Virgin Blue shares hit turbulence

By CHRIS DANIELS and AGENCIES

Air New Zealand describes Virgin Blue as a competitive threat but yesterday the rival airline's share price went into a nosedive.

Virgin Blue's shares, which listed nine months ago at A$2.25, fell 14.2 per cent to close at A$1.75.

The fall was triggered by the low-cost airline announcing that its earnings for the first four months had dropped by 22 per cent, because of tough competition and a flood of new planes on key routes.Trying to get regulatory approval for an alliance with rival Qantas, Air New Zealand has repeatedly raised the threat of competition from Virgin and its offshoot in this country, Pacific Blue.

It says even the prospect of entry on to some routes by Pacific Blue would make it crazy for a merged Air NZ-Qantas to raise prices.

The Commerce Commission rejected the argument, prompting an appeal to the High Court.

Virgin Blue chairman Chris Corrigan said market conditions remained challenging for the global aviation industry, while in Australia the market was facing increased competition after the launch of Jetstar in May.

The company said its earnings slide since the financial year began in April reflected the addition of more than 60 per cent capacity measured by ASK (available seat kilometres) in the domestic market compared with a year earlier.

The increase should slow to about 30 per cent for the second half.

Revenues for the first four months of the financial year were up 29 per cent from a year earlier.

Qantas' Jetstar, a low-cost offshoot similar to Air New Zealand's Freedom Air, has put the squeeze on Virgin Blue, challenging its position as the lowest priced airline in Australia.

Virgin Blue also faces capacity growing rapidly, as new aircraft arrive, while yields fall.

Research from sharebroker Macquarie said that the decline in earnings was expected, since there had been an increase in capacity of 60 per cent. "However, what was not expected was the apparent size of the yield decline."

Macquarie has downgraded its expectations for a Virgin profit by 15 per cent, which will mean a slightly lower earnings per share result for this year than last. It expects the shares "trade sideways" for the next six to nine months.

Analysts expect Virgin Blue to report a 2004/05 net profit of about A$214 million ($233.7 million), up from A$158.5 million in the year to end-March, 2004.