Transport group Toll Holdings has been forced to hang onto its controlling 62% stake in airline, Virgin Blue until it can get a better price for it.
Statements from both companies late Friday evening made it clear that Virgin Blue’s operational costs and earnings are going in different directions, and the prospects for the world’s airlines are worsening as well.
The news will send the shares in both companies lower today.
High fuel prices, uncertain financial markets and increasing over capacity in the local airline market is playing havoc with VBA’s costs and revenues.
Five US airlines, mostly small and regional operators, have gone bust or filed for bankruptcy protection in the past couple of weeks and one Hong Kong based budget carrier, Oasis, has also been grounded. A common cause in these problems has been the soaring cost of jet fuel.
Major US airlines have been hit with a safety blitz after some were found skimping on maintenance and safety checks. American, the biggest had to ground 300 jets late last week to make checks that authorities ordered to be done immediately.
Now the souring outlook for aviation has seen Toll abandon plans for a second, perhaps third time to unload its stake in Virgin Blue. That, plus debt and questions about its links to associate, Asciano, have seen the Toll share price under pressure in recent months.
On Friday analysts at ABN Amro downgraded Qantas’ prospects because of higher jet fuel costs and worsening prospects.
The Virgin Blue board had appointed investment bank Goldman Sachs JBWere to advise on options to unlock shareholder value. The review included transactions that could substantially reduce the level of Toll’s investment in Virgin Blue.
"Following completion of the GSJBW review the Board has considered a range of recommendations and in light of current significant adverse impacts in the equity, credit and commodity markets, has resolved that the expressions of interest received do not accurately reflect the underlying value of the Virgin Blues Airlines Group," VBA directors said in a statement to the ASX.
Toll said it agreed with the conclusion and would continue to work with the management of Virgin Blue to enhance the airline’s value and unlock value for Toll shareholders. But that essentially means waiting for financial markets to improve.
The announcement means that Toll has been stuck with its stake in Virgin and really has no idea about what to do. It has talked a lot about unlocking value, synergies with its own businesses since taking over Patrick, which owned the stake in VBA. In reality since that bid, Toll has unloaded the old Patrick stevedoring, rail and some road businesses into Asciano, and been forced to keep the VBA holding.
"Whilst our clear strategy is to reduce our investment in Virgin Blue in order to focus on our core logistics operations, the timing and value for our shareholders is paramount, and disposal in the current markets would not be in the interests of Toll shareholders," Toll managing director Paul Little said.
Toll noted that Virgin Blue had advised the market that trading conditions had deteriorated significantly in the second half of the financial year.
The airline now expected that profit after tax would not exceed $140 million for the year – excluding development costs on new initiatives of $40 million – compared to the prior year’s result of $216 million.
Toll said this would have an impact on its own earnings.
"The reduction in Virgin Blue forecast earnings will have a direct impact on the Toll group reported earnings as a result of Toll consolidating its 62.8 per cent interest," Toll said.
Mr Little said the current trading and outlook for Toll’s core transport and logistics business was strong and in line with plans, with earnings and cashflows performing well.
"The diversification of our revenue base, strong cost control and solid organic growth rates across our business will continue to protect the company from any marked economic downturn in the Asia-Pacific region," Mr Little said.
Toll said the timing of reducing the Virgin Blue investment would not affect Toll’s ability to pursue and execute further value-adding opportunities.
Virgin Blue said that with net profit for fiscal 2008 unlikely to exceed$140 million, it is likely to increase its fuel surcharge or tickets price, if fuel costs remain at the current levels for the remainder of April.
"Based on current market conditions the company now forecasts its underlying net profit after tax for the financial year ending 30 June 2008 will not be in excess of $140 million," Virgin Blue said in its statement to the ASX.
"This is exclusive of approximately $40 million of developments costs associated with new material 2008 initiatives." That’s the new trans Pacific airline due to start flying towards the end of this year.
Virgin Blue said during the current uncertain operating environment and period of planned expansion, it would attack costs.
The carrier said unrelenting rises in aviation fuel costs continued to be a key concern, with fuel now comprising more than 32 per cent of the company’s operating expenses.
"In recent weeks, jet fuel prices have again escalated to record levels with the current spot price in excess US$135 per barrel. Should prices remain at these levels, Virgin Blue will incur additional fuel costs next year of over $120 million," Virgin directors told the ASX..
"The company has indicated that continuing to absorb excessive fuel costs is an untenable position and despite reluctance to do so, the airline is likely to introduce a further fuel related surcharge or ticket price increase should fuel costs remain at current levels for the remainder of April, one-way fares would rise by $10-$12 from 1 Ma
