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Red exterior of Virgin Blue planes to match their balance sheet
Monday, June 02, 2008
The continuing decline of Virgin Blue is not only a concern to its 62.7 percent owner Toll Holdings, but there are warnings that the budget carrier may require additional investment to overcome rising fuel costs.
The $60 million net profit for Virgin Blue, forecasted by UBS, was slashed over the weekend to a $40 million loss.
The research arm of UBS added that the capital position of Virgin Blue could become ‘strained’ if fuel prices maintained their record high over $US160 a barrel.
Simon Mitchell, a UBS analyst, informed clients that “We believe Virgin Blue is currently losing money, and we forecast a full-year loss in [2008-09] on our $US150 per barrel jet fuel assumption.”
“At the current spot [price], a loss-making scenario looks even more certain,” he continued.
Last Tuesday witnessed an all-time high for the benchmark Singapore jet fuel price, of $US173.55, although it settled below $US160 at the end of the week.
Refining margins have risen even more than oil prices, which according to Business Day, has influenced the doubling of jet fuel prices over the past year.
The increasing capacity in the market is likely to further trouble Virgin Blue, as UBS notes the fleet enhancements on order for Jetstar, Virgin Blue, Qantas and Tiger Airways.
These orders are anticipated to increase capacity by 9 percent in 2008-09.
The recent announcements of Qantas and Jetstar to reduce capacity on certain routes is a path that Virgin Blue is expected to follow.
But Virgin Blue is prevented from the same flexibility of Qantas, who has older aircraft that can be retired and are fully depreciated. Virgin Blue possesses a comparatively new fleet, and do not have the same luxury of grounding aircraft.
The new strategy of Jetstar will involve the grounding of a jet, and cancellation of an order, but the budget carrier still plans to triple their fleet, with an incoming order adding 60 short-haul jets.
Virgin Blue requires $2.3 billion to fund the 33 jets on order for the carrier, and UBS has pointed to this as future strain on the balance sheet. The new Boeing 777’s purchased to service the V Australia long-haul airline are contributing to $800 million of this debt.
V Australia intends to commence flights to Los Angeles later this year.
The executive at Toll, Paul Little, inherited the stake in Virgin Blue when his company took over Patrick Corp in 2006. The acquisition has remained an ongoing concern for Toll, although the recent attempts to sell the Virgin Blue stake were shelved.
However, UBS claims that Virgin Blue may require fresh capital in 2009-10, which would exacerbate the already-tenuous situation with Toll.
Last Thursday was an all-time low for Virgin Blue on the ASX, hitting 68c. Their all-time high was in February 2007, at $2.75.
The UBS forecast of massive losses by Virgin Blue follows a JPMorgan report which predicted Virgin Blue posting a pre-tax loss of $626 million in the next financial year if oil reaches $US200 a barrel.
Source = e-Travel Blackboard: N.K