The JP Morgan report today, bought this response from Ross Greenwood (Channel Nine business reporter). Interesting read:
From Ross Greenwood, ninemsn.com.au a little bit of sense in the discussion....
The suggestion that's swept through media outlets is that Virgin Blue could collapse under the weight of higher fuel prices. Its a great headline catcher by the transport analysts at JP Morgan — who authored the report — but raises more questions than it answers. The first point to note is that it claims Virgin Blue will find itself in financial difficulties if fuel prices stay where they are for the next few years.
Well, we've had a report from the OECD saying it doesn't expect oil prices to peak much more in the forseeable future and the President of Shell Oil and the President of OPEC both say there's plenty of oil in the world and the current price spike is a bubble. So back to the Virgin Blue report by JP Morgan.
At the last balance sheet Virgin Blue had around $704 million of cash reserves in its balance sheet; total assets of $2.3 billion and total debt of $1.5 billion. It last year made $217 million. The average cost per available seat kilometre travelled was 8.52 cents — up 6 percent. Its average jetfuel price was $81 US a barrel — that was ahead 7.9 percent last year and the total cost for the year was $489 million.
In the half year to December 31, net profit after tax and new inititiatives was $113 million — presumable adding to the company's cash reserves.
That's how it was. Since then of course jet fuel prices have spiked sharply — they've doubled in the past year to more than US$173 a barrel at their peak and regularly above US$160. The broker UBS raised questions about the profitability of Virgin Blue earlier this week, suggesting it might have to raise capital from shareholders — with transport giant Toll Holdings the major holder with 63 per cent of the business.
So presume that the fuel cost for Virgin Blue this year doubled — to around $980 million. With all other things being equal it works out that the airline would roughly have lost $270 million for the full year. That still will not burn that cash reserve — but put a decent dent it in and bring it down to around $430 million. What JP Morgan and UBS are both saying is that Virgin Blue cannot stand that sort of cash drain forever. That's true enough.
But is it enough to send the airline broke? Not really in the immediate future because presumably the management will change a range of things — most likely air-fares — to address the cash drain caused by fuel prices. The second thing that will cause some stress is the constant need to upgrade aircraft (in order to keep the major servicing of the aircraft down to a mimimum) and the need to promote special fares to keep the load-factor high in the aircraft. The thing that might be cast aside is the V-Australia plan, unless the prices can be set at sensible levels. The worst scenario is that for any reason travellers stop flying or lose confidence.