THE DISTILLERY: Virgin curveball

Jotters decipher Virgin Australia's surprise earnings downgrade, with one eying Etihad's position on the airline's register.

Virgin Australia gave its shareholders, both big and small, a nasty piece of news that its profit for this financial year would be below last year’s. The stock was punished to the tune of 17.4 per cent. So how did the carrier manage that piece of PR along with its increasingly crowded register?

Also in this Friday’s shot from The Distillery – and your server needs a double – is the second-day stories that have emerged from the news that Brockman Resources has applied for access for Fortescue Metals Group’s rail infrastructure.

But first, Fairfax’s Adele Ferguson is under the belief that Etihad Airways has been snapping up Virgin shares in the wake of the Singapore Airlines diluting issue. If timing were a commodity, it would never be shorted.

“Etihad Airways' decision to restore its shareholding in Virgin quashes speculation that it might cut ties after Singapore Airlines almost doubled its stake in the country's second-largest airline to almost 20 per cent. The share purchases could be part of a bigger plan for Etihad to further increase its shareholding in Virgin as part of a move to compete against the new Emirates and Qantas alliance. There is little doubt that the airline's founder, Sir Richard Branson, who sold 10 per cent of his shares to Singapore Airlines in March, would sell his remaining 13 per cent stake in the airline at the right price.”

Meanwhile, Business Spectator’s Stephen Bartholomeusz points out that Virgin has announced this downgrade in the wake of a very recent crowding of its register.

“That means the news of the downgrade should have come out of the blue to the other Virgin Australia allies and would have been a particularly unpleasant surprise for Singapore Airlines, which doubled its stake in the carrier only three weeks ago at a cost of about $128 million. The shares it acquired are now worth about $26 million less than it paid and it is closer to $40 million down on its entire shareholding. The shareholder with the smile on his face would be Richard Branson, given that it was his Virgin Group that offloaded 10 per cent of Virgin Australia to Singapore Airlines to enable it to double its stake last month. His only regret might be that he didn’t sell, or perhaps wasn’t approached to sell, the remaining shareholding. Etihad’s James Hogan, on the other hand, will be glad that he didn’t respond to Singapore Airlines' move by buying those remaining Virgin Group shares.”

Does Sir Richard really need some more things in life to be happy about? The dude is launching people into the stratosphere.

Meanwhile, The Australian Financial Review’s Jamie Freed explains how much of the ‘buzz’ around Brockman Mining’s formal application to use some of Fortescue Metals Group’s rail infrastructure under the Western Australia Railways (Access) Code isn’t around Fortescue, but around Queensland rail haulage giant Aurizon.

“Aurizon last year formed an alliance with Brockman and Atlas Iron to investigate the $1.5 billion construction of a new Pilbara railway line after years of the smaller companies talking with Fortescue Metals about haulage deals but never reaching commercial terms. But when the iron ore price plunged to less than $US90 a tonne in September and investors became more cautious about the long-term outlook for the commodity, the project no longer looked attractive. By December, it launched a sales process for a minority, non-operating stake in its rail and port assets. The market’s natural assumption was it could maximise the price if it signed up third-party users willing to pay hefty tariffs, as BC Iron already does.”

Freed goes on to say that Brockman wants a third party to move the iron ore for it, which is where Aurizon could come in. But as Business Spectator’s Stephen Bartholomeusz explains, there is a problem for Fortescue if Brockman manages to force its way on. He argues the timing of Brockman’s application is no coincidence.

“Fortescue Metals is in the final stages of negotiations to sell a large minority stake in its rail and port assets to a third party investor for more than $US3 billion. The Brockman move could severely complicate those negotiations and assessment of the value of the equity being offered…The problem for Fortescue Metals and its proposed sale of equity in The Pilbara Infrastructure is that the value of TPI was seen to be driven by the price Fortescue itself would pay to ship its ore on the rail line and through the port facilities – the higher that price the bigger the price it would receive for the equity.”

Meanwhile, Fairfax’s Michael Pascoe brings more than a hint of condescension in a piece campaigning for a re-examination of the merits of a budget deficit. The Distillery agrees with him on the point absolutely and understands that tone. The deficit debate is bloody interesting to anyone with a clue.

Elsewhere, The Australian Financial Review’s Chanticleer columnist Tony Boyd laments the deployment of $420 million in support of uneconomic farm operations by Agriculture Minister Joe Ludwig.

And finally, The Australian Financial Review’s Karen Maley takes a look at the latest economics numbers out of Europe and finds that the region is still mired in recession with many dark days ahead of it.