Virgin Profit Misses Estimates on Qantas, Carbon Tax

Virgin Australia Holdings Ltd. (VAH), the nation’s second-largest carrier, posted first-half profit that missed analyst estimates amid a fight with Qantas Airways Ltd. (QAN) and the impact of a carbon tax. The shares slumped.

Net income dropped 56 percent to A$23 million ($24 million) in the six months through December, the Brisbane-based company said in a statement today. That missed the A$50 million median of six analyst estimates compiled by Bloomberg News.

The profit decline puts pressure on Chief Executive Officer John Borghetti’s plans to challenge Qantas’s 65 percent share of Australia’s domestic market by winning corporate travel accounts. Virgin, which sold a stake to Singapore Airlines Ltd. (SIA) last year, is seeking to buy Tiger Airways Holdings Ltd. (TGR)’s Australian unit and regional carrier Skywest Airlines Ltd. (SKYW) as part of a strategy to build on alliances.

“The shine that Virgin’s had over the last 18 months or so is starting to wear off,” Evan Lucas, a strategist at IG Markets Ltd. in Melbourne, said by phone. “It’s stuck in the middle and is buying a competitor that’s basically going to mean competing with itself.”

Virgin Australia fell 5.8 percent to 41 Australian cents at the close in Sydney, its biggest fall since Aug. 31. The stock has dropped 2.4 percent over the past year, compared with the benchmark S&P/ASX 200 (AS51) index’s 17 percent gain.

The introduction of a carbon tax in Australia cost the airline A$24.4 million in the half year which it couldn’t recover from airfares because of “aggressive competition,” the company said. The airline also said it had costs of A$36 million to train staff on a new booking system and to write down assets.

Upgraded Lounges

Borghetti has added business-class seats, increased flight numbers, upgraded lounges and interiors, set up a loyalty program, and struck code-share alliances with overseas carriers as he takes on Qantas’s leading position in domestic travel.

Virgin, which didn’t provide a specific outlook, expects to make a profit before tax, excluding one-time items, in the second half of the year.

“That’s the first in quite a few years,” Chief Financial Officer Sankar Narayan told a media briefing in Sydney. The company last made a second-half pretax profit in 2007, according to data compiled by Bloomberg.

Virgin plans to buy 60 percent of budget carrier Tiger’s Australian unit and pay about A$96 million in cash and shares for Skywest Airlines. Acquiring control of Tiger will give Virgin a budget brand to compete with Qantas’ Jetstar and bolster its operation on Australian east coast routes.

Antitrust Review

The deal with Tiger risks “muted competition” if Australia’s second-largest carrier is allowed to buy third- ranked Tiger, the Australian Competition and Consumer Commission said this month. The regulator cleared the Skywest takeover in January.

The regulator will examine whether the merger with Tiger will result in the smaller carrier increasing capacity to 35 aircraft from 11 aircraft ahead of a March 14 final decision on the deal. Virgin said it is preparing a response and “strongly believes” the deal will increase competition.

“Aggressive capacity plans are likely to curb meaningful yield growth,” Julia Weng, an analyst at Morgan Stanley in Sydney, wrote in a Feb. 8 note to clients. “We suspect concerns around excess capacity and Virgin’s ability to implement a successful turnaround will linger.”

First-half revenue climbed 5.4 percent to A$2.1 billion, as passenger numbers rose 2 percent to 10.1 million.

Falling Yield

Yield, a measure of the money the carrier earns to fly a passenger one kilometer, fell 1 percent to 12.16 Australian cents at Virgin during the period, compared with 10.46 cents at Qantas.

The decline in yield was steeper for Virgin’s domestic services compared with international operations, Narayan said, without giving more specific figures.

An index of domestic business class airfares hit a 12-year low in December as Virgin’s attempt to break into corporate travel ended an effective monopoly Qantas had enjoyed on the trade since the collapse of Ansett Holdings Ltd. following the Sept. 11, 2001, terror attacks.

Pretax earnings before items were A$61 million in the half year, compared with the A$72 million median of six analyst estimates.

Capacity growth will slow to a halt over the coming months, Narayan said.

“We’re not looking to significantly expand schedule” in the second half, he said.

Richard Branson’s Virgin Group, Air New Zealand Ltd., Singapore Air and Etihad Airways PJSC own about 61 percent of Virgin Australia, according to data compiled by Bloomberg.

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

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net

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