Virgin airline feels the pinch in a tough market

Virgin Australia has cautioned that demand from budget-conscious leisure travellers remains fragile, just as its newly acquired low-cost carrier, Tigerair, is about to step up its battle with Jetstar in the domestic market.

A day after Qantas posted a modest profit, Virgin slumped to a $98 million annual loss - from a $23 million profit a year earlier - due to stiff competition in the domestic market, the disruptions caused by a new reservations system and the carbon tax. Revenue rose 2 per cent to $4 billion for the year to June.

The airline's underlying pre-tax loss of $35 million was better than market consensus. The figure did not include one-off restructuring costs and a loss from Skywest, the West Australian airline it bought earlier this year.

Virgin's three major shareholders - Air New Zealand, Singapore Airlines and Etihad - have thrown their weight behind the airline by providing a $100 million one-year unsecured term-loan facility. It has helped ease fears Virgin will have to resort to an equity raising. Virgin's chief executive, John Borghetti, said the business travel sector was continuing a "good trend" evident over the past few months, but the leisure segment was "quite fragile and it does need stimulating".

"Hopefully, once the election is out of the way there will be more confidence out there," he said.

Mr Borghetti said Virgin did not plan to draw down on the new funding facility "but it is nice to have it there".

White Funds Management portfolio manager, Will Seddon, said the underlying businesses of both Virgin and Qantas seemed to be "going backwards at a pretty rapid rate".

Virgin is holding firm on plans to boost capacity in the domestic market by up to 4 per cent in the first half, but it has declined to flag the likely increase in growth for Tigerair.

Virgin's domestic operations - the core of its business - made a pre-tax loss of $44 million for the year, compared with a $93 million profit previously. That included a $9 million loss from Skywest. Its international business' pre-tax earnings also slipped to $8 million, from $24 million in 2011-12. While the annual results were "disappointing", Mr Borghetti emphasised that Virgin had hastened a reshaping of its business over the last year, which included the new booking system.

"We did this during the most aggressive competitive period probably in the last two decades in Australian aviation," he said. He pointed out that yields - or return on fares - had grown in each month of the last quarter due to it attracting more business travellers.

Despite Tigerair's losses running at $60 million a year, Mr Borghetti said he was confident of turning around the budget airline, in which Virgin has a controlling stake, within three years.

Tigerair's long-term growth plans entail a doubling in size by 2018, which will prompt a strong response from Jetstar.

Like Qantas on Thursday, Virgin has not given guidance for the new financial year, due to the "uncertain economic environment". It also did not pay a dividend.

Macquarie Equities analysts said Virgin's cash burn remained a concern, given the direction of fuel prices and the value of the Australian dollar. While the building blocks were in place, the analysts said "execution is yet to be seen in the form of improved results".