Natural disasters and spiralling fuel costs have forced Virgin Blue Holdings Ltd to issue a fourth earnings downgrade in 12 months, leaving the airline’s share price at a near seven-month low.
The airline group – comprising Virgin Blue, Polynesian Blue, Pacific Blue and V Australia – said on Wednesday it expected to post a before tax loss for 2010/11 in a range between $30 million to $80 million.
“This assumes no further significant increase in fuel prices and no material deterioration in the trading environment,” Virgin Blue said in a statement. If the result prints in line with expectations, it would be well below the $33.4 million pre-tax profit in 2009/10.
Investors hammered Virgin Blue in response, with the stock slumping 7.58 per cent to be at the lowest level since August 26, 2010 at 30.5 cents at 1405 AEDT.
Chief executive John Borghetti said plans to wean the airline off the heavy reliance on the leisure market and seek a larger share of corporate and business travellers were unchanged.
On the contrary, Mr Borghetti said current circumstances left him even more certain it was the correct approach. “We are more confident than ever that our strategy is the right one,” Mr Borghetti said.
The airline said it faced an extra $115 million in costs in the second half, with $50 million due to soaring jet fuel and $15 million because of the Christchurch earthquake.
That was on top of the previously announced $50 million hit as a consequence of Cyclone Yasi and the devastating Queensland floods. In response, Virgin Blue said it had initiated an “action plan” that identified cost savings and revenue initiatives, such as fuel surcharges and capacity reductions, that would “partially offset” the impact of these recent events.
Macquarie Equities Research said Virgin Blue’s domestic operations looked on track to post a full-year loss for the first time since the company listed in 2002.
“Management is seeing no sign of capacity being eased off from competitor Jetstar, leaving domestic leisure yields under substantial pressure,” Macquarie said in a research note dated March 23.
Virgin Blue had anticipated capacity growth of between six and eight per cent across the group in 2010/11, but a company spokesperson told AAP the airline had flexibility to adjust capacity in light of recent events. Cost savings would not include job losses, they said.
At the airline’s first half results presentation in February, Mr Borghetti said the second half would be “challenging”, but declined to issue specific earnings guidance, saying it was too early to do so.
In Wednesday’s statement, Mr Borghetti said: “We have witnessed an unprecedented number of significant events in an extraordinarily short period of time, including natural disasters and a sharp spike in fuel prices.”
“These events have severely impacted consumer confidence, resulting in a slower than usual recovery in tourism.”
Macquarie said the Virgin downgrade also pointed to some earnings pressure at Australia’s national flag carrier Qantas Airways Ltd.
“Clearly this is not a great indicator of demand strength for QAN either, with VBA’s (Virgin’s) main competitor directly exposed to weakness in the Japan market,” Macquarie said.
“We also expect Jetstar domestic would be losing money in the current environment.
“However, QAN’s earnings as a whole are likely to be less severely impacted due to a better hedging profile and its dominant share of premium traffic which continues to improve.”
At 1405 AEDT, Qantas was down two cents at $2.07.