06-Jun-2008 3:09 PM
JP Morgan issues clarification regarding Virgin Blue earnings outlook
Analysis
JP Morgan has issued a statement that recent press reports incorrectly interpreted one of several scenarios featured in a research report as suggesting Virgin Blue is at risk of insolvency. JP Morgan stated this scenario "does not represent our view of Virgin Blue’s future earnings".
JP Morgan added:
- We expect Virgin Blue to report FY08 profit of $82m, followed by $19m in FY09 before rebounding almost 600% to $133m in FY10.
- The scenario in question reflected an unlikely combination of factors including permanently high fuel prices and no increase in airfares or any other revenue or cost saving measures. Our actual forecast for Virgin Blue, which form the basis of our Neutral recommendation, reflect very different assumptions including higher air fares over several years and lower jet fuel costs.
- We forecast Virgin Blue to increase fares by 3% in FY09 and 1.5% in FY10. Over this period we expect jet fuel prices to fall from the current level of US$156 per barrel to US$98. If fuel prices stay high we would expect further fare rises by all carriers including Virgin Blue.
- Virgin Blue recently announced an increase to fuel levies that we expect to boost fares by about 3.5%. We expect recent domestic capacity cuts by Qantas to tighten domestic supply conditions assisting airfare growth. If Virgin Blue also cuts capacity soon, we would expect a similar positive impact on yields.
- Virgin Blue has recently flagged it is considering a range of initiatives to combat the jet fuel prices including cutting capacity, redeploying planes to more profitable markets, delaying arrival of new aircraft and selling existing aircraft
- Our December 08 DCF-based price target of $0.85 is 34% above the current share price. Risks to this price target include fuel costs, capacity and inadequate yields.