Virgin braces as earnings go belly up
The airline has walked away from its February forecasts that it would beat the $82.5 million in underlying pre-tax profits it recorded in 2011-12. It means Virgin is on track to post a loss in the second half.
The profit warning follows Qantas dampening investor expectations two weeks ago.
Shares in Virgin fell 8¢ to 38¢ - making it the biggest loser among the ASX's top-200 companies after the profit warning late on Wednesday. The stock is tightly held, with Singapore Airlines, Air New Zealand, Etihad and Richard Branson's Virgin Group controlling more than 60 per cent.
Qantas also fell 5¢ to $1.665, its fourth consecutive day of declines.
Analysts at Bank of America Merrill Lynch said much of the profit downgrade was of Virgin's own making because it had added too much capacity to the domestic market.
Virgin put much of the blame for the weaker earnings on an overhaul of its reservations system and tough economic conditions. It does not believe it can recoup in the fourth quarter revenue lost while replacing its Navitaire system with Sabre.
The airline has forecast underlying pre-tax profits this financial year to be less than the $82.5 million pre-tax profit it recorded in January. It did not give more definitive guidance because of "the slower trading conditions and the competitive and weakening economic environment".
Analysts are hopeful of improved fortunes next financial year from reduced growth in capacity by Virgin and Qantas, and removal of a third independent player in Tiger when Virgin buys a 60 per cent stake.
However, the addition of Tiger could prove a drag on Virgin's earnings next financial year.
Macquarie Equities analysts said Virgin's profit downgrade was "not overly surprising" in the wake of similar comments from Qantas on the domestic market. "We believe Virgin will struggle to break even in the second half, although losses should be significantly less than Qantas," they said. However, reductions in capacity in the domestic market meant both airlines were "materially leveraged to an improvement in trading conditions" next financial year.
Frequently Asked Questions about this Article…
Virgin Australia shares plunged after the airline warned its underlying pre-tax profit would be weaker than last year. The company blamed tough domestic trading conditions and disruption from an overhaul of its reservations system (replacing Navitaire with Sabre), and analysts also pointed to excess capacity on the domestic market as a contributing factor.
Shares in Virgin fell about 8 cents to 38 cents — a drop of more than 17 per cent — making it the biggest loser among the ASX top 200 companies on the day of the profit warning.
Yes. Virgin walked away from earlier forecasts that it would beat its prior underlying pre-tax profit of $82.5 million and said underlying pre-tax profits for the year will be less than that amount. The company indicated it is on track to post a loss in the second half.
Virgin said revenue was lost while replacing its Navitaire reservations system with Sabre and it does not believe it can recoup that lost revenue in the fourth quarter, which contributed to the downgrade in expected earnings.
Bank of America Merrill Lynch analysts said much of the downgrade was self-inflicted because Virgin added too much capacity to the domestic market. Macquarie Equities analysts described the downgrade as unsurprising after similar comments from Qantas and said Virgin would likely struggle to break even in the second half, though expected losses to be smaller than Qantas's.
Analysts noted that removing a third independent player (Tiger) could improve market conditions next financial year by reducing capacity growth, but they also warned that adding Tiger could prove a drag on Virgin’s earnings in the next financial year.
The stock is tightly held: Singapore Airlines, Air New Zealand, Etihad and Richard Branson’s Virgin Group together control more than 60 per cent of Virgin Australia.
Airline earnings can be highly sensitive to domestic trading conditions, competitive capacity decisions and operational disruptions (such as reservations system rollouts). Both Virgin and Qantas appear materially leveraged to improvement in trading conditions next financial year, so investors should watch capacity trends, competitive moves and company guidance when assessing airline stocks.
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