Virgin Australia shares dived more than 17 per cent after the airline warned its pre-tax profit will be weaker than last year due to tough conditions in the domestic market.
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.