The lesson from Virgin's shock downgrade

Want to know the secret of losing money on the stock market? Buy airline stocks.

For the public they hold mystique, glamour and a curious attraction.

For investors, airlines seem to promise nothing but heartache, as Virgin Australia once again proved this morning.

With its second downgrade in just three months, Virgin (VAH) has foreshadowed a loss of as much as $110 million, compared with last year’s $23 million profit, amid a late rush of downgrades.

That was despite what is considered to be an efficient and highly skilled management and a share register that now includes a roll call of the world and the region’s premier airlines.

The reasons are myriad: higher fuel costs, the carbon tax and the recent purchase of Skywest.

Restructuring costs are expected to be $100 million this year, which relate mostly to its new booking system and the integration of Tiger Airlines.

Since his ascension to the top job, Virgin chief executive John Borghetti has repositioned the company, taking the airline upmarket, challenging Qantas’ stranglehold on the domestic market while establishing a global network through its links with Etihad, Singapore Airlines and Air New Zealand.

Borghetti this morning held out the promise of better times ahead as Virgin shares dropped 5.5% to 43c.

But, globally, the airline industry is dominated by government subsidised operations, many of which cast only a scant eye towards profits. Add to the equation escalating fuel costs, and you have a recipe for at best a long-term run of slim earnings interspersed with losses (see Roger Montgomery's Airlines turbulence should unnerve investors).

Speculation has been swirling around Virgin for months of a capital raising but that was dismissed this morning.

Whle some punters believe a bidding war eventually will erupt between Virgin's major partners, and are investing in the hope of getting a takeover premium, perhaps the only sure fire way to get a certain return from any airline is to stick to purchasing tickets.

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