Virgin Blue plunges on profit warning UPDATE: Steve Creedy, Aviation writer May 28, 2010 12:41PM VIRGIN BLUE shares plummeted 29 per cent today after the airline cut its profit forecast by up to 75 per cent because of a rapid deterioration in leisure travel. The airline, in which British billionaire Richard Branson's Virgin Group owns 26 per cent, shocked financial markets this morning by announcing pre-tax profit would be in the $20 million to $40 million range compared to recent guidance of $80m. It also warned that average fares, already at historical lows, would be 10 per cent weaker than it had expected this quarter due to a sharp drop in the leisure market at a time when airlines have been adding capacity. "Since the guidance given earlier this month, we have continued to see rapid deterioration and increased volatility in the operating environment, particularly in respect of the leisure segment both domestically and internationally," a Virgin Blue statement said. By early afternoon, Virgin Blue shares were down 11.5 cents, or 26 per cent, to 31.5c, recording its biggest drop in 21 months. The share price fell as low as 30.5c in the morning. Analysts have been tracking weakening leisure demand in the Australian domestic market for some time and several had warned that yields, which reflect average fares, were under threat. But there was surprise at the extent of the downgrade and the fact that it was just three weeks after Virgin Blue's last profit guidance. IG Markets analyst Ben Potter said it was a disastrous start for incoming chief executive John Borghetti. "The airline has blamed a rapid deterioration and sharp increase in the volatility in its operating environment," Mr Potter said in a note. "Nonetheless, it's hard to fathom how they could reiterate guidance just three weeks ago and now possibly be wrong by up to 75 per cent." Virgin Blue gets most of its revenue from the domestic market but it has also been hampered by its loss-making international offshoot, V Australia. While V Australia has been showing health gains in passenger loads its is understood to be still losing money. The problems on domestic routes was underscored yesterday by the airlines latest traffic figures which showed domestic passenger numbers in April grew by just 0.5 per cent. This translated into passenger growth, as measured in revenue passenger kilometres, of 1.3 per cent against a capacity rise 3.1 per cent. The bigger rise in capacity compared to traffic meant Virgin Blue flew its planes less full and had to cut prices to fill seats. The combination of more capacity and softening leisure demand has seen the cheapest domestic fares fall to historical lows.
VBA Price at posting:
31.5¢ Sentiment: None Disclosure: Held
