30 June 2010, the Group received a dividend of $2.3 million (2009: $nil) from its investment in Polynesian Blue Limited.

b) Summarised financial information of associate, not adjusted for percentage ownership held by the Group

100%Assets

$mLiabilities

$mRevenues

$mProfit $m

2010

Polynesian Blue Limited 20.1 10.8 33.6 0.9

2009

Polynesian Blue Limited 26.5 13.5 37.4 0.8

Consolidated2010 $m

2009 $m

15. Other financial assetsOther deposits 58.4 49.0

16. Property, plant and equipmentBuildings – at cost 116.4 116.0

Accumulated depreciation (16.5) (11.5)

99.9 104.5

Aircraft and aeronautic related assets – at cost* 3,162.3 2,886.1


2,568.7 2,451.3

Plant and equipment – at cost 154.8 140.6

Accumulated depreciation and impairment (77.7) (60.3)

77.1 80.3

Computer equipment – at cost 43.4 39.5


8.2 9.6

Total property, plant and equipment – net book value 2,753.9 2,645.7

*As at 30 June 2010, included in aircraft and aeronautic related assets are deposits and other costs incurred in respect of aircraft which have not yet been delivered. Such costs amount to $271.9 million (2009: $312.5 million).

Included in aircraft and aeronautic related assets at 30 June 2009 were engines held for sale. These engines were in use as at 30 June 2009, and had a net book value of $51.2 million. These engines had been sold by 30 June 2010, at a gain of $13.2 million. This gain has been recognised in the Short Haul segment under net loss on sale of property, plant and equipment (see note 5).


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(a) ReconciliationsReconciliations of the carrying amounts for each class of property, plant and equipment are set out below:

Consolidated2010

Carrying amount at beginning

of year$m

Additions$m

Disposals$m

Depreciation$m

Transfers$m

Foreign exchange

movements$m

Carrying amount at end of year

$mBuildings 104.5 0.4 - (5.0) - - 99.9

Aircraft and aeronautic related assets 2,451.3 531.3 (279.1) (168.1) - 33.3 2,568.7

Plant and equipment 80.3 14.2 - (17.4) - - 77.1

Computer equipment 9.6 4.9 - (6.3) - - 8.2

TOTAL 2,645.7 550.8 (279.1) (196.8) 33.3 2,753.9

Consolidated2009

Carrying amount at beginning

of year$m

Additions$m

Disposals$m

Depreciation$m

Transfers$m

Foreign exchange

movements$m


$mWork in progress – buildings 73.5 - - - (73.5) - -

Buildings 33.9 1.6 - (4.5) 73.5 - 104.5

Aircraft and aeronautic related assets 2,141.4 800.8 (242.0) (150.0) - (98.9) 2,451.3

Plant and equipment 79.2 21.0 (1.2) (18.5) - (0.2) 80.3

Computer equipment 8.0 9.0 - (7.3) - (0.1) 9.6

TOTAL 2,336.0 832.4 (243.2) (180.3) - (99.2) 2,645.7

(b) Non-current assets pledged as securityRefer to note 20 for information on non-current assets pledged as security by the Group.

(c) Other impairment testingAs a result of the net losses incurred in the early stages of operation of V Australia, the cash-generating unit (“CGU”) containing the assets used by V Australia was tested for impairment at 30 June 2010. The recoverable amount of the cash-generating unit was estimated based on its value in use, with a pre-tax discount rate of 15.81% (2009: 12.89%) and a growth rate of 2.0% (2009: 2.0%). These calculations use cash flow projections based upon financial budgets covering a three-year period. Cash flows beyond a three year period are calculated using the estimated growth rate stated above. The cash flows are based on management’s expectations regarding the market including guest numbers, revenue yield and associated operating costs. The weighted average growth rate used is consistent with forecasts included in industry forecasts. The growth rate does not exceed the long-term average growth rate for the business in which the CGU operates.

The discount rate used is pre-tax and adjusted to reflect specific risks relating to the relevant segment and the countries in which it operates. The method used to determine the discount rate was the weighted average cost of capital method.

Descriptions of other key assumptions underlying the cash flow projections include:

> The fuel price has been set with regard to the spot West Texas Intermediate crude oil price adjusted for refining margins;> The USD/AUD exchange rate is set to reflect the year end spot rate; and

> Load factors and average net fares were set having regard to historical experience, market conditions, fleet plans and competitor analysis over the forthcoming years.

No (2009: no) impairment loss was identified as a result of the impairment testing performed. For

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Consolidated2010 $m

2009 $m

17. Intangible assetsGoodwill – at cost 43.8 43.8

Accumulated amortisation and impairment - -

43.8 43.8

Software – at cost 34.2 25.3

Accumulated amortisation and impairment (25.8) (18.9)

8.4 6.4

Patents and trademarks – at cost 1.7 1.4

Accumulated amortisation and impairment (0.6) (0.5)

1.1 0.9

Total intangible assets – net book value 53.3 51.1

(a) ReconciliationsReconciliations of the carrying amounts for each class of intangible asset are set out below:

Consolidated2010

Carrying amount at begin-ning of year$m

Addi-tions:

acquired$m

Amorti-sation

$mTransfers

$m


$mGoodwill 43.8 - - - 43.8

Software 6.4 9.0 (7.0) - 8.4

Patents and trademarks 0.9 0.2 - - 1.1

TOTAL 51.1 9.2 (7.0) - 53.3

Consolidated2009

Carrying amount at begin-ning of year$m

Addi-tions:

acquired$m

Amorti-sation

$mTransfers

$m


$mGoodwill 43.8 - - - 43.8

Software 2.4 7.4 (3.4) - 6.4

Patents and trademarks 0.5 0.4 - - 0.9

TOTAL 46.7 7.8 (3.4) - 51.1

There was no impairment loss recognised on intangible assets during the year ended 30 June 2010 (2009: nil).

$5.5 million of internally developed software was capitalised during the year ended 30 June 2010 (2009: nil).

The amortisation charge is recognised in “Depreciation and amortisation expense” in the Income Statement.

(b) Impairment tests for cash-generating units containing goodwill

Goodwill is allocated to the Group’s CGUs identified according to operating segment. Goodwill is allocated entirely to the Short haul CGU.

Key assumptions used for value-in-use calculations

Growth rate(i)

Discount rate(ii)

CGU2010

%2009

%2010

%2009

%

Short haul operations 2.0 2.0 11.51 11.88

(i) Weighted average growth rate used to extrapolate cash flows beyond the budget period

(ii) Pre-tax discount rate applied to the cash flow projections.

The recoverable amount is determined based on value-in-use calculations. Unless indicated otherwise, the value in use during the year ended 30 June 2010 was determined similarly as during the year ended 30 June 2009. These calculations use cash flow projections based upon financial budgets covering a three-year period. Cash flows beyond a three year period are calculated using the estimated growth rates stated above. The cash flows are based on management’s expectations regarding the market including guest numbers, revenue yield and associated operating costs. The weighted average growth rates used are consistent with forecasts included in industry forecasts. The growth rate does not exceed the long-term average growth rate for the business in which the CGU operates. The discount rates used are pre-tax and reflect specific risks relating to the relevant segments and the countries in which they operate. The method used to determine the discount rate was the weighted average cost of capital method.

No (2009: no) impairment loss was identified as a result of the impairment testing performed.

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Consolidated2010 $m

2009 $m

18. Deferred tax assetsThe balance comprises temporary differences attributable to:Amounts recognised in profit or lossEmployee benefits 21.1 14.3

General accruals 33.4 12.3

Tax loss carried forward 93.8 78.8

Other 13.2 10.5

161.5 115.9

Amounts recognised directly in equityEquity raising costs 1.9 -

Cash flow hedges 13.8 41.3

177.2 157.2

Set-off of deferred tax liabilities pursuant to set-off provisions (171.2) (156.5)

Net deferred tax assets 6.0 0.7

Movements:Opening balance 157.2 44.9

Credited to profit or loss 45.6 43.4

Credited / (charged) to other comprehensive income (25.6) 68.9

Tax losses assumed from subsidiaries - -

Closing balance 177.2 157.2

19. Trade and other payablesCurrentTrade payables and accruals 318.6 254.7

Other payables 5.2 14.0

323.8 268.7

Non currentOther payables - 0.1

Trade and other payables are non-interest bearing.

The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 29.

The Company has entered into a Deed of Cross Guarantee with certain subsidiaries as described in note 36. Under the terms of the Deed, the Company has guaranteed the repayment of all current and future creditors in the event any of the entities party to the Deed are wound up. Details of the consolidated financial position of the Deed are set out in note 36.

20. Interest-bearing liabilities

CurrentLoans (Aeronautic Finance Facilities) – secured 251.5 233.3

Non currentLoans (Aeronautic Finance Facilities) – secured 1,536.3 1,546.1

(a) Terms and debt repayment scheduleTerms and conditions of outstanding loans were as follows:

Consolidated Nominal Interest RateFace Value

$mCarrying Amount

$mSecured bank loans Currency Year of Maturity 2010 2009 2010 2009 2010 2009

Aircraft AUD 2010 - 2020 4.45% - 6.32% 3.13% - 6.12% 1,196.5 1,366.8 1,196.5 1,366.8

Aircraft USD 2010 - 2022 0.65% - 4.47% 1.72% - 4.37% 614.6 432.0 614.6 432.0

1,811.1 1,798.8 1,811.1 1,798.8

For more information about the Group’s exposure to interest rate, foreign currency and liquidity risk, see note 29.

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20. Interest-bearing liabilities (continued)

(b) Assets pledged as securityThe interest-bearing loans are secured over assets purchased and issued capital of the following Group subsidiaries:

> VBNC1 Pty Limited; > VBNC2 Pty Limited;> VBNC3 Pty Limited; > VBNC4 Pty Limited; > VBNC5 Pty Limited; > VBNC9 Pty Limited; > VBIANC1 Pty Limited;> VB LH No. 2 Pty Limited;> VB 700 2009 Pty Limited;> VB E190 No. 2 Pty Limited; and> VB LH 2010-11 No. 2 Pty Limited.

The carrying amounts of assets pledged as security for current and non-current interest bearing liabilities are:

Consolidated2010 $m

2009 $m

Non-current

Floating charge

Aircraft and aeronautic related assets 2,228.5 2,102.3

(c) Financing arrangementsUnrestricted access was available at balance date to the following lines of credit:

Total facilities available:

Standby letters of credit 4.0 5.4

Bank guarantees 7.9 16.5

Aeronautic finance facilities 2,155.3 1,954.2

2,167.2 1,976.1

Facilities utilised at balance date:

Standby letters of credit 4.0 5.4

Bank guarantees 7.9 16.5

Aeronautic finance facilities 1,811.1 1,798.8

1,823.0 1,820.7

Facilities not utilised at balance date:

Standby letters of credit - -

Bank guarantees - -

Aeronautic finance facilities 344.2 155.4

344.2 155.4

Standby letters of creditThe standby letter of credit facility is a committed facility, available to be drawn down over the next year. The standby letters of credit are secured over at-call deposits of an equivalent amount. The current interest rate on the facility is 4.40% (2009: 2.95%).

Bank guaranteesThe guarantees are secured over at-call deposits of an equivalent amount. The amount of the standby letters of credit and bank guarantee facilities can be increased by the provision of additional security. The current interest rate on the facility is 4.40% (2009: 2.95%).

Aeronautic finance facilitiesThese facilities are available to assist the Group to finance purchases of aeronautical assets. The facilities are secured over assets purchased and issued capital of the subsidiaries listed in note 20(b). The weighted average interest rate on these facilities is 4.80% (2009: 4.43%).

Consolidated

note2010 $m

2009 $m

21. ProvisionsCurrent

Employee benefits 32 62.0 51.8

Maintenance 20.3 22.3

Other 0.1 1.0

82.4 75.1

Non-current

Employee benefits 32 8.5 2.6

Maintenance 41.4 39.9

49.9 42.5

(a) Movements in provisionsMovements in each class of provision during the financial period, except for employee benefits are set out below:

Consolidated2010

Car-rying

amount at be-

ginning of the year$m

Provi-sion

made during

the year$m

Pay-ments made during

the year$m

Car-rying

amount at end of the year$m

Maintenance - current 22.3 49.2 (51.2) 20.3

Maintenance - non-current 39.9 1.5 - 41.4

Other - current 1.0 - (0.9) 0.1

(b) Provision for maintenanceAs disclosed in note 3(j), provision is made for the estimated future costs of major cyclical maintenance of airframes, engines, landing gear and auxiliary power units of operating leased aircraft. The Group expects to incur the liability over the life of the aircraft.F

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(c) Other provisionsThis relates to stamp duty and operational levies of which the Group expect to settle the liability over the next 12 months.

Consolidated2010 $m

2009 $m

22. Unearned revenue

Current

Unearned passenger revenue 475.2 375.1

Other unearned revenue 141.1 118.1

616.3 493.2

Non-current

Other unearned revenue 0.6 1.1

23. Deferred tax liabilitiesThe balance comprises temporary differences attributable to:

Amounts recognised in profit or loss

Depreciation 171.9 149.4

Other 33.9 (3.7)

205.8 145.7

Amounts recognised directly in other comprehensive income

Other - 15.8

205.8 161.5

Set-off of deferred tax liabilities of parent entity pursuant to set-off provisions (171.2) (156.5)

Net deferred tax liabilities 34.6 5.0

Movements

Balance at beginning of year 161.6 169.5

(Credit) / charged to profit or loss 59.3 (23.0)

Charged to other comprehensive income (15.1) 15.1

Closing balance 205.8 161.6

24. Share capital

Ordinary shares, fully paid 654.9 428.0

Treasury shares held by the KEPP Trust (22.4) (20.3)

632.5 407.7

The Company does not have authorised capital or par value in respect of its issued shares. All issued shares are fully paid.

(a) Movements in ordinary share capital

Consolidated

Note

Number of Shares (m)

Balance at 1 July 2008 1,042.1

Issue of shares by KEPP (i) 0.2

Issue of shares – executive’s remuneration (ii) 0.6

Balance at 30 June 2009 1,042.9

Balance at 1 July 2009 1,042.9

Issue of shares by KEPP (i) 0.1

Issue of shares – executives’ remuneration (ii) -

Issue of shares for cash (iii) 1,157.2

Balance at 30 June 2010 2,200.2

(i) The trustee for the Key Employee Performance Plan holds a number of shares in Virgin Blue Holdings Limited, which may be transferred to employees of the Group in accordance with the rules of the Plan. On consolidation, shares held for the Key Employee Performance Plan (“KEPP”) are offset against contributed equity. During the 12 months to 30 June 2010, KEPP transferred 0.1 million (2009: 0.2 million) shares valued at $0.1 million (2009: $0.6 million) to employees of the Group for nil consideration.

(ii) Note 33 provides details of shares issued on exercise of options.

(iii) In September 2009 the Company completed an equity raising of $231.4 million (proceeds received net of transaction costs totalled $222.9 million before tax). The total number of shares issued was 1,157.2 million.

(b) Terms and conditions of ordinary sharesWith the exception of shares held in trust under the Key Employee Performance Plan, holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders’ meetings.

In the event of winding up of the Company, ordinary shareholders rank after all other shareholders and creditors and are fully entitled to any proceeds of liquidation.

At 30 June 2010, the trustee for the Key Employee Performance Plan holds 20.2 million (2009: 9.0 million) shares. A participating employee is not entitled to any income or other rights (including voting rights) derived from any shares acquired by the trustee under KEPP unless and until the shares are transferred to the employee for nil consideration, following satisfaction of any vesting conditions – refer to note 34.F

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25. Reserves

Nature and purpose of reserves

(i) Foreign currency translation reserveExchange differences arising on translation of foreign operations are taken to the foreign currency translation reserve, as described in note 3(b). The reserve is recognised in profit and loss when the net investment is disposed of.

(ii) Hedging reserve – cash flow hedgesThe hedging reserve is used to record gains or losses on a hedging instrument in a cash flow hedge that is recognised directly in equity, as described in note 3(i). Amounts are recognised in profit and loss when the associated hedged transaction affects profit and loss, or recognised as part of the acquisition price of property, plant and equipment.

(iii) Share-based payments reserveThe share-based payments reserve is used to recognise the fair value of options issued but not exercised.

26. Dividends

(a) DividendsNo dividends were recognised in the current or prior year by the Group.

(b) Franked dividends

The Company2010 $m

2009 $m

Dividend franking account

Franking credits available for subsequent financial years based on a tax rate of 30% (2009: 30%) 76.4 76.8

The above available amounts are based on the balance of the dividend franking account as at the end of the financial year, adjusted for:

(a) franking credits that will arise from the payment of the amount of the current tax liabilities;

(b) franking debits that will arise from the payment of dividends recognised as a liability at the reporting date;

(c) franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date; and

(d) franking credits that the entity may be prevented from distributing in subsequent years.

Consolidated2010 $m

2009 $m

27. Commitments(a) Capital expenditure

commitmentsCommitments for the acquisition of property, plant and equipment, including aircraft and aeronautic assets, contracted for at the reporting date but not recognised as liabilities, payable:

Within one year 431.2 500.7

One year or later and no later than five years 2,485.7 1,679.6

Later than five years 898.9 59.7

3,815.8 2,240.0

(B) Non-cancellable operating lease expense commitments

Commitments in relation to operating leases contracted for at the reporting date but not recognised as liabilities, payable:

Within one year 163.0 172.9

One year or later and no later than five years 348.2 367.9

Later than five years 258.3 286.8

769.5 827.6

The Group leases property and equipment, principally aircraft, under non-cancellable operating leases expiring from one to 12 years from 30 June 2010. Aircraft lease payments are payable in US dollars. Leases of property and equipment generally provide the Group with a right of renewal at which time all terms are renegotiated or the asset is returned to the lessor.

28. Contingent liabilities and contingent assetsDetails of contingent liabilities and contingent assets where the possibility of future payments/receipts is not considered remote are set out below, as well as details of contingent liabilities and contingent assets, which although considered remote, the directors consider should be disclosed.

The directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement.

Contingent liabilities not considered remoteThe Group has provided bank guarantees and standby letters of credit to third parties as guarantees of payment for fuel and fulfilment of obligations under government assistance agreements.

The value of bank guarantees and standby letters of credit issued as at the end of the financial period was $17.6 million (2009: $21.9 million).


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Contingent liabilities considered remote

Government assistanceSome government assistance received may be refundable if agreed performance criteria are not achieved. The performance periods of the grants are six years from 1 June 2004, five years from 1 October 2008, and five years from 1 January 2009. The directors are of the opinion that no amounts will be refundable under these grants and hence no provision for refund has been raised.

29. Financial instrumentsThe Group has exposure to a variety of financial risks, including market risk, credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group.

The Group manages these risk exposures using various financial instruments. The Board has determined suitable hedging limits for financial risks and these are documented in the Financial Risk Management Policy. All transactions entered into are carried out within these guidelines approved by the Board. Implementation of this Policy is delegated to management, who have flexibility to act within the bounds of the authorised policy limits. Group policy is to not enter, issue or hold derivative financial instruments for speculative trading purposes. Compliance with the policy is monitored on an ongoing basis through regular reporting to the Board.

(a) Market riskMarket risk is the risk that changes in market prices, such as fuel prices, foreign exchange rates and interest rates, will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market exposures, within acceptable parameters, while optimising the return.

The Group enters into derivatives, and also incurs financial liabilities, in order to manage market risks. All such transactions are carried out within the guidelines set by the Board in the Treasury Risk Management Policy. Generally the Group seeks to apply hedge accounting in order to manage volatility in profit or loss.

(i) Fuel price riskPrice risk arises on the Group’s exposure to jet fuel prices. The Group’s fuel price risk management strategy aims to provide the airline with protection against sudden and significant increases in oil prices while ensuring that the airline is not competitively disadvantaged in a serious way in the event of a substantial impact on the price of fuel.

Risk managementGroup Treasury is responsible for managing this exposure by using swap contracts and option contracts. These contracts are designated at Group level as hedges of price risk on specific volumes of future jet fuel consumption. The Group’s risk management policy is to hedge, subject to limits determined by the Board, anticipated jet fuel consumption for subsequent financial periods. Realised gains or losses on these contracts arise due to differences between the actual fuel prices on settlement, the forward rates of the derivative contracts and the cost of option premiums paid.

During the year, the net loss arising from fuel hedging activities for the Group was $54.3 million (2009: loss of $250.4 million) as a result of actual fuel prices moving lower than the average hedged price. Of this net amount, a loss of $63.2 million (2009: loss of $147.9 million) represents the effective portion of the hedges which has been recognised in fuel expense, and a gain of $8.9 million (2009: loss of $102.5 million) represents the ineffective portion of the hedges (including changes in option time value) which has been recognised in ineffective and non-designated derivatives expense.

Sensitivity analysisThe following table summarises the sensitivity of the Group’s financial assets and liabilities to a possible change in fuel prices. A USD 30 per barrel (“bbl”) increase / decrease in the price of fuel would have increased / (decreased) equity and profit and loss by the amounts shown below. This analysis assumes that all other variables remain constant.

USD 30/bbl increase

USD 30/bbl decrease

Car-rying

amount $m

Profit $m

Equity

$m

Profit $m

Equity

$m

2010

Net financial liabilities

- Derivative liability (20.9) (3.3) 88.6 9.2 (29.4)

2009

Net financial liabilities

- Derivative liability (111.6) 6.6 85.3 9.4 (128.7)

(ii) Foreign exchange risk

Exposure to foreign exchange riskThe Group undertakes transactions in US dollars, including the cost of purchasing fuel, aircraft, lease payments and the sale of airline passenger revenue. The Group also undertakes transactions in New Zealand dollars, largely arising from the Group’s New Zealand based subsidiary.F

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29. Financial instruments (continued)(a) Market risk (continued)(ii) Foreign exchange risk (continued)The Group’s exposure to foreign exchange risk at balance date was as follows, based on notional amounts (presented in AUD):

30 June 2010 30 June 2009 AUD

$mUSD $m

NZD $m

AUD $m

USD $m

NZD $m

Cash and cash equivalents - 78.8 39.7 - 82.9 13.4

Trade receivables 0.4 5.0 4.1 - 2.9 1.6

Other receivables - 20.5 - - - -

Financial assets at fair value through profit or loss - 57.5 - - 46.3 -

Trade payables (3.0) (72.9) (10.2) (12.4) (50.7) (6.4)

Interest bearing liabilities - (614.6) - - (432.0) -

Gross balance sheet exposure (2.6) (525.7) 33.6 (12.4) (350.6) 8.6

Forward exchange contracts - 492.8 - - 435.0 -

Net exposure (2.6) (32.9) 33.6 (12.4) 84.4 8.6

The following significant exchange rates applied during the year:

Average rate Reporting date spot rateAUD 2010 2009 2010 2009

USD 0.8782 0.7580 0.8523 0.8114

NZD 1.2575 1.2284 1.2308 1.2428

Risk management In order to protect against exchange rate movements, the Group enters into forward exchange contracts and option contracts to purchase US dollars. These contracts are hedging highly probable forecasted purchases for the ensuing financial periods. The contracts are timed to mature when the operating expenses or capital expenditure are expected to be incurred. Realised gains or losses on these contracts arise due to differences between the actual spot rates on settlement, the forward rates of the derivative contracts and the cost of option premiums paid.

During the year, the net loss arising from foreign exchange hedging activities for the Group was $35.5 million (2009: gain of $89.6 million) as a result of the Australian dollar appreciating above the average hedged price. Of this net amount, a loss of $39.2 million (2009: gain of $120.2 million) represents the effective portion of the hedges which has been recognised in the relevant expenditure category which the contract was hedging, and a gain of $3.7 million (2009: loss of $30.7 million) represents the ineffective portion of hedges and non-designated derivatives (including changes in option time value) which has been recognised in ineffective and non-designated derivatives expense.

Sensitivity analysisThe following table summarises the sensitivity of the Group’s financial assets and liabilities to a reasonably possible change in the US dollar. A 10% appreciation/depreciation of the AUD against the USD would have increased/(decreased) equity and profit and loss by the amounts shown below. This analysis assumes that all other variables remain constant. The analysis is performed on the same basis for 2009.

USD 10% increase USD 10% decreaseProfit $m

Equity $m

Profit $m

Equity $m

2010Financial assets

- Non-derivative financial asset (14.7) - 18.0 -

- Derivative financial asset 0.1 (43.8) 0.5 54.2

Financial liabilities

- Non-derivative liability 8.8 52.4 (10.7) (64.0)

(5.8) 8.6 7.8 (9.8)

2009Financial assets

- Non-derivative financial asset (12.0) - 14.7 -

- Derivative financial asset 5.5 (41.8) (5.6) 50.2

Financial liabilities

- Non-derivative liability 43.9 - (53.6) -

37.4 (41.8) (44.5) 50.2


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(iii) Interest rate risk

Exposure to interest rate riskThe Group holds both interest bearing assets and interest bearing liabilities, and therefore the Group’s income and operating cash flows are subject to changes in market interest rates.

The Group’s main interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk.

At the reporting date, the interest rate profile of the Group’s interest-bearing financial instruments was:

Consolidated Carrying amount

2010$m

2009$m

Fixed rate instruments

Financial assets 458.6 113.5

Financial liabilities (410.5) (316.9)

48.1 (203.4)

Variable rate instruments

Financial assets 356.1 362.4

Financial liabilities (1,400.5) (1,495.1)

(1,044.4) (1,132.7)

Risk managementThe Group manages its cash flow interest-rate risk by using floating-to-fixed interest rate swaps to hedge part of this exposure. Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Generally, the Group raises long-term borrowings at floating rates and swaps them into fixed rates that are lower than those available if the Group borrowed at fixed rates directly. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals (mainly quarterly), the difference between fixed contract rates and floating rate interest amounts calculated by reference to the agreed notional principal amounts. The maturity profiles and settlement dates of the swaps exactly match the amortisation profile and repayment dates on the underlying loans.

During the year, the net loss arising from interest rate hedging activities for the Group was $9.5 million (2009: loss of $2.2 million), as a result of actual interest rates sitting lower than the average hedged rates. Of this net amount, $9.5 million (loss) represents the effective portion of the hedges which has been recognised in interest expense (2009: loss of $2.2 million). There was no ineffective portion of interest rate hedges (2009: nil).

Sensitivity analysisAn analysis demonstrating the sensitivity of financial instruments to a reasonably possible change in interest rates is provided in the table below.

Fixed rate instrumentsThe Group does not account for any fixed rate financial assets and liabilities at fair value through profit or loss, and the Group does not designate derivatives (interest rate swaps) as hedging instruments under a fair value hedge accounting model. Therefore a change in interest rates at the reporting date would not affect profit or loss.

Variable rate instrumentsThe Group accounts for variable rate financial assets at fair value through profit or loss, and financial liabilities at amortised cost using the effective interest method.

A 100 basis point increase / (decrease) in interest rates would have increased / (decreased) equity and profit and loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant.

100 bp increase

100 bp decrease

Carrying amount

($m)

Profit ($m)

Equity ($m)

Profit ($m)

Equity ($m)

2010


Interest rate swaps (11.5) - 10.3 - (10.7)


Financial assets 356.1 3.6 - (3.6) -

Financial liabilities 1,400.5 14.0 - (14.0) -

17.6 10.3 (17.6) (10.7)

2009


Interest rate swaps (13.1) - 13.6 - (14.3)


Financial assets 362.4 3.6 - (3.6) -

Financial liabilities (1,495.1) (15.0) - 15.0 -

(11.4) 13.6 11.4 (14.3)

(b) Credit riskCredit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from trade debtor counterparties (travel agents, industry settlement organisations and credit provided direct to customers), deposits and unrealised gains on derivative financial instruments. F

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29. Financial instruments (continued)

(b) Credit risk (continued)

Trade and other receivablesThe Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the Group’s customer base, including default risk of the industry, has less of an influence on credit risk. A significant proportion of the Group’s revenue is derived from credit cards, however there are no significant concentrations of credit risk.

The Group has credit policies in place under which each new trade debtor counterparty is analysed individually for creditworthiness before the Group’s standard payment terms are offered. Purchase limits are established for each counterparty and reviewed on a regular basis to ensure that sales made on credit terms are made to counterparties with appropriate credit history. The Group continuously monitors counterparty credit limits on defaults, incorporating this information into credit risk controls.

InvestmentsThe Group limits its exposure to credit risk by only investing in liquid securities, and only with counterparties that have an investment grade credit rating.

Exposure to credit riskThe carrying amount of the Group’s financial assets represents the maximum credit exposure. The Group’s maximum exposure to credit risk at the reporting date was:

Carrying amount

Note2010 $m

2009 $m

Cash and cash equivalents 11 814.7 475.9

Trade and other receivables 12 125.0 100.4

Commodity contracts used for hedging: Assets 13 10.8 -

Forward exchange contracts used for hedging: Assets 13 26.1 13.8

Other financial assets 15 58.4 49.0

1,035.1 639.1

Impairment lossesThe ageing of the Group’s trade receivables at the reporting date was:

Gross 2010 $m

Impair-ment 2010 $m

Gross 2009 $m

Impair-ment 2009 $m

Not past due 73.9 - 55.1 -

Past due 1-30 days 9.9 - 5.5 -

Past due 31-60 days 0.1 - 3.0 -

61+ days 3.6 (0.1) 3.0 (0.9)

87.5 (0.1) 66.6 (0.9)

The Group has established a provision for doubtful debts for trade and other receivables that represents its estimate of incurred losses. The main components of this provision are a specific loss component that relates to individually significant exposures.

The movement in the Group’s provision for doubtful debts in respect of trade receivables during the year was as follows:

2010 $m

2009 $m

Balance at 1 July 0.9 1.0

Impairment loss recognised 0.1 0.8

Write-off of bad debts (0.9) (0.9)

Balance at 30 June 0.1 0.9

Impairment losses/gains are included in “other expenses” in the Income Statement.

The impairment loss at 30 June 2010 of $0.6 million (2009: loss of $0.8 million) relates to specific receivables that were considered doubtful. Based on historic default rates, the Group believes that no impairment allowance is necessary in respect of trade receivables not past due, or past due by up to 30 days.

The provision for doubtful debts account in respect of trade receivables is used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible; at that point the amount is considered irrecoverable and is written off against the financial asset directly. At 30 June 2010 the Group does not have any collective impairment on its trade and other receivables (2009: no collective impairment).

(c) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.

Risk managementPrudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding as required and the ability to close-out market positions if necessary. Due to the dynamic nature of the underlying businesses, Group Treasury aims at maintaining flexibility in funding by keeping adequate liquidity available.

The Group aims to ensure that it has sufficient cash on demand to meet expected operational expenses, including the servicing of financial obligations. This excludes the potential impact of extreme circumstances that cannot be predicted, such as natural disasters.

The Group also maintains various lines of credit, which are detailed in note 20.


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Aircraft financing

During the year, the Group undertook a number of aircraft financing transactions. These transactions included:

> sale and leaseback of three Boeing 737-800 aircraft; > sale and leaseback of 8 spare engines;> mortgaging of two owned Boeing 737-700 aircraft, one Boeing 777-800 aircraft and two owned Embraer E-190 aircraft; and> deferral of the delivery of two Boeing 777-300ER aircraft.

During the prior year, the Group undertook a number of aircraft financing transactions. These transactions included:> sale and leaseback of one Boeing 737-800 and two Embraer E-190 aircraft;> mortgaging of two owned Boeing 737-700 aircraft; and> deferral of the delivery of two Boeing 777-300ER aircraft, from 2010 to delivery in 2011 and 2012.

Exposure to liquidity riskThe following are the contractual maturities of financial liabilities, excluding the impact of netting agreements:

Consolidated 2010

Carrying amount

$m

Contractual cash flows

$m

Less than 1 year $m

1-2 years $m

2-5 years $m

More than 5 years $m

Non-derivative financial liabilities

Secured bank loans (1,811.1) (2,251.4) (334.9) (264.0) (784.4) (868.1)

Trade and other payables (323.8) (323.8) (323.8) - - -

Derivative financial liabilities

Commodity contracts used for hedging:

- Outflow (31.7) (31.7) (31.7) - - -

Interest rate swaps used for hedging:

- Inflow - 65.5 18.0 15.4 29.7 2.4

- Outflow (11.5) (77.0) (22.8) (18.8) (33.0) (2.4)

(2,178.1) (2,618.4) (695.2) (267.4) (787.7) (868.1)

It is not expected that the cash flows included in the maturity analysis could occur significantly earlier or at significantly different amounts.

Consolidated 2009

Carrying amount

$m

Contractual cash flows

$m

Less than 1 year $m

1-2 years $m

2-5 years $m


Non-derivative financial liabilities

Secured bank loans (1,798.8) (2,300.5) (320.1) (307.6) (740.6) (932.2)

Trade and other payables (268.8) (268.8) (268.7) (0.1) - -

Derivative financial liabilities


- Outflow (111.6) (111.6) (76.3) (35.3) - -

Interest rate swaps used for hedging:

- Inflow - 91.7 15.6 18.0 48.2 9.9

- Outflow (13.1) (103.4) (26.4) (22.8) (45.3) (8.9)

(2,192.3) (2,692.6) (675.9) (347.8) (737.7) (931.2)

At 30 June 2010, the Group held various types of derivative instruments that were designated as cash flow hedges of future forecast transactions.

These were:

> hedging of future jet fuel purchases by commodity contracts;> hedging of future interest payments by interest rate swap contracts; and> hedging of future foreign currency payments by forward exchange contracts and option contracts.

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29. Financial instruments (continued)

(c) Liquidity risk (continued)

Exposure to liquidity risk (continued)The following table indicates the periods in which the cash flows associated with derivatives that are cash flow hedges are expected to occur:

Carrying amount Expected cash flows

Consolidated 30 June 2010

$m

Less than 1 year $m

1 to 2 years

$m2 to 5 years

$m


Total $m

Interest rate swaps:

- Liabilities (11.5) (4.8) (3.4) (3.3) - (11.5)


- Liabilities (31.7) (31.7) - - - (31.7)


- Asset 10.8 10.8 - - - 10.8

Forward exchange contracts used for hedging:

- Asset 26.1 26.1 - - - 26.1

(6.3) 0.4 (3.4) (3.3) - (6.3)

Carrying amount Expected cash flows

Consolidated 30 June 2009

$m

Less than 1 year $m

1 to 2 years

$m2 to 5 years

$m


Total $m

Interest rate swaps:

- Liabilities (13.1) (12.4) (5.5) 3.5 1.3 (13.1)


- Liabilities (111.6) (76.3) (35.3) - - (111.6)

Forward exchange contracts used for hedging:

- Assets 13.8 11.9 1.9 - - 13.8

(110.9) (76.8) (38.9) 3.5 1.3 (110.9)

The cash flows outlined above are expected to impact profit and loss in the same periods in which the cash flows are expected to occur.

(d) Capital managementThe Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Board of Directors monitors the return on capital, which the Group defines as net operating income divided by total shareholders’ equity. There were no changes in the Group’s approach to capital management during the year.

In September 2009 the Group completed a fully underwritten equity raising of approximately $231.4 million. Refer to note 24 for further information.

(e) Net fair valueThe net fair value of cash, cash equivalents and non-interest bearing financial assets and liabilities approximates their carrying value due to their short maturity. The net fair value of other financial assets and liabilities is determined by valuing them at the present value of future contracted cash flows. Cash flows are discounted using standard valuation techniques at the applicable market yield, having regard to the timing of the cash flows.

The net fair value of forward foreign exchange and fuel contracts is determined as the unrealised gain / loss at balance date by reference to market exchange rates and fuel prices. The net fair value of interest rate swaps is determined as the present value of future contracted cash flows. Cash flows are discounted using standard valuation techniques at the applicable market yield, having regard to the timing of the cash flows. The net fair value of options is determined using standard valuation techniques, including Black-Scholes, Monte Carlo and binomial models.

The interest rates used to discount estimated cash flows, where applicable, are based upon rates determined from the Weighted Average Cost of Capital calculation, as disclosed in note 17.


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The fair values of financial assets and liabilities, together with the carrying amounts shown in the Statement of Financial Position, are as follows:

Carrying Amount Fair Value Consolidated Note

2010 $m

2009 $m

2010 $m

2009 $m

Assets carried at fair value

Fuel hedging contracts – cash flow hedges 13 10.8 - 10.8 -

Forward foreign exchange contracts - Cash flow hedges 13 26.1 13.8 26.1 13.8

36.9 13.8 36.9 13.8

Assets carried at amortised cost

Trade and other receivables 12 125.1 100.4 125.0 100.4

Cash and cash equivalents 11 814.7 475.9 814.7 475.9

939.8 576.3 939.7 576.3

Liabilities carried at fair value

Fuel hedging contracts – cash flow hedges 13 31.7 111.6 31.7 111.6

Interest rate swap contracts – cash flow hedges 13 11.5 13.1 11.5 13.1

43.2 124.7 43.2 124.7

Liabilities carried at amortised cost

Trade and other payables 19 323.8 268.7 323.8 268.7

Loans (Aeronautic Finance Facilities) 20 1,811.1 1,798.8 1,811.1 1,798.8

2,134.9 2,067.5 2,134.9 2,067.5

The basis for determining fair values is discussed in note 3(u).

(f) Fair value hierarchyFinancial instruments carried at fair value can be classified according to their valuation method. The different methods are defined as follows:

> Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities > Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as

prices) or indirectly (i.e., as derived from prices)> Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). All financial instruments carried at fair value of the Group are classified as Level 2 instruments, namely:

Level 2 2010

$m2009 $m

Derivative financial assets 36.9 11.9

Derivative financial liabilities (43.2) (124.7)

(6.3) (112.8)

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30. SubsidiariesThe consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 3(a):

Name Equity Holding30 June 2010

%

30 June 2009

%

Virgin Australia Holdings Pty Limited (3) 100% 100%

Virgin Blue Airlines Pty Limited (3) 100% 100%

Virgin Tech Pty Ltd (3) 100% 100%

VB Investco Pty Ltd 100% 100%

Pacific Blue Holdings Pty Ltd (3) 100% 100%

Pacific Blue Airlines (NZ) Ltd 100% 100%

Pacific Blue Airlines (Aust) Pty Ltd (3) 100% 100%

VBNC1 Pty Ltd 100% 100%





V Australia Airlines Pty Ltd 100% 100%




Velocity Rewards Pty Ltd 100% 100%

Blue Holidays Pty Ltd 100% 100%

Red Jet Foundation Pty Ltd 100% 100%

VB Ventures Pty Ltd 100% 100%

Virgin Blue International (Holdings) Pty Ltd 100% 100%

Virgin Blue International Airlines Pty Ltd 100% 100%

Virgin Australia Airlines Pty Ltd 100% 100%

VBIANC1 Pty Ltd 100% 100%

VB Training Pty Ltd 100% 100%

VB Leaseco Pty Ltd 100% 100%

VB LH No. 1 Pty Ltd 100% 100%

VB LH No. 2 Pty Ltd 100% 100%

VB 800 2009 Pty Ltd 100% 100%

VB 700 2009 Pty Ltd 100% 100%

VB E190 2009 Pty Ltd 100% 100%

VB E190 2009 No.2 Pty Ltd 100% -

VB PDP 2010-11 Pty Ltd 100% -

VB LH 2010-11 No.1 Pty Ltd 100% -

VB LH 2010-11 No.2 Pty Ltd 100% -

VB Leaseco No.2 Pty Ltd 100% -

Key Employee Performance Plan (1) - -

The Loyalty Trust (1) - -

Red Jet Foundation Charitable Trust (1) - -

Express Blue Air Freight Pty Ltd (2) - -

(1) The Company administers the Key Employee Performance Plan, The Loyalty Trust and Red Jet Foundation Charitable Trust through appointed Trustees.

(2) Express Blue Air Freight Pty Ltd (“EBAF”) was liquidated during the current financial year. The Company controlled EBAF during 2009, despite holding no issued capital, as the Company has the power to govern the financial and operating policies of EBAF so as to obtain benefits from its activities.

(3) Pursuant to ASIC Class Order 98/1418 (as amended), these controlled entities are relieved from the Corporations Act requirements for preparation, audit and lodgement of financial reports. Refer note 36 for further information.

All entities with the exception of Pacific Blue Airlines (NZ) Ltd were incorporated in Australia. Pacific Blue Airlines (NZ) Ltd was incorporated in New Zealand. The proportion of ownership interest is equal to the proportion of voting power held.

Consolidated2010 $m

2009 $m

31. Reconciliation of (loss) / profit after income tax to net cash from operating activities

Profit / (loss) for the financial year 21.3 (160.0)

Adjustments for:

Depreciation 196.7 180.3

Amortisation 7.1 3.4

Dividends from controlled entities (2.3) -

Share of profit of associate (0.6) (0.4)

Loss / (gain) on disposal of fixed assets 9.3 (30.6)

Interest received (27.7) (26.6)

Equity-settled share-based payment expenses 2.1 0.6

Unrealised foreign exchange movements – non-operating activities 7.7 32.2

213.6 (1.1)

Changes in working capital and provisions:

Increase in trade and other receivables (20.6) (19.3)

Decrease in inventories - 0.6

Decrease in other financial assets 1.1 2.0

(Increase) in other operating assets (4.0) (12.1)

Increase / (decrease) in tax balances 27.1 (98.4)

Decrease / (increase) in derivatives (40.4) 61.7

Increase in trade creditors and accruals 55.1 43.4

Increase in provisions 14.7 27.9

Increase in unearned income 122.6 96.4

Net cash inflow from operating activities 369.2 101.1

32. Employee benefitsCurrent

Salaries and wages accrued 4.2 3.7

Provision for employee bonus 10.2 3.0

Provision for annual leave 37.4 32.7

Provision for long service leave 14.4 12.4

66.2 51.8

Non-current

Provision for long service leave 8.5 2.6


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(a) Superannuation plansThe Group contributes to several defined contribution superannuation plans. The amount recognised as expense for the year ended 30 June 2010 was $37.5 million (2009: $35.3 million).

(b) Share-based paymentsDetails of share-based payments made to employees are disclosed in note 33.

33. Share-based payments

(a) Executive option plansThe Group has established the following executive option plans. The options have been granted to senior executives of the Group.

Plan Vesting Periods and ConditionsSenior Executive Option Plan – Issue 4 Vest in equal proportions over a four year period with a first anniversary date of 31 January 2006. The

options will vest on the first anniversary if the Company share price is 10% or more above $1.963 and on each anniversary after that if the share price is 10% or more above the targeted share price for the previous year. The options will lapse on each anniversary date if they do not vest.

Senior Executive Option Plan – Issue 5 Vest in equal proportions over a four year period with an issue date of 8 December 2005 and a first anniversary date of 8 December 2006. The options will vest on each anniversary date if the total shareholder return (growth plus dividend) (“TSR”) of the Company over the vesting period is equal to or better than the percentage increase of the ASX 200 index. Options that do not meet the performance hurdle in any one year will not immediately expire, rather, they will be carried over each year until the performance hurdle is met for a continuous period of 30 trading days, until the expiry date of the options.

Senior Executive Option Plan – Issue 6 As for the Senior Executive Option Plan – Issue 5, with an issue date of 1 May 2005 and a first anniversary date of 1 May 2006.

Senior Executive Option Plan – Issue 7 As for the Senior Executive Option Plan – Issue 5, with an issue date of 8 December 2006 and a first anniversary date of 8 December 2007.

Senior Executive Option Plan – Issue 9 Options will vest on 30 June 2010 if the increase in earnings per share of the Company for the three years ended 30 June 2010 is greater than 20.9%.

Senior Executive Option Plan – Issue 10 Options will vest on 30 June 2011 if the fully diluted earnings per share of the Company at 30 June 2011 is as projected in the three year business plan approved by the Board in October 2008. This performance hurdle was amended on 26 November 2009 as described below, to recognise the effect of the Company equity raising in September 2009.

Senior Executive Option Plan – Issue 11 100% of the options will vest on 30 June 2012 if the increase in earnings per share of the Company for the three years ended 30 June 2012 is 20 cents per share. 50% to 99% of the options will vest, on a linear scale, if the increase in earnings per share over that three year period is between 12 cents and 19 cents. No options will vest if the increase in earnings per share over that three year period is less than 12 cents.

Subject to Board discretion in certain circumstances, the participant must also be employed by the Group in a General manager’s role or higher throughout the performance period.

CEO Co-Investment Scheme Options will vest on 30 June 2013 if the Company’s 20 day weighted average share price at 30 June 2013 is 25% higher than the 20 day weighted average share price of the Company at 8 May 2010 ($0.61).

The following executive option plans were active during 2009, but had expired by 30 June 2009:

Plan Vesting Periods and ConditionsSenior Executive Option Plan – Issue 3 Vest in equal proportions over a four year period with an issue date of 4 October 2004 and a first anniversary

date of 4 October 2005. The options will vest on the first anniversary if the Company share price is 10% or more above $1.78 and on each anniversary after that if the Company share price is 10% or more above the targeted share price for the previous year. The options will lapse on each anniversary date if they do not vest.

Senior Executive Option Plan – Issue 8 As for the Senior Executive Option Plan – Issue 5, with an issue date of 15 January 2007 and a first anniversary date of 15 January 2008.

Executive Performance Rights Plan – Issue 1 Performance rights were to vest on 30 June 2009 if the increase in earnings per share of the Company for the three years ended 30 June 2009 is greater than 62.5%.

All options are granted for no consideration. When exercisable, each option is convertible into one ordinary share.

In addition to the executive option plans described above, the Chief Executive Officer is entitled to participate in an additional issue of options under the Senior Executive Option Plan, subject to the issue being approved by the shareholders at the Company’s Annual General Meeting in November 2010. This issue, should it be approved by the shareholders, will be for the performance period from 8 May 2010 to 7 May 2013. The performance conditions require growth in the Company’s TSR over the performance period exceeding that of the median of the ASX 200 Index (excluding financial sector and resource companies). For testing purposes, both the base TSR on 8 May 2010 and TSR on the testing date will be determined using the 20 day volume weighted average price of the Company’s shares.

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33. Share-based payments (continued)

(a) Executive option plans (continued)Satisfaction of the performance hurdle will be tested at 7 May 2013 and in respect of any options that remain unvested at that time, again on 31 December 2013. If the Company’s TSR growth ranking against the comparator group of companies is below the 50th percentile, none of the options will vest, at 50%, 50% of the options will vest, between the 51st and 74th percentile, an additional 2% of the options vest for each 1 percentile ranking above 50% and if the Company’s TSR growth is 75% or above the performance of the comparator group of companies, all options will vest.

As these options have not been granted at 30 June 2010 (as they are still subject to shareholder approval), no further information has been disclosed about these options.

Set out below are summaries of options granted under the plans by the Group:

During the year (number) (millions)

Option Plan Grant date

Number of options at

beginning of year

(millions)Options granted

Options forfeited or

lapsed Options

exercised

Number of options at

year end on issue

(millions)

Number of options vested and exercisable at year end

(millions)Exercise

Price Expiry Date

2010

SEOP – Issue 4(1) 31 Jan 2005 0.2 - (0.2) - - - $1.963 30 Jan 2010

SEOP – Issue 5(1) 8 Dec 2005 5.5 - (0.5) - 5.0 0.4 $1.55 7 Dec 2010

SEOP – Issue 6(1) 1 May 2006 0.3 - - - 0.3 - $1.77 30 Apr 2011

SEOP – Issue 7(1) 8 Dec 2006 3.8 - (0.6) - 3.2 - $2.19 7 Dec 2011

SEOP – Issue 9(1) 21 Nov 2007 1.5 - (1.5) - - - $0.00 30 Jun 2011

SEOP – Issue 10(1) 22 Apr 2009 7.7 - (0.7) - 7.0 - $0.00 30 Jun 2012

SEOP - Issue 11 1 Apr 2010 - 17.5 (0.6) - 16.9 - $0.00 30 Jun 2013

CEOCIS(2) 2 Mar 2010 - 0.6 - - 0.6 - $0.00 30 Jun 2014

Total 19.0 18.1 (4.1) - 33.0 0.4

Weighted average exercise price $0.93 $0.00 $0.57 - $0.46 $1.55

2009

SEOP – Issue 3(1) 4 Oct 2004 0.3 - (0.3) - - - $1.78 3 Oct 2009

SEOP – Issue 4(1) 31 Jan 2005 0.4 - (0.2) - 0.2 0.2 $1.963 30 Jan 2010

SEOP – Issue 5(1) 8 Dec 2005 6.3 - (0.8) - 5.5 0.5 $1.55 7 Dec 2010

SEOP – Issue 6(1) 1 May 2006 0.3 - - - 0.3 - $1.77 30 Apr 2011

SEOP – Issue 7(1) 8 Dec 2006 3.8 - - - 3.8 - $2.19 7 Dec 2011

SEOP – Issue 8(1) 15 Jan 2007 0.2 - (0.2) - - - $2.37 14 Jan 2012

SEOP – Issue 9(1) 21 Nov 2007 1.8 - (0.3) - 1.5 - $0.00 30 Jun 2011

EPRP – Issue 1(3) 27 Dec 2006 1.1 - (1.1) - - - $0.00 30 Jun 2010

SEOP – Issue 10(1) 22 Apr 2009 - 7.7 - - 7.7 - $0.00 30 Jun 2012

Total 14.2 7.7 (2.9) - 19.0 0.7

Weighted average exercise price $1.42 $0.00 $0.88 - $0.93 $1.67

Notes to Employee Option Plans (1) SEOP is the Senior Executive Option Plan(2) CEOCIS is the CEO Co-Investment Scheme(3) EPRP is the Executive Performance Rights Plan

The weighted average remaining contractual life of share options outstanding at the end of the financial year was 2 (2009: 2) years.

Fair value of options grantedThe assessed fair value at grant date of options granted during the period are:

Plan Grant Date 2010 ($) 2009 ($)SEOP – Issue 11 1 April 2010 0.69 -

CEOCIS 2 March 2010 0.47 -

SEOP – Issue 10 22 April 2009 - 0.29


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The fair value of options at grant date is determined in one of two ways, depending on the terms of the options:

> Fair value is independently determined using a binomial or Monte Carlo option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option and the probability of any market performance conditions being met.

> Fair value is determined as the value of the shares at grant date less the value of the dividends forgone over the vesting period. Expected volatility is estimated by considering historic average share price volatility.

The model inputs for options granted during the period include:

2010 2009

SEOP 11 CEOCIS SEOP 10

(a) Exercise price $0.00 $0.00 $0.00

(b) Grant date 1 April 2010 2 March 2010 22 April 2009

(c) Expiry date 30 June 2013 30 June 2014 30 June 2012

(d) Share price at grant date $0.72 $0.47 $0.30

(e) Expected volatility of the company’s shares - - -

(f) Expected dividend yield 0% for 18 months, then 5% for the remaining period -

0% for 18 months, then 5% for the remaining period

(g) Risk-free interest rate - - -

Modification of share-based payment termsOn 26 November 2009, performance conditions for SEOP 10 were amended to recognise the effect of the equity raising completed in September 2009 (see note 24).

Prior to the amendment, the options would vest on 30 June 2011 if the fully diluted earnings per share of the Company at 30 June 2011 was as projected in the three year business plan approved by the Board in October 2008. There were 7,172,770 options issued under SEOP 10 available for vesting on the date of the modification. The options had no exercise price. The market price of the Company shares on the date of the modification was $0.51.

As a result of the amendment, the fully diluted earnings per share hurdle was revised downwards, proportionate with the number of new shares issued, and the expected interest earned on the cash received through the equity raising. The vesting date and the period remained unchanged.

The fair value of the modified options was calculated using the same methodology as described above. There was no change in the value of the options as a result of the modification to the performance conditions.

(b) Employee share plansThe Group has established the following employee share plan.

Share PlanDate Established Details Restrictions

Key Employee Performance Plan (“KEPP”)

8 December 2003 Directors may grant performance rights to eligible full-time or permanent part-time employees of the Group, other than a non-executive director of a member of the Group. The Company has appointed CPU Share Plans Pty Limited as Trustee to acquire and hold shares under the KEPP. The Trustee will transfer shares held by it to a participating employee when the vesting conditions in relation to a performance right have been satisfied or have been waived by the Board.

The Company provides all monies required by the trustee to acquire shares for the purposes of the KEPP, including costs and duties.

A participating employee is not entitled to any income or other rights (including voting rights) derived from any shares acquired by the Trustee under the KEPP unless and until the shares are transferred to the employee, following satisfaction of any vesting conditions. The vesting conditions require employees to hold and not sell any of their initial purchase of shares and to remain a Virgin Blue employee throughout the period.

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33. Share-based payments (continued)

(b) Employee share plans (continued)Set out below are summaries of performance rights granted in the Key Employee Performance Plan by the Group:

Number of performance rights at the beginning of

the year(m)

Number of performance rights granted during the

year (m)

Number of performance

rights vested and exercised during

the year (m)

Number of performance rights forfeited during the

year (m)

Number of performance rights at the end of the

year (m)

Number of performance

rights vested and exercisable at the

end of the year (m)

2010 0.1 - (0.1) - - -

2009 0.3 - (0.2) - 0.1 -

Set out below are summaries of shares in Virgin Blue Holdings Limited held within the Key Employee Performance Plan:

Shares at the

beginning of the period

Acquired by the Plan during the period

Distribution during the

period

Shares at the end of the period

Number (m)

Number (m)

Fair value per share

$Number

(m)Number

(m)

2010 9.0 11.3 0.37 (0.1) 20.2

2009 9.2 - - (0.2) 9.0

Shares from the KEPP Trust were distributed as follows:

DateNumber

(m)

Weighted average fair value per

share ($)

2010

01 July 2009 to 30 June 2010 0.1 0.49

2009

01 July 2008 to 30 June 2009 0.2 0.33

The fair value of shares granted and distributed during the period is the market price of shares of the Company on the Australian Securities Exchange as at close of trading on each of the issue dates. The fair value is allocated over the vesting period evenly.

(c) Expenses arising from share-based payment transactionsTotal expenses arising from share-based payment transactions recognised during the year as part of employee benefit expense were as follows:

Consolidated2010 $m

2009 $m

Options issued under employee option plans 2.1 0.3

Shares issued under employee share plans 0.1 0.2

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34. Related parties

(a) Key management personnel disclosures

Key management personnel compensationThe key management personnel compensation included in “Labour and staff related costs” are as follows:


2009 $’000

Short-term employee benefits 3,563 4,772

Post-employment benefits 208 430

Share-based payments 996 1,400

Termination benefits 1,800 -

6,567 6,602

The compensation of key management personnel, other than Mr S Swift, is paid by Virgin Blue Airlines Pty Limited on behalf of the Group. The compensation of Mr S Swift is paid by Virgin Blue International Airlines Pty Limited on behalf of the Group. It has been determined that it is not practicable to split the benefits between entities in the Group.

Individual directors and executives compensation disclosuresInformation regarding individual directors and executives compensation and some equity instruments disclosures as permitted by Corporations Regulations 2M.3.03 and 2M.6.04 is provided in the Remuneration Report section of the Directors’ Report on pages 26 to 36.

Apart from the details disclosed in this note, no director has entered into a material contract with the Group since the end of the previous financial year and there were no material contracts involving directors’ interests existing at year-end.

Loans to key management personnelThere were no loans made, guaranteed, secured or outstanding during the year to key management personnel or their related parties (2009: nil).

Other transactions with key management personnelA number of key management personnel, hold positions in other subsidiaries of the ultimate parent entity that result in them having control or significant influence over the financial or 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-key management personnel related entities on an arm’s length basis. The details of these transactions are disclosed in note 34(b). Personal travel by key management personnel and their related parties is undertaken on terms no more favourable than those of employees, as per Group policy.

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34. Related parties (continued)

(a) Key management personnel disclosures (continued)Options over equity instrumentsThe movement during the reporting period in the number of options over ordinary shares in the Company held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows:

2010

Held at 1 July 2009

‘000

Granted as comp-

ensation ‘000

Exercised ‘000

Other changes*

‘000

Held at 30 June 2010 ‘000

Vested during the

year ‘000

Vested and exercisable at 30 June

2010 ‘000

Directors

Mr J Borghetti - 659 - - 659 - -

Mr B Godfrey 2,077 - - (408) 1,669 - -

Other key management personnel of the Group

Mr K Neate 1,561 1,448 - (102) 2,907 - 261

Mr A David 1,542 1,766 - (302) 3,006 - -

Mr R Tanner 357 1,025 - (70) 1,312 - -

Mr S Swift 1,031 1,025 - (70) 1,986 - -

Ms M McArthur 287 1,025 - - 1,312 - -

Ms E Savage - - - - - - -

Ms D Keighery - - - - - - -

2009

Held at 1 July 2008

‘000

Granted as comp-

ensation ‘000

Exercised ‘000

Other changes*

‘000

Held at 30 June 2009 ‘000

Vested during the

year ‘000

Vested and exercisable at 30 June

2009 ‘000

Directors

Mr B Godfrey 974 1,669 - (566) 2,077 - -


Mr K Neate 1,286 417 - (142) 1,561 - 261

Mr S Pichler 1,364 - - (1,364) - - -

Mr A David 1,424 464 - (346) 1,542 - 189

Mr R Tanner 70 287 - - 357 - -

Mr S Swift 842 287 - (98) 1,031 - -

Ms M McArthur - 287 - - 287 - -

* Other changes represent options that lapsed or were forfeited during the year.

No options have been granted since the end of the financial year. The options were provided at no cost to the recipients. No options held by key management personnel are vested but not exercisable. No options were held by key management personnel related parties.

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Movements in shares The movement during the year in the number of ordinary shares in the Company held directly, indirectly or beneficially, by each key management person, including their related parties, is as follows:

2010

Balance at 1 July 2009

‘000

Granted during

the year as comp-ensation

‘000Purchases

’000Sales ’000

Commenced as a key

management person ’000

Balance at 30 June

2010 ’000

Directors of Virgin Blue Holdings Limited

Mr J Borghetti - - - - 744 744

Mr B Godfrey 29,324 - 29,324 - - 58,648

Mr N Chatfield 439 - 439 - - 878

Mr P McCall - - - - - -

Mr D Baxby 20 - - - - 20

Mr R Thomas 153 - 153 - - 306

Mr M Vaile - - - - - -

Mr S Murphy 111 - 111 - - 222

Mr K Roberts 6 - 6 - - 12


Mr K Neate 547 - 547 - - 1,094

Mr A David 73 - 73 - - 146

Mr R Tanner 20 - 35 - - 55

Mr S Swift 397 - 397 (329) - 465

Ms M McArthur - - - - - -

Ms E Savage - - - - - -

Ms D Keighery - - - - - -

2009

Balance at

1 July 2008 ‘000

Granted during

the year as comp-ensation

‘000Purchases

’000

In-specie dividend

(A) ‘000

Sales ’000

Com-menced as a key manage-

ment person ’000

Retired as a key manage-

ment person ’000

Balance at

30 June 2009 ’000

Directors of Virgin Blue Holdings Limited

Mr B Godfrey 28,492 332 500 - - - - 29,324

Mr N Chatfield 55 - - 402 (18) - - 439

Mr P McCall - - - - - - - -

Mr D Baxby 20 - - - - - - 20

Mr R Thomas 85 - - 68 - - - 153

Mr M Vaile - - - - - - - -

Mr P Little - - - 36,071 - - (36,071) -

Mr R Watson - - - - - - - -

Mr B McInerney 15 - - 360 - - (375) -

Mr T Mallon 5 - - 8 - - (13) -

Mr J Ludeke - - - 328 - - (328) -

Mr S Murphy 111 - - - - - - 111

Mr K Roberts - - - - - 6 - 6


Mr K Neate 472 75 - - - - - 547

Mr S Pichler - - - - - - - -

Mr A David - 73 - - - - - 73

Mr R Tanner - 20 - - - - - 20

Mr S Swift 341 56 - - - - - 397

Ms M McArthur - - - - - - - -

(A) On 22 August 2008, Toll Holdings Limited (“Toll”) distributed 98.3% of its 62.7% shareholding in the Company to Toll shareholders by way of an in-specie dividend

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34. Related parties (continued)

(b) Non-key management personnel disclosures The Group has a related party relationship with its subsidiaries (see note 30), its associate (see note 14) and with its key management personnel (refer to disclosures for key management personnel on preceding pages).

Controlling entityThe ultimate parent entity in the Group is Virgin Blue Holdings Limited.

Transactions with related partiesThe following transactions occurred with related parties:


2009 $’000

Purchase of goods and services – Non-key management personnel related entities

“Virgin” and “Virgin Blue” brand name royalty paid to other related party 10,265 16,867

Airline service revenue

Revenue for airline services to associate 14,133 15,662

Dividend revenue

From associates 2,281 -

Outstanding balancesThe following balances are outstanding at the reporting date in relation to transactions with related parties:

Key management personnel and key management personnel related entities

Current receivables (sales of goods and services)

- Associates 2,826 4,830

Current payables (purchases of goods and services)

- Associates 7,868 8,458

No provisions for doubtful debts have been raised in relation to any outstanding balances, and no expense has been recognised in respect of bad or doubtful debts due from related parties.

Loans to / from related parties

Loans to associates

Beginning of the year 1,533.3 2,266.9

Loan repayments received (1,496.0) (765.4)

Foreign exchange loss (37.3) 31.8

End of the year - 1,533.3

No provisions for doubtful debts have been raised in relation to any outstanding balances, and no expense has been recognised in respect of bad or doubtful debts due from related parties.

Terms and conditionsAll transactions were made on normal terms and conditions and at market rates

Loans to associates bore a floating interest rate, equal to the New Zealand Reserve Bank Bill Rate. The loan was fully repaid during 2010. The interest rate on these loans at 30 June 2009 was 3.12%.


2009 $’000

35. Auditors’ remunerationDetails of amounts paid to the auditor of the Company, KPMG, and its related practices for audit and non-audit services provided during the year are set out below.

Statutory audit

KPMG Australia:

- Audit and review of financial reports 934 652

Other services

KPMG Australia:

- Taxation services 32 84

- Other assurance, accounting assistance and other services 388 291

Total audit fees 1,354 1,027

36. Deed of Cross GuaranteePursuant to ASIC Class Order 98/1418 (as amended) dated 13 August 1998, the wholly-owned subsidiaries identified in note 31 are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports, and Directors’ Report.

It is a condition of the Class Order that the Company and each of the subsidiaries enter into a Deed of Cross Guarantee. The effect of the Deed is that the Company guarantees to each creditor payment in full of any debt in the event of winding up of any of the subsidiaries under certain provisions of the Corporations Act 2001. If a winding up occurs under other provisions of the Corporations Act, the Company will only be liable in the event that after six months any creditor has not been paid in full. The subsidiaries have also given similar guarantees in the event that the Company is wound up. The Deed came into effect on 18 June 2007.


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A consolidated Statement of Comprehensive Income and Consolidated Statement of Financial Position, comprising the Company and controlled entities which are a party to the Deed, after eliminating all transactions between parties to the Deed of Cross Guarantee is set out as follows:

Consolidated2010 $m

2009 $m

Income StatementRevenue and income 2,537.2 2,465.7

Operating expenses (2,423.8) (2,374.7)

Profit before tax expense, finance costs, ineffective cash flow hedges and non-designated derivatives 113.4 91.0

Ineffective cash flow hedges and non-designated derivatives 12.6 (133.2)

Profit / (loss) before income tax and net finance costs 126.0 (42.2)

Finance costs (65.5) (84.7)

Finance income 32.7 27.3

Profit / (loss) before income tax 93.2 (99.6)

Income tax expense / (benefit) 30.8 (32.3)

Net profit / (loss) after income tax 62.4 (67.3)

Statement of Comprehensive Income and Retained ProfitsProfit / (loss) for the period 62.4 (67.3)

Other comprehensive income 64.2 (175.9)

Total comprehensive income for the period 126.6 (243.2)

Transfers to / (from) reserves (64.2) 175.9

Retained profits at the beginning of the year 358.7 426.0

Retained profits at the end of the year attributable to equity holders of the Company 421.1 358.7

Consolidated2010 $m

2009 $m

Statement of Financial Position

Current assets

Cash and cash equivalents 595.6 293.4

Trade and other receivables 316.5 302.1

Derivative financial instruments 26.1 11.9

Current tax assets 6.9 1.7

Total current assets 945.1 609.1

Non-current assets

Derivative financial instruments - 1.9

Other financial assets 31.4 18.5

Property, plant and equipment 1,938.2 2,062.8

Deferred tax assets - 0.9

Intangible assets 50.1 47.7

Total non-current assets 2,019.7 2,131.8

Total assets 2,964.8 2,740.9

Current liabilities

Trade and other payables 234.8 217.4

Interest-bearing liabilities 138.6 141.1

Provisions 76.1 53.5


Unearned revenue 325.6 316.3

Total current liabilities 799.2 816.9

Non-current liabilities

Payables - 0.1


Interest-bearing liabilities 1,020.5 1,159.1

Provisions 75.9 54.3

Deferred tax liabilities 31.3 -

Unearned revenue 0.5 1.1

Total non-current liabilities 1,136.5 1,250.7

Total liabilities 1,935.7 2,067.6

Net assets 1,029.1 673.3

Equity

Share capital 624.9 397.7

Reserves (16.9) (83.1)

Retained profits 421.1 358.7

Total equity 1,029.1 673.3

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37. Parent entity disclosuresAs at, and throughout the financial year ended 30 June 2010 the parent company of the Group was Virgin Blue Holdings Limited.

(a) Financial results and position of the parent entity

Company2010$m

2009$m

Result of the parent entity

Profit for the period 7.8 8.9

Other comprehensive income - -

Total comprehensive income for the period 7.8 8.9

Financial position of the parent entity at year end

Current assets 582.0 256.5

Total assets 749.5 415.0

Current liabilities 62.2 35.5

Total liabilities 62.2 35.5

Total equity of the parent comprising of:

Share capital 655.0 428.0

Share based payments reserve 15.3 13.3

Retained earnings 17.0 9.2

Total equity 687.3 450.5

(b) Parent entity contingenciesThe Company does not have any contingent assets or contingent liabilities at 30 June 2010 (2009: nil).

(c) Parent entity capital commitments for acquisition of property, plant and equipment

The Company does not have any capital commitments at 30 June 2010 (2009: nil).

(d) Parent entity guarantees in respect of debts of its subsidiaries

The Company has entered into a Deed of Cross Guarantee with the effect that the Company guarantees debts in respect of a number of its subsidiaries.

Further details of the Deed of Cross Guarantee and the subsidiaries subject to the deed, are disclosed in note 36.

38. Subsequent eventsOn 16 August 2010, Virgin Blue Holdings Limited announced the first phase of a Group network review. From 18 October 2010, it is planned that Pacific Blue will cease to fly New Zealand domestic operations with capacity redeployed towards trans-Tasman, Pacific Islands and South East Asian routes.

On 26 August 2010, Virgin Blue Holdings Limited signed an agreement with Etihad Airways PSJC establishing a commercial agreement that will see V Australia launch direct services to Abu Dhabi in 2011, together with a codeshare on the Etihad network.

On 26 September 2010, the Virgin Blue Group experienced issues with the reservation system used by Virgin Blue, Pacific Blue and Polynesian Blue, for a 24 hour period. At the date of this report, the cause of this shut down is being investigated and the full financial impact is unknown.

Other than as described above, there has not arisen in the interval between the end of the financial period and the date of this report, any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors of the Company, to affect significantly the operations of the Group, the results of those operations or the state of affairs of the Group, in future financial years.


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1. In the opinion of the directors of Virgin Blue Holdings Limited (“the Company”):

(a) the financial statements and notes, set out on pages 40 to 84, and the remuneration disclosures that are contained in the Remuneration Report in the Directors’ Report, are in accordance with the Corporations Act 2001, including:

(i) giving a true and fair view of the Group’s financial position as at 30 June 2010 and of its performance for the financial year ended on that date; and

(ii) complying with Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001;

(b) the remuneration disclosures that are contained in the Remuneration Report in the Directors’ Report comply with Australian Accounting Standard AASB 124 Related Party Disclosures; and

(c) there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable.

2. There are reasonable grounds to believe that the Company and the group entities identified in note 30 will be able to meet any obligations or liabilities to which they are or may become subject to by virtue of the Deed of Cross Guarantee between the Company and those group entities pursuant to ASIC Class Order 98/1418.

3. The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer for the financial year ended 30 June 2010.

4. The directors draw attention to note 2(a) to the financial statements, which includes a statement of compliance with International Financial Reporting Standards.

Signed in accordance with a resolution of the directors:

John Borghetti Director

Dated at Brisbane this 29 September 2010

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independent Auditor’s Report to members of Virgin Blue Holdings Limited

Report on the financial report We have audited the accompanying financial report of the Group comprising Virgin Blue Holdings Limited (the Company) and the entities it controlled at the year’s end or from time to time during the financial year, which comprises the consolidated statement of financial position as at 30 June 2010, and consolidated income statement and consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year ended on that date, a summary of significant accounting policies and other explanatory notes 1 to 38 and the directors’ declaration.

Directors’ responsibility for the financial report The directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In note 2(a), the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards.

Auditor’s responsibilityOur responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards (including the Australian Accounting Interpretations), a view which is consistent with our understanding of the Group’s financial position and of its performance.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

IndependenceIn conducting our audit, we have complied with the independence requirements of the Corporations Act 2001.

Auditor’s opinion In our opinion:

(a) the financial report of the Group is in accordance with the Corporations Act 2001, including:

(i) giving a true and fair view of the Group’s financial position as at 30 June 2010 and of its performance for the year ended on that date; and

(ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001.

(b) the financial report also complies with International Financial Reporting Standards as disclosed in note 2 (a).

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Report on the remuneration report We have audited the Remuneration Report included in pages 26 to 36 of the directors’ report for the year ended 30 June 2010. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with Section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with auditing standards.

Auditor’s opinionIn our opinion, the remuneration report of Virgin Blue Holdings for the year ended 30 June 2010, complies with Section 300A of the Corporations Act 2001.

KPMG

Robert S Jones Partner

Brisbane, 29 September 2010.

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Asx Additional information

Additional information required by the Australian Securities Exchange Limited Listing Rules and not disclosed elsewhere in this report is set out below:

Shareholdings (as at 14 September 2010)

Substantial shareholdersThe number of shares held by substantial shareholders and their associates is set out below:

Shareholder Number of ordinary sharesVirgin Group 573,015,919

Voting rightsOrdinary sharesRefer to note 24.

Options and rightsRefer to note 33.

Distribution of equity security holdersNumber of equity security holders

Category Ordinary shares Options

1 – 1,000 23,715 -

1,001 – 5,000 23,190 -

5,001 – 10,000 6,576 -

10,001 – 100,000 9,022 -

100,001 and over 917 23

63,420 23

26,488 shareholders hold less than a marketable parcel of ordinary shares.

On-market buy-backThere is no current on-market buy-back.

Twenty largest shareholders

NameNumber of ordinary

shares heldCapital held

%Vieco 2 Limited 573,015,919 25.94

National Nominees Limited 218,031,983 9.87

J P Morgan Nominees (Australia) Limited 180,234,063 8.16

HSBC Custody Nominees (Australia) Limited 129,879,530 5.88

Citicorp Nominees Pty Limited 111,856,875 5.06

Share Direct Nominees Pty Ltd 65,568,210 2.97

CU Nominees Pty Limited 56,294,826 2.55

Cogent Nominees Pty Limited 26,082,519 1.18

CPU Share Plans Pty Limited 20,159,744 0.91

P G A (Investments ) Pty Ltd 20,000,000 0.91

Cogent Nominees Pty Limited (SMP Accounts) 19,474,382 0.88

UBS Nominees Pty Ltd 16,147,381 0.73

Queensland Investment Corporation 13,426,841 0.61

AMP Life Limited 12,431,804 0.56

Sun Hung Kai Investment Services Limited 11,000,000 0.50

Comsec Nominees Pty Limited 7,763,895 0.35

ANZ Nominees Limited 7,675,032 0.35

Just Super Co Pty Ltd 5,930,580 0.27

JP Morgan Nominees Australia Limited (Cash Income Account) 5,410,567 0.24

Chesters Nominees Pty Ltd 4,000,000 0.18

1,504,384,151 68.10

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COMPANY SECRETARYMs Merren McArthur

PRINCIPAL ADMINISTRATIVE AND REGISTERED OFFICEVirgin Blue Holdings Limited56 Edmondstone RoadBowen Hills QLD 4006AustraliaTelephone: (07) 3295 3000

SHARE REGISTRYComputershare Investor Services Pty LimitedLevel 19307 Queen StreetBrisbane QLD 4000Telephone: (07) 3237 2100

SECURITIES ExCHANGEThe Company is listed on the Australian Securities Exchange. The Home Exchange is Brisbane.

OTHER INFORMATIONVirgin Blue Holdings Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares.

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