Virgin Blue in A Sea of Red After Perfect Storm of Disasters
By Damon Kitney, The Australian | Mar. 24, 2011
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The worst six months in Virgin Blue's 10-year history will send the airline well into the red this year as it battles soaring oil prices, a string of natural disasters and weak demand in its core leisure market.
The airline warned yesterday that it expected to post a pre-tax loss for 2011 of between AU$30 million and AU$80 million, its fourth profit warning in the past 12 months.
Analysts said the warning implied a second-half pre-tax loss of between AU$100m and AU$150m, making it Virgin's worst-ever half year. Virgin shares closed 6 percent lower at 31c.
Chief executive John Borghetti said the airline had been hit by the "perfect storm". He said: "I haven't seen as many adverse events in such a short time.
"Here we have the weather, earthquakes and oil prices all converging at the same time."
Since Virgin delivered its first-half results, fuel prices had added an extra AU$50 million to the airline's costs. Yesterday, it moved to increase its hedging cover for the 2012 financial year from 12 percent to 50 percent.
It has also hedged its exposure for the remainder of this financial year at a worst-case price of US$101.28 a barrel.
The Christchurch earthquake will have a AU$15 million impact on the second-half result, on top of a previously announced AU$50 million hit from the Queensland floods and Cyclone Yasi.
Yesterday's warning highlights the pressures across the aviation industry as the soaring cost of jet fuel and natural disasters at home and abroad have crippled demand at the same time as airlines have been adding capacity. Virgin Blue had been looking forward to capacity growth of between 6 percent and 8 percent across the group in 2011. It is now expected to be capped at 6 percent.
Air New Zealand warned last week it would suffer a second-half loss due to fuel prices and the earthquakes in Christchurch and Japan.
The airline is a major shareholder in Virgin Blue and yesterday revealed it had increased its stake from 14.19 percent to 14.99 percent.
There is now speculation that Qantas is poised to impose another fuel surcharge to offset the impact of soaring jet fuel prices.
Earlier this month, Qantas and Virgin lifted international fuel surcharges for the second time in four weeks. Qantas shares closed steady yesterday at AU$2.09.
While analysts have questioned how much Qantas's budget offshoot, Jetstar, is suffering from the earthquakes in Japan and New Zealand given its high exposure to both markets, softness on those routes is believed to have been offset to some extent by strong growth in Singapore.
The Qantas mainline business is more insulated from the impact of cost increases across the sector because of its high-margin brand, with 90 percent of the corporate travel market.
It also has a limited exposure to the Japanese, Christchurch and domestic New Zealand markets.
Mr Borghetti said yesterday Virgin's predicament highlighted the importance of his strategy to reposition the airline to target higher-yielding business travel. The leisure market currently represents 90 percent of Virgin's domestic traffic.
Mr Borghetti wants Virgin to grow to snare 20 percent of the domestic corporate travel market within two years, up from the current level of about 11 percent.
"What we are seeing today totally endorses what we are doing in terms of our strategy," he said. "This doesn't change anything. If anything, we would speed up the strategy if we could."
The airline remained on track to take delivery of new wide-bodied aircraft to fly trans-Australia routes in May and for its new domestic product and brand to be in the market by June 30, he said.
The strategy was backed by analysts at Macquarie Equities and Merrill Lynch, the latter saying "it is the right strategy" and that "Virgin will succeed".
Mr Borghetti said the benefits would start to flow in a year's time.
Analysts said yesterday that Singapore Airways-backed Tiger Airways' plans to grow its Australian seat capacity by 20 percent from April and capacity growth from Jetstar would keep pressure on domestic yields at the price-focused end of the market.