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Virgin Australia Profit Misses Estimates as Costs Rise

Virgin Australia Annual Profit Misses Estimates as Costs Surge
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. Photographer: Ian Waldie/Bloomberg

Aug. 28 (Bloomberg) -- Virgin Australia Holdings Ltd., the country’s second-largest airline, posted net income that missed analyst estimates as rising costs curbed the 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.

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, paring the benefit from a 20 percent rise in sales to A$3.91 billion. Passenger numbers grew 4.3 percent as the company won business-class clients from Qantas Airways Ltd. and entered tie-ups with carriers including Singapore Airlines Ltd. 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 closed unchanged at 48 Australian cents, capping a 68 percent climb this year, compared with a 7.5 percent gain for the benchmark S&P/ASX 200 index and an 18 percent slump for Qantas.

Increased Competition

Chief Executive Officer John Borghetti has “done a good job and he’s on top of it now,” David Paradice, founder of Sydney-based Paradice Investment Management Pty., said by phone after the results were reported. The increased competition with Qantas was “just what the market needs,” according to the fund manager who said he holds just below 5 percent of Virgin shares. Paradice manages more than $6 billion, according to its website.

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

Excluding A$55.3 million of one-time items, earnings before tax of A$82.5 million were above the A$76 million average of 13 analyst estimates compiled by Bloomberg. Virgin didn’t give any forecast for the current year “given the uncertain economic environment,” the company said.

Virgin has used alliances to extend its international reach and is adding new premium services as it sheds its budget roots.

The 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. The larger carrier, which reported its first annual loss in at least 17 years last week amid tougher competition, has been adding extra seats to defend a 65 percent share of the Australian market which it considers optimal.

Essential Services

Borghetti said in an interview that Virgin was prepared to lose money on some services if they were essential to its appeal to premium travelers.

“Saying you’re going to cut routes that don’t make money leaves a situation where the routes you’ve got become unprofitable,” he said in a phone interview after the results. “You’ve got to provide a network, otherwise your whole business strategy doesn’t work.”

Still, Virgin would make its biggest push to add seats on more profitable routes between Australia’s east and west coasts, rather than the busiest routes between Sydney, Melbourne and Brisbane, he 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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