Virgin Australia feels pinch from competition and tax

Carrier pins hopes on alliances after profits miss forecasts with a 56 per cent plunge

PUBLISHED : Wednesday, 27 February, 2013, 12:00am
UPDATED : Wednesday, 27 February, 2013, 4:37am

Virgin Australia, the country's second-largest carrier, posted first-half profit that missed analyst estimates amid a fight with Qantas Airways for passengers and the impact of a carbon tax.

Net income slumped 56 per cent to A$23 million (HK$183.57 million) in the six months to December, the company said in a statement yesterday. That missed the median analyst estimate of A$50 million. Revenue climbed 5.4 per cent to A$2.1 billion as passenger numbers rose 2 per cent to 10.1 million.

The profit drop puts pressure on chief executive John Borghetti's plans to challenge Qantas' 65 per cent share of Australia's domestic market by winning corporate travel accounts.

Virgin, which sold a stake to Singapore Airlines last year, is seeking to buy Tiger Airways' Australian unit and regional carrier Skywest Airlines as part of a strategy to build on alliances.

"The shine that Virgin had over the past 18 months or so is starting to wear off," said Evan Lucas, a strategist at IG Markets. "It's stuck in the middle and is buying a competitor that's basically going to mean competing with itself."

The introduction of a carbon tax in Australia cost the airline A$24.4 million in the half-year, which it could not recover from airfares because of "aggressive competition", the company said.

It also said it had costs of A$36 million to train staff on a new booking system and write-down assets.

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

Virgin 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 said. The company last made a second-half pre-tax profit in 2007.

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

The deal with Tiger risked "muted competition" if Virgin, the No 2 carrier, was allowed to buy third-ranked Tiger, the Australian Competition and Consumer Commission said this month. The regulator cleared the Skywest takeover last month.

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