Toll grits teeth as VB shares head south
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who was having bets about a month ago re $5000 in the bank and a parcel of VB shares????
If I terminated the term deposit today I'd still have 5k. Those DJ shares are worth $2,784 at today's closing price 49 cents.
Good luck!
Nope, these glasses are without prejudice. If QF stocks had the same performance then I'd point out the discrepancy.
I think VB have a pretty good operation, except for the intro of the 777. I cannot see how this will make any money for at least 1-2 years and this could be all it takes to bring a good company down.
At what point will the decision makers realize they need to cut V Oz free in order to keep VB/PB a going concern.
From the sideline we may be entering that area where ego's begin to get hurt and logical best practice is ignored.
I think VB have a pretty good operation, except for the intro of the 777. I cannot see how this will make any money for at least 1-2 years and this could be all it takes to bring a good company down.
At what point will the decision makers realize they need to cut V Oz free in order to keep VB/PB a going concern.
From the sideline we may be entering that area where ego's begin to get hurt and logical best practice is ignored.
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All VB ops are seperate entities so they can be cut loose at any stage. If what you suggest happens then VOZ will be able to sell the frames and orders to someone else who is looking for them. BG is an accountant at the end of the day and if the numbers don't add up he will be the first one to look at cutting it off.
Virgin Blue, Pacific Blue, Polynesian Blue, V Australia, Virgin Tech, Velocity etc. The list goes on and it means that one doesn't interfere with the other should they go belly up.
Anyway could someone please tell me how much money you would imagine VOZ can make out of freight on the initial run SYD-LAX-SYD. I am very interested to find out if they can break even if they can fill the hold full of freight and whether or not the pax are going to be the cream on the cake so to speak. "The 777-300ER can carry 7,120 cu ft of cargo includes up to eight pallets, 20 LD-3 containers". What does this equate to in terms of cash?
Virgin Blue, Pacific Blue, Polynesian Blue, V Australia, Virgin Tech, Velocity etc. The list goes on and it means that one doesn't interfere with the other should they go belly up.
Anyway could someone please tell me how much money you would imagine VOZ can make out of freight on the initial run SYD-LAX-SYD. I am very interested to find out if they can break even if they can fill the hold full of freight and whether or not the pax are going to be the cream on the cake so to speak. "The 777-300ER can carry 7,120 cu ft of cargo includes up to eight pallets, 20 LD-3 containers". What does this equate to in terms of cash?
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It adds up to a loss with the cost of oil at $140US a barrel and the whole model predicated on the cost of oil at $70US a barrel! Accountants $%^hole I say, strategist no way!
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Hi all,
I found this! It is a reasonably analytical (facts and figures) point of view on Australian airlines, by no means perfect but some good points in there. Sorry that it is a little long!
How long can they remain profitable?
This will examine in some detail Australia’s two largest airlines with the aim to establish how long they will remain profitable in an era of high oil prices.
The approach taken is to develop growth figures across a number of categories based on the airlines historical data. The data has been obtained from the financial reports of both airlines.2 The time frame that has been used is from FY 2003/04 through to 2006/07. The historical growth rates will then be projected forward until 2018. After developing the base case, a number of differing scenarios will be developed that will provide an indication of how long we can expect the airlines to remain profitable. The factors that have been considered and the per annum growth rates over the period are displayed below.
The first figure in each line is Qantas, the second Virgin.
Factor QANTAS Group Growth pa Virgin Blue Growth pa Description
Revenue 8.4% (QF) 9.9%(VB) Data calculated from financial statements
Expenses 9.3% (QF) 10.2%(VB) Data calculated from financial statements
Expenses (less fuel) 5.1% (QF) 6.7% (VB) This has been calculated due to the different growth rates in non fuel expenses and fuel expenses.
Fuel 36.5% (QF) 29.3% (VB) Data calculated from financial statements
Available Seat Kilometres (ASK) 4.3% (QF) 8.3% (VB) Measures the airlines capacity growth.
Revenue/ASK 3.5% (QF) 1.1% (VB) Measures revenue per ASK
Expenses/ASK 4.3% (QF) 1.3% (VB) Measures expenses per ASK
Fuel/ASK 27.5% (QF) 14% (VB) Measures fuel costs per ASK
This above shows that expenses have been growing at a faster rate than revenue for the last four financial years, mainly due to the significant increase in fuel costs over that period.
To determine the airlines future profitability, the revenue and expenses of the airline have been related to its capacity, or Available Seat Kilometres (ASK) giving two values, being revenue per ASK (R/ASK) and expenses per ASK (E/ASK). For as long as an airline can keep R/ASK greater than E/ASK an airline will remain profitable.
Using the historical growth rates, a baseline (or business as usual) projection has been made for the period 2008 to 2018. The non fuel and fuel expenses have been calculated separately and summed to provide the projected expenses. Using this baseline projection, fuel as percentage of total operating cost, increases from 24% in 2007 to 58% in 2018 for QANTAS and 27% to 75% for Virgin Blue. Chart one and two detail the future profitability of QANTAS and Virgin Blue respectively using this baseline.
Using this baseline, QANTAS will make a net loss from 2009 and Virgin Blue from 2012. Over time the losses per ASK increase and at some point the airlines will become insolvent. This baseline will be now used to develop a number of other scenarios. The scenarios that will be used are described below:
* Scenario one. Revenue, fuel costs and capacity growth continues to grow at historical rates whilst on-fuel costs reduce.
* Scenario two. Revenue and fuel costs continues to grow at historical rates (calculated according to provided capacity), whilst non-fuel costs and capacity reduce.
* Scenario three. Fuel costs continues to grow at historical rates (calculated according to provided capacity) whilst revenue, non-fuel costs and capacity reduce.
* Scenario four. Fuel costs remain constant relative to capacity whilst revenue, non-fuel costs and capacity reduce.
* Scenario five. Fuel costs remain constant relative to capacity whilst revenue, non-fuel costs and capacity increase at historical rates.
2% per annum has been used as the figure declining costs, capacity growth and revenue. Obviously, higher or lower figures will result in changes to the predictions developed.
Some of these scenario’s assume that the airlines can increase revenue and reduce non fuel operating costs in an era of high oil prices. Oil prices have been negatively impacting airlines for some years now. For example in the QANTAS annual report of 2005 it stated that ‘Qantas’ greatest challenge remains the cost of fuel, which we believe will stay at the current high levels.3 As a result airlines for a number of years have been reducing costs. The easy cost saving options have already implemented, meaning that to further reduce costs will be increasingly difficult. The airlines will no doubt continue to raise fuel surcharges in an effort to increase revenue. Unfortunately for the airlines, each fare increase will result in fewer passengers, meaning that their Revenue Seat Factor or Load factor will fall, leading to further capacity reduction.
The scenarios in their worst cases show the fairly sobering picture that, with the exception of scenario four and five, both QANTAS and Virgin Blue are likely to become unprofitable between now and 2018. The scenario’s have not been assigned probabilities, however my gut feel is as follows:
* The price of jet fuel will continue to increase at or above the current rate as we approach and past peak oil.
* Both airlines will slow their capacity growth over the next couple of years before reducing it.
* Both airlines will attempt to reduce their non-fuel operating costs, although this may be difficult due to inflation.
* Revenue will decrease over time as fewer passengers can afford to travel, due to increases in the cost of air travel and the worsening economic situation associated with the onset of peak oil. I don’t see passenger numbers beginning to fall for a year or two yet, as I don’t think that the pinch from higher fuel prices has as yet significantly changed spending habits (either that or we are just going further into debt?).
This most closely resembles scenario three, meaning that as early as 2010, both of Australia’s major airlines could cease to be profitable. At some point, if they continue to be unprofitable they will become insolvent.
Winners and losers
The impact of Australia’s two largest airlines collapsing would be enormous. But, as in all situations, there are winners and losers. The losers would include:
* Those people who work for the airlines.
* Those individuals and funds managers invested in airlines, airports and associated infrastructure.
* The industry that supports aviation, including component manufacturers, maintenance and repair, air traffic control, catering etc.
* Airports, including the corporations that own them, security staff, retailers operating from airports, car hire companies, taxi drivers.
* Tourism, including tour operators, hotels, restaurants and retail outlets in tourist centres.
* Organisations that rely upon air travel for movement of personnel for meetings, courses and work such as mining, government and many other businesses.
The winners list is somewhat shorter:
* Public transport such as trains and buses.
* Long distance bus companies.
* Telecommunications companies, particularly those support tele-conferencing, video tele-conferencing and other technologies allowing people to work from home.
* Our climate.
* Oil depletion may slow due to reduced fuel demand.
Hopefully Cambridge Energy Research Associates (CERA) vision of an undulating oil production plateau4 will eventuate (see here for a response to CERAs view5), demand will soften and the airlines will remain marginally profitable for the next decade or two. Personally however, I don’t ascribe to hope as a method of fixing problems, particularly problems of such magnitude.
Inaccuracies
The model is relatively simple, and as a result has some inherent inaccuracies. These include:
* Not all revenue is derived from passengers. For example, only 79% of QANTAS’ revenue came from passenger revenue in 2006-07. The bulk of the remainder came from air freight and tours and travel services. Higher oil prices will likely have a negative effect on these revenue sources as well, so this should not have a significant impact on the model.
* Does not specifically account for changes in foreign exchange rates and changes in the oil price. My first model attempted to oil prices and foreign exchange rates to calculate total oil costs, however there was too many unknowns (such as hedging strategies) to make this viable.
* Does not consider the performance of differing groups within the airlines. For example QANTAS has domestic, international, regional and Jetstar amongst its groups. The performance amongst these groups could vary significantly. Whilst operating statistics are available for each of these business units, the financial data is not so easy to source.
* Historical growth rates are not an accurate prediction of future growth rates. To counter this, the model will be updated over time using a four year moving average. The FY 07/08 full year results will be interesting.
* The impact of oil supply disruptions has not been considered, however with minimal capacity to surge current oil production, we are probably only an extreme weather event, terrorist act or geo-political event away from physical shortages. This would most likely be a very costly for airlines.
Conclusion
This analysis provides some very worrying findings. Both of Australia’s major airlines could become unprofitable within a couple of years if current trends continue and unviable at some point shortly after that. There is some hope that a reduction in capacity and non-fuel operating costs with a steadying of fuel costs may allow the airlines to remain profitable, but with peak exports likely past and peak oil in the not to distant future, this is a slim hope.
From a risk management perspective, the collapse of airlines would have a major negative impact on the Australia economy. Based on this analysis, it is almost certain that the airlines will collapse, it is only a matter of time unless fuel prices are reduced, and quickly, to a more manageable level over the long term. Declining exports and discoveries whilst demand continues to increase, means that it is unlikely that this will occur. The net result is that Australia faces an extreme level of risk.
With so much at stake, it would be reasonable to expect that our nation’s leaders would be doing everything in their power to prepare the nation for a new age of higher oil prices. Over recent weeks, there has been much discussion by the major political parties on issues such as FuelWatch6 and reducing either the GST or excise on petrol, but very little on practical methods of reducing our dependence on oil. I will leave it to you to decide how well we are being served by our leaders on an issue of such vital importance to the future of our nation.
Interesting indeed! Lets hope that the speculative oil bubble bursts very soon. One thing i am very sceptical of is this so called peak oil. Espercialy now that shale oil in greater quantities than crude oil have been discovered all over the place.
Safe Flying,
Ratter
I found this! It is a reasonably analytical (facts and figures) point of view on Australian airlines, by no means perfect but some good points in there. Sorry that it is a little long!
How long can they remain profitable?
This will examine in some detail Australia’s two largest airlines with the aim to establish how long they will remain profitable in an era of high oil prices.
The approach taken is to develop growth figures across a number of categories based on the airlines historical data. The data has been obtained from the financial reports of both airlines.2 The time frame that has been used is from FY 2003/04 through to 2006/07. The historical growth rates will then be projected forward until 2018. After developing the base case, a number of differing scenarios will be developed that will provide an indication of how long we can expect the airlines to remain profitable. The factors that have been considered and the per annum growth rates over the period are displayed below.
The first figure in each line is Qantas, the second Virgin.
Factor QANTAS Group Growth pa Virgin Blue Growth pa Description
Revenue 8.4% (QF) 9.9%(VB) Data calculated from financial statements
Expenses 9.3% (QF) 10.2%(VB) Data calculated from financial statements
Expenses (less fuel) 5.1% (QF) 6.7% (VB) This has been calculated due to the different growth rates in non fuel expenses and fuel expenses.
Fuel 36.5% (QF) 29.3% (VB) Data calculated from financial statements
Available Seat Kilometres (ASK) 4.3% (QF) 8.3% (VB) Measures the airlines capacity growth.
Revenue/ASK 3.5% (QF) 1.1% (VB) Measures revenue per ASK
Expenses/ASK 4.3% (QF) 1.3% (VB) Measures expenses per ASK
Fuel/ASK 27.5% (QF) 14% (VB) Measures fuel costs per ASK
This above shows that expenses have been growing at a faster rate than revenue for the last four financial years, mainly due to the significant increase in fuel costs over that period.
To determine the airlines future profitability, the revenue and expenses of the airline have been related to its capacity, or Available Seat Kilometres (ASK) giving two values, being revenue per ASK (R/ASK) and expenses per ASK (E/ASK). For as long as an airline can keep R/ASK greater than E/ASK an airline will remain profitable.
Using the historical growth rates, a baseline (or business as usual) projection has been made for the period 2008 to 2018. The non fuel and fuel expenses have been calculated separately and summed to provide the projected expenses. Using this baseline projection, fuel as percentage of total operating cost, increases from 24% in 2007 to 58% in 2018 for QANTAS and 27% to 75% for Virgin Blue. Chart one and two detail the future profitability of QANTAS and Virgin Blue respectively using this baseline.
Using this baseline, QANTAS will make a net loss from 2009 and Virgin Blue from 2012. Over time the losses per ASK increase and at some point the airlines will become insolvent. This baseline will be now used to develop a number of other scenarios. The scenarios that will be used are described below:
* Scenario one. Revenue, fuel costs and capacity growth continues to grow at historical rates whilst on-fuel costs reduce.
* Scenario two. Revenue and fuel costs continues to grow at historical rates (calculated according to provided capacity), whilst non-fuel costs and capacity reduce.
* Scenario three. Fuel costs continues to grow at historical rates (calculated according to provided capacity) whilst revenue, non-fuel costs and capacity reduce.
* Scenario four. Fuel costs remain constant relative to capacity whilst revenue, non-fuel costs and capacity reduce.
* Scenario five. Fuel costs remain constant relative to capacity whilst revenue, non-fuel costs and capacity increase at historical rates.
2% per annum has been used as the figure declining costs, capacity growth and revenue. Obviously, higher or lower figures will result in changes to the predictions developed.
Some of these scenario’s assume that the airlines can increase revenue and reduce non fuel operating costs in an era of high oil prices. Oil prices have been negatively impacting airlines for some years now. For example in the QANTAS annual report of 2005 it stated that ‘Qantas’ greatest challenge remains the cost of fuel, which we believe will stay at the current high levels.3 As a result airlines for a number of years have been reducing costs. The easy cost saving options have already implemented, meaning that to further reduce costs will be increasingly difficult. The airlines will no doubt continue to raise fuel surcharges in an effort to increase revenue. Unfortunately for the airlines, each fare increase will result in fewer passengers, meaning that their Revenue Seat Factor or Load factor will fall, leading to further capacity reduction.
The scenarios in their worst cases show the fairly sobering picture that, with the exception of scenario four and five, both QANTAS and Virgin Blue are likely to become unprofitable between now and 2018. The scenario’s have not been assigned probabilities, however my gut feel is as follows:
* The price of jet fuel will continue to increase at or above the current rate as we approach and past peak oil.
* Both airlines will slow their capacity growth over the next couple of years before reducing it.
* Both airlines will attempt to reduce their non-fuel operating costs, although this may be difficult due to inflation.
* Revenue will decrease over time as fewer passengers can afford to travel, due to increases in the cost of air travel and the worsening economic situation associated with the onset of peak oil. I don’t see passenger numbers beginning to fall for a year or two yet, as I don’t think that the pinch from higher fuel prices has as yet significantly changed spending habits (either that or we are just going further into debt?).
This most closely resembles scenario three, meaning that as early as 2010, both of Australia’s major airlines could cease to be profitable. At some point, if they continue to be unprofitable they will become insolvent.
Winners and losers
The impact of Australia’s two largest airlines collapsing would be enormous. But, as in all situations, there are winners and losers. The losers would include:
* Those people who work for the airlines.
* Those individuals and funds managers invested in airlines, airports and associated infrastructure.
* The industry that supports aviation, including component manufacturers, maintenance and repair, air traffic control, catering etc.
* Airports, including the corporations that own them, security staff, retailers operating from airports, car hire companies, taxi drivers.
* Tourism, including tour operators, hotels, restaurants and retail outlets in tourist centres.
* Organisations that rely upon air travel for movement of personnel for meetings, courses and work such as mining, government and many other businesses.
The winners list is somewhat shorter:
* Public transport such as trains and buses.
* Long distance bus companies.
* Telecommunications companies, particularly those support tele-conferencing, video tele-conferencing and other technologies allowing people to work from home.
* Our climate.
* Oil depletion may slow due to reduced fuel demand.
Hopefully Cambridge Energy Research Associates (CERA) vision of an undulating oil production plateau4 will eventuate (see here for a response to CERAs view5), demand will soften and the airlines will remain marginally profitable for the next decade or two. Personally however, I don’t ascribe to hope as a method of fixing problems, particularly problems of such magnitude.
Inaccuracies
The model is relatively simple, and as a result has some inherent inaccuracies. These include:
* Not all revenue is derived from passengers. For example, only 79% of QANTAS’ revenue came from passenger revenue in 2006-07. The bulk of the remainder came from air freight and tours and travel services. Higher oil prices will likely have a negative effect on these revenue sources as well, so this should not have a significant impact on the model.
* Does not specifically account for changes in foreign exchange rates and changes in the oil price. My first model attempted to oil prices and foreign exchange rates to calculate total oil costs, however there was too many unknowns (such as hedging strategies) to make this viable.
* Does not consider the performance of differing groups within the airlines. For example QANTAS has domestic, international, regional and Jetstar amongst its groups. The performance amongst these groups could vary significantly. Whilst operating statistics are available for each of these business units, the financial data is not so easy to source.
* Historical growth rates are not an accurate prediction of future growth rates. To counter this, the model will be updated over time using a four year moving average. The FY 07/08 full year results will be interesting.
* The impact of oil supply disruptions has not been considered, however with minimal capacity to surge current oil production, we are probably only an extreme weather event, terrorist act or geo-political event away from physical shortages. This would most likely be a very costly for airlines.
Conclusion
This analysis provides some very worrying findings. Both of Australia’s major airlines could become unprofitable within a couple of years if current trends continue and unviable at some point shortly after that. There is some hope that a reduction in capacity and non-fuel operating costs with a steadying of fuel costs may allow the airlines to remain profitable, but with peak exports likely past and peak oil in the not to distant future, this is a slim hope.
From a risk management perspective, the collapse of airlines would have a major negative impact on the Australia economy. Based on this analysis, it is almost certain that the airlines will collapse, it is only a matter of time unless fuel prices are reduced, and quickly, to a more manageable level over the long term. Declining exports and discoveries whilst demand continues to increase, means that it is unlikely that this will occur. The net result is that Australia faces an extreme level of risk.
With so much at stake, it would be reasonable to expect that our nation’s leaders would be doing everything in their power to prepare the nation for a new age of higher oil prices. Over recent weeks, there has been much discussion by the major political parties on issues such as FuelWatch6 and reducing either the GST or excise on petrol, but very little on practical methods of reducing our dependence on oil. I will leave it to you to decide how well we are being served by our leaders on an issue of such vital importance to the future of our nation.
Interesting indeed! Lets hope that the speculative oil bubble bursts very soon. One thing i am very sceptical of is this so called peak oil. Espercialy now that shale oil in greater quantities than crude oil have been discovered all over the place.
Safe Flying,
Ratter
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Ratter,
it was long indeed! But unless I am missing something (which is possible) it is already incorrect. VB have been unprofitable for a couple of months already, after announcement of year end result being lower than its half year (i.e. second half will be loss) and forecast for 08/09 is a loss. We dont need to wait for 2010 to see if VB will be unprofitable, we know they are now.
The big question is whether QF Group will go the same way? (i.e. become unprofitable)Time will tell as FY08/09 progresses and the new fuel price takes its place..and we see just how much of a market downturn there might be. QF has the added benefit of a better domestic business traveller model. Although the conditions may not suit the profitability of Jetstar (in its own right), its lower cost base may help QF keep (two brand strategy) the limited money of vacationers away from VB, which may in turn strangle them. The added ability of QF to park old fully depreciated aircraft without any real cost/loss will help them should there be a large market downturn.
Unless someone with a lot of money rescues VB, all that QF need to worry about is surviving longer than VB and then 95% market share again...just like 7 years ago...
This time might be different...someone like SQ (or even EK) might like the assets/business of VB more than Ansett (once V-Aust) is up and running and buy in at a bargain and give them both a large footprint in the Aust/NZ market and the dreame of Trans Pacific market. Of course for that V-Oz needs to remain majority Australian owned.
More questions than answers still...
it was long indeed! But unless I am missing something (which is possible) it is already incorrect. VB have been unprofitable for a couple of months already, after announcement of year end result being lower than its half year (i.e. second half will be loss) and forecast for 08/09 is a loss. We dont need to wait for 2010 to see if VB will be unprofitable, we know they are now.
The big question is whether QF Group will go the same way? (i.e. become unprofitable)Time will tell as FY08/09 progresses and the new fuel price takes its place..and we see just how much of a market downturn there might be. QF has the added benefit of a better domestic business traveller model. Although the conditions may not suit the profitability of Jetstar (in its own right), its lower cost base may help QF keep (two brand strategy) the limited money of vacationers away from VB, which may in turn strangle them. The added ability of QF to park old fully depreciated aircraft without any real cost/loss will help them should there be a large market downturn.
Unless someone with a lot of money rescues VB, all that QF need to worry about is surviving longer than VB and then 95% market share again...just like 7 years ago...
This time might be different...someone like SQ (or even EK) might like the assets/business of VB more than Ansett (once V-Aust) is up and running and buy in at a bargain and give them both a large footprint in the Aust/NZ market and the dreame of Trans Pacific market. Of course for that V-Oz needs to remain majority Australian owned.
More questions than answers still...
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A look at the mammoth amount of VB middle-management and "committee"/work groups would be better justified.
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There was an interesting article on smh.com.au about two weeks ago which I only came across today:
Scenario games at Virgin Blue
June 17, 2008
The airline might not like it, but the analysts are playing Dark, Darker and Darkest anyway.
THE longer jet fuel prices stay at present levels, the more radical Virgin Blue will have to become in the art of cost slashing.
On Friday the airline signalled that plans to "remove" four Boeing 737s from its domestic fleet and cut $50 million from its annual cost base were just the first step. This looks like a baby step when compared to Qantas chief executive Geoff Dixon's aggressive cost-cutting plans, which will involve job cuts and plans to scale back unprofitable routes, both domestic and international. And the grounding of a Jetstar plane.
But with jet fuel prices still hovering near $US170 a barrel, some analysts have warned the eight-year-old Virgin Blue could be forced to take far more extreme actions than even Qantas.
Slashing its price target from 95c to 50c, ABN Amro has forecast the airline's fuel bill would rise $163 million to $735 million next financial year. Share in the carrier rose 1.5c to 57.5c yesterday.
The broker warned that if jet fuel prices remained at current levels Virgin Blue management would eventually "need to consider" deferring capital expenditure (i.e., fleet expansion), "significant fleet groundings", and additional revenue streams such as baggage charges. The problem with fleet groundings for Virgin Blue is that, unlike Qantas which can retire its decrepit fleet of fully depreciated jets, it has relatively new aircraft. This means it will either have to find someone to sub-lease its jets (in a deteriorating global aviation industry), or pay its own financing or leasing costs on the planes even while they are grounded. And the problem with raising fares and adding new charges is that it could further dampen already slowing demand for domestic and international air travel.
While Virgin Blue's managing director, Brett Godfrey, displayed his dislike for analysts painting different "scenarios" after JP Morgan warned two weeks ago the airline would go broke if it did not raise fares, Citi Investment Research has followed up with some scenarios of its own.
In the scenario where jet fuel hovers around $US185 a barrel, Citi values Virgin Blue at 30c a share and warns that the airline, in an "extreme move", may be forced to withdraw from its yet-to-be-launched US route and from New Zealand.
Citi also outlines a slightly better scenario where Virgin Blue could break even for the next two years, based on current fuel costs and the cost-cutting program implemented on Friday.
Scenario games at Virgin Blue
June 17, 2008
The airline might not like it, but the analysts are playing Dark, Darker and Darkest anyway.
THE longer jet fuel prices stay at present levels, the more radical Virgin Blue will have to become in the art of cost slashing.
On Friday the airline signalled that plans to "remove" four Boeing 737s from its domestic fleet and cut $50 million from its annual cost base were just the first step. This looks like a baby step when compared to Qantas chief executive Geoff Dixon's aggressive cost-cutting plans, which will involve job cuts and plans to scale back unprofitable routes, both domestic and international. And the grounding of a Jetstar plane.
But with jet fuel prices still hovering near $US170 a barrel, some analysts have warned the eight-year-old Virgin Blue could be forced to take far more extreme actions than even Qantas.
Slashing its price target from 95c to 50c, ABN Amro has forecast the airline's fuel bill would rise $163 million to $735 million next financial year. Share in the carrier rose 1.5c to 57.5c yesterday.
The broker warned that if jet fuel prices remained at current levels Virgin Blue management would eventually "need to consider" deferring capital expenditure (i.e., fleet expansion), "significant fleet groundings", and additional revenue streams such as baggage charges. The problem with fleet groundings for Virgin Blue is that, unlike Qantas which can retire its decrepit fleet of fully depreciated jets, it has relatively new aircraft. This means it will either have to find someone to sub-lease its jets (in a deteriorating global aviation industry), or pay its own financing or leasing costs on the planes even while they are grounded. And the problem with raising fares and adding new charges is that it could further dampen already slowing demand for domestic and international air travel.
While Virgin Blue's managing director, Brett Godfrey, displayed his dislike for analysts painting different "scenarios" after JP Morgan warned two weeks ago the airline would go broke if it did not raise fares, Citi Investment Research has followed up with some scenarios of its own.
In the scenario where jet fuel hovers around $US185 a barrel, Citi values Virgin Blue at 30c a share and warns that the airline, in an "extreme move", may be forced to withdraw from its yet-to-be-launched US route and from New Zealand.
Citi also outlines a slightly better scenario where Virgin Blue could break even for the next two years, based on current fuel costs and the cost-cutting program implemented on Friday.
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Some good thoughtful stuff here in the last few messages.
Several country bumpkin observations to throw in however. I have never seen an accurate analyst forecast for either Qantas or Virgin Blue this century if you are looking for predictions more than one year out, and even then a lot of them would get less than five out of ten.
And another. A travel firm I know pretty well tells me both airlines have found they can get much more out of passengers in recent weeks than they thought possible. So the punters, so far, are coughing up. Maybe the drive to the airport is such a shock they come to expect the worst when it comes to fares.
What I'd like to know is if the really cheap buyers who buy stupid fares for next to nothing have quit the scene. If they have this will hurt Tiger and Jetstar much more than the Virgins and Qantas.
Several country bumpkin observations to throw in however. I have never seen an accurate analyst forecast for either Qantas or Virgin Blue this century if you are looking for predictions more than one year out, and even then a lot of them would get less than five out of ten.
And another. A travel firm I know pretty well tells me both airlines have found they can get much more out of passengers in recent weeks than they thought possible. So the punters, so far, are coughing up. Maybe the drive to the airport is such a shock they come to expect the worst when it comes to fares.
What I'd like to know is if the really cheap buyers who buy stupid fares for next to nothing have quit the scene. If they have this will hurt Tiger and Jetstar much more than the Virgins and Qantas.
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Read elsewhere that there was apparently a press conference scheduled for this morning with Brett Godfrey ... however doesn't seem like it went ahead as nothing has surfaced?
Any ideas what they may be planning to announce now?
Any ideas what they may be planning to announce now?
