Markets: Virgin's telling silence

The airline's continued inability to provide detail for the volatile aviation sector's outlook doesn't bode well for the stock.

Virgin’s $98.1 million loss in 2013 is as ugly as its sleek image is appealing to some. Perhaps that is why the airline put out a statement that its partners, Air New Zealand Etihad Airways and Singapore Airways, have committed to backing the beleaguered company with a $90 million one-year loan facility.

Virgin’s operating cash flow plunged 51 per cent to $184.2 in the 12 months to June while expenses associated with its new reservations system, which left more than a few customers apoplectic about long delays, were $81.5 million. Fuel costs rose 3.3 per cent (Virgin Australia swings to full-year loss, August 30).

Virgin may argue its focus is on yield and that its revenue per available seat kilometre rose in June and July in line with more domestic bookings, but it has yet to make much of a dent in Qantas’ market share, which sits at 34 per cent compared to the flying kangaroo's 62 per cent share of the Australian domestic air travel market. The problems associated with Virgin’s reservation system this year will hardly help the company’s efforts to chip away at Qantas’ stranglehold on the domestic market.

And when it comes to business conditions in the months ahead, Virgin remains silent: “...given the uncertain economic environment we are unable to provide guidance for the 2014 financial year.” This perhaps speaks volumes as to the headwinds facing Virgin, and aviation generally.

Qantas warned yesterday of more voracious competition for 2014 as international carriers try to grab more of the commercial and tourist traveller markets. The falling Australian dollar may mean more Virgin customers choose to travel within Australia rather than overseas, but it also means the company will pay a higher fuel bill.

This is likely to have the most significant impact on Virgin’s bottom line. If the Australian currency weakens against the US dollar, Virgin’s jet fuel costs will rise notwithstanding any surge in oil prices. Oil prices are forecast to rise because of continued turmoil in Libya, which supplies about 2 per cent of the world’s oil, as well as possible western military action in Syria. Bloomberg’s New York Harbor 54-grade jet fuel spot price is already up 19 per cent since April 17.

While Virgin shares are up 30 per cent on two years ago, they have fallen 20 per cent in the last 12 months – and look likely to fall further.