Skywest sees 'satisfactory' profits; Virgin Blue and Air NZ profitable; PIA losses widen

Shares in Australian regional carrier, Skywest Airlines, slipped 7.3% yesterday, despite the carrier reporting a “satisfactory” 177% jump in profit before tax and a 190% gain in net profits to USD10 million and USD7 million, respectively, in the 12 months ended Jun-2010.

Also in the period, the carrier reported a 19% jump in revenues to USD153 million, exceeding an 11% increase in the cost of sales.

However, the carrier stated the second half performance was “not as strong as expected” with the volatile operating environment and changes in the Australian taxation regime (especially in respect to the Federal Government's proposed-then-aborted Resources Super Profits Tax) affecting demand. Skywest added that it “believes that the proposed Resources Super Profits Tax caused a weaker overall profit result than would have otherwise been achieved”.

Virgin Blue profitable, plans 'game changing' Etihad agreement

On the other end of the spectrum, but also in the Australian market, shares in Virgin Blue soared 12.5% yesterday.

On the same day, Virgin Blue reported an underlying EBIT of USD76.5 million in the 12 months ended 30-Jun-2010, a 10.5% year-on-year increase, with a profit before tax of USD30.2 million in the period, compared with a loss of USD199.0 million in the previous corresponding period.  The results were in the mid-range of the carrier’s guidance.

The improved profitability for Virgin Blue came as total revenue increased 13.1%, exceeding a 10.5% increase in operating costs to USD2,547 million (which Deutsche Bank described as “higher than expectations”). Also in the period, the carrier witnessed a 7.1% yield reduction to USD 8.85 cents (the carrier added that yields continue to be pressured), with an underlying CASK reduction of 7.7% to USD 7.49 cents and an ex-fuel reduction of 1.9%.  

The carrier yesterday also announced the second phase of its network review with the introduction of A330-200 aircraft for its domestic network and an overhaul of its international long-haul network. The carrier added that, from Feb-2011, it would consolidate its international network to two strategic hubs in Los Angeles and Abu Dhabi providing a gateway to a “truly international network through partnerships”.

This is part of the strategic partnership with Etihad also announced today, which the carrier descried as a “real game changer” which “positions us as a truly global player”.  Virgin Blue CEO John Borghetti, in an interview with The Australian on 27-Aug-2010, added that the carrier’s plan to make its international network “more appealing” to the business traveller market will make Virgin Group a credible alternative to Qantas

Commenting on the Etihad agreement, Deutsche Bank noted: "Whilst it’s too early to quantify any potential benefits, we see VBA’s entry into an agreement with Etihad as a positive given that it (i) increases the likelihood that VBA will capture a greater share of the corporate market, by providing it access to the lucrative European route and (ii) supports V Australia to break even by end of FY11." Deutsche Banks’ price target of AUD 0.50 cents and “buy” recommendation were maintained following the financial release and news announcement.

Meanwhile, Goldman Sachs reduced its 12-month price target from AUD 0.47 cents to AUD 0.42 cents. No change was made to the company’s "hold" recommendation, commenting: “While a rebound in domestic consumption growth in FY11 would likely bode well for leisure travel demand (to which VBA is highly exposed), we remain concerned that significant capacity increases planned by Qantas, Jetstar and Virgin could suppress a demand-driven recovery in domestic yields. V Australia also remains as a source of earnings risk over the next few years. That being said, the stock continues to trade at a deep discount to the market (FY11 P/E of ~9.5x), despite today's downgrades. However, until we gain confidence that the earnings downgrade cycle is over, we retain our neutral view."

Air New Zealand sees demand and yield improvements

Still in the South Pacific region, shares in Air New Zealand gained 4.1% yesterday, also coinciding with the release of the carrier’s financial results, in which the carrier revealed a strong rise in full-year profit and added that it expected higher profits over the medium term.  Chairman John Palmer added that the industry is showing signs of a recovery, with demand and yields continuing to improve.

During the 12 months to 30-Jun-2010, Air New Zealand reported a 290% increase in net profits to USD57.5 million, with a 2.9% EBITDAR gain to USD469.5 million and a normalised profit before tax of USD961 million (-6% year-on-year). The net profitability gain occurred despite a 12.2% reduction in revenues to USD2,837 million and a 0.4% passenger reduction to 12.3 million and as operating costs were trimmed by 14.9% to USD2,341 million. Yields decreased 7.1% to USD 8.98 cents in the period, short-haul yields decreasing 5.4% and long-haul yields down 10.7% to USD 6.59 cents.

Pakistan International Airlines' net losses continue to widen

Also reporting financial results yesterday was Pakistan International Airlines, which reported widening net losses of USD51.2 million in the three months ended 30-Jun-2010, compared with a net loss of USD39.3 million in the previous corresponding period, attributable to a 74% year-on-year increase in fuel costs to USD127.8 million during the period. The carrier reported a 28% increase in revenues to USD310.6 million. 

Asia Pacific selected airlines daily share price movements (% change): 26-Aug-2010