Last updated: May 16, 2013 8:49 am

Virgin Australia shares hit by profit warning

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A woman talks on a mobile phone near a Virgin Australia Holdings Ltd. Boeing 737-800 aircraft at the domestic terminal of Sydney airport in Sydney, Australia©Bloomberg

Virgin Australia has blamed weak economic conditions and a move to a new reservations system for a profit downgrade that knocked almost a fifth off the airline’s stock.

Shares in Australia’s second-biggest carrier fell 17.4 per cent to A$0.38 as investors took their first chance to react to Wednesday’s after-hours alert on earnings.

Backtracking on previous guidance, the Brisbane-based airline said pre-tax profit in the year to June would be lower not higher than last year’s A$82.5m (US$81.5m).

The warning comes less than a month after Virgin Group boss Richard Branson reduced his holding in the airline to 13 per cent through the sale of a 10 per cent stake, worth A$123m, to Singapore Airlines.

It highlights the tough conditions in Australia’s domestic aviation market, where Virgin has been fighting a bruising capacity battle with Qantas over the past 12 months that analysts hope is drawing to a close.

“The adverse impact to revenue from the introduction of the Sabre system in the third quarter is not likely to be recovered by the end of [the] 2013 financial year, given the slower-than-anticipated improvement in trading and economic conditions,” Virgin said.

“It is not possible at this time to provide any further profit guidance.”

The weak trading conditions were reflected in Virgin’s April traffic statistics, published alongside the warning. They showed domestic passenger numbers down 5 per cent on the same month a year ago.

Last week, the Reserve Bank of Australia cut interest rates to a record low of 2.75 per cent in an attempt to stimulate demand and predicted that the Australian economy would grow at a below trend 2.5 per cent in 2013.

Under the leadership of John Borghetti, Virgin Australia has repositioned itself as a direct competitor to Qantas, which has a dominant 65 per cent share of the domestic market.

Mr Borghetti has introduced a competitive business class offering, a frequent flyer scheme and increased flights on key corporate routes. Virgin has also struck alliances with several international carriers, including Abu Dhabi’s Etihad and Singapore Airlines, and taken control of two smaller domestic airlines.

Analysts, however, were not surprised by the warning, given recent bearish comments from Mr Borghetti and Alan Joyce, chief executive of Qantas.

Mr Joyce told investors at a recent conference in Sydney that a “tough environment” and a “high degree of domestic capacity” had pushed down profitability.

“It is not overly surprising to see Virgin’s profit expectations lowered – median consensus estimates for 2013 were A$66m, well below previous guidance,” said Russell Shaw, analyst at Macquarie Securities in Sydney.

“Our revised forecast of A$58.9m is 10 per cent below consensus, although we expect market estimates to drift lower over the next couple of days.”

In spite of the downgrade, Mr Shaw said he was still expecting an earnings recovery in 2014 as Virgin and Qantas “dial back” on domestic capacity growth.

Virgin said on Wednesday that capacity growth in the first half of the 2014 financial year would be within the 4-5 per cent range.

The airline should also benefit from the recent acquisitions of Skywest Australia, a regional carrier, and budget airline Tiger Australia.

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