The answer is clear:
Virgin Blue 'could fold over fuel costs'
June 5, 2008 - 2:14PM
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Virgin Blue Holdings Ltd faces financial oblivion if jet fuel remains at record prices and the carrier cannot raise fares to cover the increase, an analysis by broker JP Morgan says.
"If jet fuel were to stay at current levels for several years and Virgin Blue could not significantly increase fares, it would not survive," JP Morgan analysts Matthew Crowe and Russell Crichton-Browne wrote in a note.
In some relief to airlines, crude oil for July delivery fell more than $US2 to $US122.30 s barrel overnight.
JP Morgan said if high fuel prices persisted, an equity injection would not help keep Virgin Blue airborne.
"Equity injections would be futile as prices would not cover costs."
The two analysts said that even with $1 billion in equity Virgin Blue would become insolvent under this scenario .
"A five per cent fare rise is not enough to cover fuel costs," they said.
"A $500 million equity injection would buy some time in the hope that fuel costs fall, but if fuel did not fall Virgin Blue, on our analysis, would eventually become insolvent despite the equity injection."
The analysts said two back-to-back five per cent fare rises would save the company and reduce the need for an equity injection.
However, they said the resulting growth profile would not be very attractive, with fiscal 2015 estimated earnings still below fiscal 2007.
"Virgin Blue needs to raise fares to cover the cost of fuel, rather than raise equity.
"To create a profile of strong earnings growth at the current oil price, we estimate Virgin Blue needs to raise fares by 10 per cent and then raise fares 0.5 per cent per annum."
The analysts reduced their December 2008 price target to 85 cents "reflecting cuts to our earnings estimates and current fuel price sentiment".
"Risks to this price target include fuel costs, capacity and further loss-making expansions."
Virgin Blue last lifted its airfares on May 6.
One-way fares on Virgin Blue domestic flights increased by between $5 and $10, based on flight sector length, and its Pacific Blue branded trans-Tasman and short-haul international fares increased by between $5 and $15.
At 1353 Thursday, Virgin Blue was up 3.5 cents, or 5.83 per cent, to 63.5 cents.