Virgin tipped to reap more fuel savings in second half

Yesterday Virgin Australia was trading at A47c. Photo / Getty Images

Virgin Australia is tipped to benefit more from fuel savings in the year's second half after reporting a sharp upturn in its latest trading update.

The airline will offer more on its results from the year's first six months tomorrow but the second-quarter update this month showed an underlying A$10.4 million ($10.8 million) profit, up from a A$49.7 million loss in the same period last year.

The result is of intense interest for Air NZ shareholders as that airline has a 25.9 per cent stake in Virgin.

CIMB analysis said the Virgin trading update was better than expected, with revenue improvement and cost cutting providing most of the uplift in earnings. The result was driven by a stronger second quarter on improved group yield, domestic yield and load factor, and further cost cutting.

Virgin had indicated that trading conditions improved in the second quarter, although consumer sentiment was still weak and international yield recovery has been constrained by pressure in the South East Asia and Europe markets. Despite the fall in oil prices over the past six months, fuel savings in the second quarter were only A$7 million versus the prior corresponding period.

CIMB expected a greater benefit to be realised in the second half of the year as hedging contracts roll off.

Deutsche Bank said the A$10.4 million result fell short of its forecast of A$29.9 million for the period. "The variance appears to be a lower fuel benefit than we had forecast.

"We believe ... Virgin's hedging has been too conservative to capture the full benefit of the sharp downward move in oil prices," the bank said. "We believe that this is a timing issue and that the 2H15 period will see a greater benefit from falling fuel prices."

Deutsche Bank has a target price of A60c a share in the next 12 months. Yesterday Virgin Australia was trading at A47c.

CIMB recommends holding Virgin shares and said its rival Qantas was a better prospect for investors.

Qantas will report its half-year result next Thursday and has forecast a first-half profit of up to A$350 million, up from losses last year.