Virgin Blue slides on weak domestic Australian outlook

Virgin Blue’s shares slumped 7.6% yesterday as it issued a profit warning in its Mar-2010 traffic report. News headlines focused on its trans-Tasman alliance with Air New Zealand yesterday, but Virgin Blue quietly mentioned that profit before tax and exceptional items for the current financial year (to 30-Jun-2010) would be at the lower end of the AUD80-110 million range announced on 04-Feb-2010.

Virgin Blue stated that capacity growth has remained in line with expectations, but the demand environment in Apr-2010, as seen in forward bookings through to the end of the financial year, has “weakened” and volatility has “increased”.

Goldman Sachs JBWere noted, “while group load factors improved in March (+ 0.4 ppts), it is difficult to draw any firm conclusions on operating performance, given Virgin Blue does not disclose monthly yield data. We note, however, that the BITRE domestic airfare index declined by 7.2% in March and 5.0% on pcp in April across all cabin classes. Interestingly, Qantas reported that domestic yields in March were +5.7% on pcp, which appears contrary to the BITRE airfare index. The divergence may be driven by differences in Qantas' product mix and/or heavier yield discounting by Virgin Blue and/or Tiger [Airways]”.

The analysts recently downgraded its earnings estimates for Virgin Blue on the back of pressure on domestic yields, but added, “it appears as though the outlook for 4Q2010 is worse than we had thought”. Goldman Sachs JBWere has a HOLD recommendation on Virgin Blue.

Bookings may also be affected by rising interest rates in Australia. The Reserve Bank is due to announce its latest decision on rates at 2pm Sydney time today. The market has 70% priced in another 25 basis points increase, which would be the third consecutive monthly increase.

Tiger Airways’ shares eased 0.6% in Singapore yesterday, while Qantas fell 0.7% in a softer broader Australian share market.

Elsewhere, Singapore Airlines fell 1.2% and Cathay Pacific dropped 1.7%.

Asia Pacific selected airlines daily share price movements (% change): 03-May-2010