Virgin Australia Returns to Profit as Qantas Flyers Lured

Virgin Australia Holdings Ltd. (VAH), the country’s second-largest airline, posted full-year profit that missed analyst estimates as surging costs curbed benefits of increased sales to corporate customers.

Net income was A$23 million ($24 million) in the 12 months ended June 30 after a loss of A$68 million a year earlier, the Brisbane-based carrier said in a statement today. That missed the A$47 million average of 10 analyst estimates compiled by Bloomberg. The shares slumped the most in almost five months.

Operating costs increased 16 percent to A$3.81 billion as the airline paid more for fuel, staff and airport charges and added more seats on domestic routes. The increased spending limited the benefit of a 4.3 percent rise in passenger numbers as the company won business class clients from Qantas Airways Ltd. (QAN) and entered tie-ups with carriers including Singapore Airlines Ltd. (SIA) and Etihad Airways PJSC.

“The cost base is going up and the challenge for Virgin is to ensure their revenues rise well in excess of their costs,” Russell Shaw, an analyst at Macquarie Group Ltd. in Sydney, said by phone before the results.

The shares fell 5.2 percent to 45.5 Australian cents as of 10:31 a.m., the biggest decline since April 3. The slide pared this year’s gain to 60 percent compared with a 7.4 percent advance for the benchmark S&P/ASX 200 index. Qantas has slumped 19 percent in 2012.

Virgin Australia’s shareholders include Richard Branson’s Virgin Group, Etihad and Air New Zealand Ltd.

Sales Rise

Sales rose 20 percent to A$3.91 billion as the company extended its international reach and added new premium services as it sheds its budget roots. Competition from the airline contributed to Qantas reporting its first loss in at least 17 years last week.

Virgin’s move to add business class flights has ended an effective monopoly on the segment enjoyed by Qantas since the collapse of Ansett Australia in 2001, and the larger carrier has been adding extra seats to defend a 65 percent share of the Australian market which it considers optimal.

“We have changed the competitive landscape in Australian aviation,” John Borghetti, Virgin Australia’s chief executive officer, said in a statement.

Virgin said it had met a goal set last year of about doubling its share of Australia’s corporate travel market to 20 percent as it shed its former lower-cost image and name. That level was a “tipping point which we believe effectively creates a new competitive norm”, Borghetti said.

Premium Airfares

Virgin has “ticked all the boxes,” Macquarie’s Shaw said. “The next 12 months will be about bedding down what they’ve achieved.”

The carrier’s push to meet this target and increase the frequency of its flights contributed to premium airfares slumping to their lowest levels in a decade in July, based on a government index.

The airline’s capacity on domestic flights rose 9.6 percent from a year earlier during the year. The move from a low-cost to a full-service carrier model meant that group yields, a measure of ticket prices, rose 12 percent.

Virgin didn’t give any forecast for the current year “given the uncertain economic environment,” the company said.

Capacity will rise by between 8 percent and 9 percent by the end of December. Qantas said Aug. 23 it would add as much as 11 percent to its domestic capacity by the end of December from a year earlier.

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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