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Date Posted: 22:33:37 05/16/13 Thu
Author: King Kong Smooth FM May 28th Regent Theatre (Thursday16/5)
Subject: HEARD ON THE STREET: Virgin Australia Downed in Dogfight

HEARD ON THE STREET: Virgin Australia Downed in Dogfight
16/05/2013 8:00PM

By Robb M. Stewart

These are turbulent times at Virgin Australia. The airline's shares had run up about 25% since mid-March before crashing down to earth Thursday after the company warned it expects earnings to fall rather than rise in the year to June. Shares in Virgin--which is part owned by Air New Zealand and Singapore Airlines--fell 17.4%.

The airline is engaged in a bruising battle with larger Qantas at the high- and low-end of the markets. So far, it's not exactly winning.

A plan to draw in higher-paying passengers has had some success. The problem is that selling more expensive seats isn't translating into bigger profits. In April, revenue per seat hit the highest level since December 2011. But loads for April fell, with domestic passenger numbers in particular down 5% year-on-year.

Virgin wants to take the fight to Qantas at the lower end of the market too. To that end, it is buying a majority stake in no-frills carrier Tiger Airways for 35 million Australian dollars (US$34.4 million). Australia's antitrust regulator last month okayed the deal, partly because Tiger has yet to record a profit or get a strong foothold in the market despite substantial investment. That rationale, though, underscores the size of the task that lies ahead.

One positive is that Virgin says capacity across the sector will rise 4% in the second half of this fiscal year rather than the 5%-7% previously envisaged. That should ease downward pricing pressures.

But both Virgin and its big rival have to contend with a weakening economic backdrop too. Australia's government this week forecast growth will cool to 2.75% in the 2014 fiscal year from 3% this year. Unemployment's expected to nudge higher by the middle of next year as well. That bodes ill for domestic airline traffic and could heighten the stakes for competing airlines.

The share price reaction to Virgin's profit warning was a strong one. It may prove overdone. For now, though, the outlook remains cloudy. Investors should continue to adopt the brace position.


Write to Robb M. Stewart at robb.stewart@wsj.com


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(END) Dow Jones Newswires

May 16, 2013 06:00 ET (10:00 GMT)

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