Virgin Australia share price drop probed by regulators

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Virgin Australia confirmed it would post a loss of A$49m (US$44m) for the last six months of 2013, in an update to investors prompted by a regulator probe into unusual share trading over the past week.

The airline, which is locked in a bruising battle with Qantas in the Australian domestic market, blamed volatility on world markets and at home for a sharp drop in its share price.

Shares in Virgin Australia fell 20 per cent – from A$0.35 on Monday to A$0.28 two days later – prompting the ASX stock exchange to send a “price query letter” to question the reasons behind the volatility.

“Virgin Australia is not aware of any information concerning it, that has not been announced to the market, which could explain the recent trading in Virgin Australia securities,” said the airline on Thursday.

Virgin Australia said it expected to report a pre-tax loss of A$49m for the six months to December 31 2013 – in line with analysts’ expectations. It said this would exclude its share of losses attributed to Tigerair Australia, a low-cost operator in which Virgin Australia owns a 60 per cent stake.

Virgin Australia blamed the share sell-off on factors including the recent volatility in world markets, which it said may have had an impact on local markets and a selling down of cyclical stocks.

It said listed aviators in Australia generally, including its major competitor Qantas, had also experienced a decrease in their shares over the same period. Qantas shares fell 5.5 per cent between Monday and Wednesday.

Virgin Australia added that an announcement made this week by Virgin Atlantic – a separate company – that it intended to withdraw operations between Sydney and Hong Kong in May, may have caused confusion in the market. People may have mistakenly assumed that Virgin Atlantic was the same entity as Virgin Australia, it said.

Virgin Australia’s battle with national flag carrier Qantas in its own backyard is prompting both companies to wrack up significant losses. In December, Qantas warned it would lose A$250m-A$300m in the six months to December 31 – in the same period the previous year, Qantas reported A$223m in profit.

Qantas blamed unfair competition from Virgin on domestic routes and revealed a A$2bn programme of cuts to reassure investors.

Since joining Virgin Australia as chief executive in 2010, John Borghetti, a former Qantas executive, has taken over regional airlines, boosted capacity and added business seats to challenge Qantas in its lucrative domestic market.

In response, Qantas has increased capacity on domestic routes to protect its 65 per cent market share – a level that the airline’s chief executive, Alan Joyce, refers to as a “line in the sand”.

Analysts at Deutsche Bank said Virgin Australia’s cost base must be increasing significantly as it competes with Qantas for business passengers. It forecasts that the battle between the airlines will result in them making a combined pre-tax loss of $818m in the 2014 financial year.

“We struggle to see how the airlines will reverse these losses in 2015 and forecast them to make a combined pre-tax loss of A$282m before reaching profitability in 2016,” said Cameron McDonald, analyst at Deutsche.

Virgin Australia has also restructured its operation to take on more foreign capital to challenge Qantas. This enabled Etihad Airlines, Singapore Airlines and Air New Zealand late last year to back a A$350m capital raising, which took their combined stake in Virgin to 67 per cent.

Observers said the relatively small free float at Virgin Australia meant its share price could be significantly affected by small trades. The company would not comment on whether a major shareholder was seeking to exit the share register.

The ASX issues price query letters when share price movements drift outside standard parameters without an easy explanation. It issued 52 letters to companies in January.

Virgin Australia shares regained some of their losses on Thursday, rising 7 per cent to A$0.337.

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