MARKETS SPECTATOR: Borghetti's backers

Virgin Australia boss, John Borghetti has some big-name supporters should his strategy to fully rival Qantas be a longer or bumpier ride than expected.

John Borghetti can sleep more soundly tonight.

The Virgin Australia chief executive was probably informed beforehand that his pals across the Tasman, Air New Zealand, planned to increase their stake to 25.99 per cent. Their effusive praise could have been written by Borghetti’s own PR team.

“The additional interest affirms Air New Zealand’s strong belief and confidence in Virgin Australia and the strategy it is pursuing under the leadership of John Borghetti,” says Air NZ.

That may take some pressure off Borghetti as Virgin’s stock has been soundly beaten by Qantas. Over the last year Qantas shares have gained 32 per cent. Virgin shares are up 8.4 percent over the same period.

Curiously, Air NZ wants no Virgin board seat. An Air NZ spokesperson told Markets Spectator there are no plans for the airline to merge with Virgin.

Borghetti has some powerful backers in the event his efforts to turn Virgin into a fully-fledged Qantas rival take longer than expected. More than two-thirds of Virgin’s shares will soon be held by Air NZ, Singapore Airlines, Etihad and Virgin Group. “They are likely to provide an equity buffer in the event of an earnings shock,” says UBS analyst Simon Mitchell.

Mitchell forecasts Virgin making a net profit if $33 million in the 12 months to June 30. That compares with a 59 million net profit last year. The airline is attracting fewer passengers than both Mitchell and Virgin had previously forecast. Virgin’s acquisition of SkyWest will add very little to its bottom line. Tiger Airways, in which it has a 60 per cent stake, is loss making.

Borghetti has turbulence ahead.

Today Virgin’s shares fell 1 cent, or 2.2 per cent, to 45 cents. Qantas shares gained 1.5 cents, or 1 per cent, to $1.49. The S&P/ASX200 Index dropped 42.506, or 0.9 per cent, to 4792.70.

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