Investors dump Virgin shares after profit warning
The airline has walked away from forecasts it issued in February it would beat the $82.5 million in underlying pre-tax profits it recorded in 2011-12. It means Virgin is on track to post a loss in the second half, a period typically the toughest for Australian airlines. The warning comes after Qantas dampened investor expectations two weeks ago.
Shares in Virgin fell 8¢ to 38¢ - making it the biggest loser among the ASX's top-200 companies - after the profit warning issued late on Wednesday. The stock is tightly held - Singapore Airlines, Air New Zealand, Etihad and Richard Branson's Virgin Group control more than 60 per cent of the register.
Qantas also fell 5¢ to $1.665, its fourth consecutive day of declines.
Analysts at Bank of America Merrill Lynch said much of the profit downgrade was of Virgin's own making because it had added too much capacity to the domestic market. Virgin put the blame for weaker earnings on a hit to revenue from an overhaul to its reservations system and tough economic conditions.
It does not believe it can recoup in the fourth quarter the revenue it lost while replacing its Navitaire system with Sabre in January.
The airline has forecast underlying pre-tax profits this financial year to be less than the $82.5 million in 2011-12. It did not give more definitive guidance because of "the slower trading conditions and the competitive and weakening economic environment".
Analysts are hopeful of improved fortunes next financial year from reduced growth in capacity by Virgin and Qantas, and the removal of third independent player Tiger. The latter will fall under the control of Virgin, which is completing the purchase of a 60 per cent stake. The addition of Tiger could prove a drag on Virgin earnings next financial year.
Macquarie Equities analysts said Virgin's profit downgrade was "not overly surprising" after similar comments from Qantas.
"We believe Virgin will struggle to break even in the second half, although losses should be significantly less than Qantas," they said. However, the analysts said reductions in capacity in the domestic market meant both airlines were "materially leveraged to an improvement in trading conditions" next financial year.
Frequently Asked Questions about this Article…
Virgin Australia shares dived (more than 17%) after the airline warned its underlying pre-tax profit would be weaker than the $82.5 million it earned in 2011–12. The downgrade — and the prospect of a second-half loss — prompted a sharp sell-off, with the stock falling about 8¢ to 38¢ and becoming the biggest loser among the ASX top 200.
Virgin blamed weaker earnings on tough domestic trading conditions and a hit to revenue from an overhaul of its reservations system — replacing Navitaire with Sabre in January — and said it does not expect to recoup that lost revenue in the fourth quarter.
Yes. Bank of America Merrill Lynch said much of the downgrade was Virgin’s own making because it had added too much capacity to the domestic market. Macquarie analysts said the downgrade was not overly surprising after similar comments from Qantas and expect Virgin to struggle to break even in the second half.
Qantas shares also fell (about 5¢ to $1.665), marking its fourth straight day of declines. The article reported Virgin as the biggest loser among the ASX top 200 following the profit warning, signalling broader investor concern in the airline sector.
The stock is tightly held: Singapore Airlines, Air New Zealand, Etihad and Richard Branson’s Virgin Group together control more than 60% of Virgin Australia’s register, according to the article.
Analysts hope for improved fortunes next financial year driven by reduced capacity growth from both Virgin and Qantas and the removal of a third independent player. Tiger is expected to fall under Virgin’s control (a 60% stake purchase), though adding Tiger could also drag on Virgin’s earnings in the next financial year.
According to the article, Virgin does not believe it can recoup the revenue it lost while replacing Navitaire with Sabre in the fourth quarter, contributing to the profit downgrade.
The profit warning highlights the risks in airline investing: sensitivity to domestic trading conditions, impacts from IT/system changes, and the effects of capacity decisions. The article shows these factors can trigger sharp share-price moves and that analysts see both airlines as materially leveraged to any improvement in trading conditions next financial year.
Call 1300 880 160
Start a chat
Schedule a call
