Shares in Virgin Blue dropped by a record 22% at one stage yesterday while its 62.8% owner, Toll Holdings, also saw its shares sold off sharply as investors gave an earnings downgrade the thumbs down.
Toll lost ground because the poor position at Virgin Blue meant it had to drop plans to try and sell or cut its stake in the airline.
Investors have been long pressing for Toll to sell off Virgin Blue since it was acquired in the Patrick takeover in 2006, but Toll’s efforts have not borne fruit.
Virgin Blue shares slumped to a record low of 86.5c at one stage, cutting its market value to $925 million. The shares ended down 21.6% at 87c. They had closed on Friday ahead of the update at $1.11.
Toll shares fell nearly 16% to a low of $7.96 before recovering slightly to end at $8.05 a fall of 15%.
Virgin Blue Friday slashed its 2008 net profit forecast to less than $140 million for the 12 months to June 30, down from $216 million a year earlier.
It is looking at boosting ticket prices or oil surcharges, as well as cutting costs. But so far it has said it will not alter its plans to start a Trans-Pacific service under the name of V from later this year. That is costing around $40 million.
Toll’s shares are now down 29% so far this year, while Virgin Blue’s shares are off 58%. The overall market is down 16%.
The savage reaction from investors came as Qantas confirmed plans that will see its subsidiary Jetstar enter into a strategic and commercial partnership with Vietnam’s Pacific Airlines to grow the airline in Vietnam and Asia under the Jetstar name.
Qantas shares, which firmed 11c on Friday to $3.80, despite the down day and downgrade by ABN Amro, saw its shares sold down 4% yesterday to around $3.60, before they recovered to $3.66.
There are some positives in the deal in Vietnam: Qantas moves up to 30 planes to the new joint venture by 2014.
Qantas said that as of May 23, 2008, Vietnam’s second largest carrier, Pacific Airlines, will complete its transformation to become the country’s first low cost, value based airline and will be renamed Jetstar Pacific.
Qantas, which made an initial investment of 18% in Pacific Airlines in July of last year, will increase its investment in the airline to 30% in 2010.
The airline said the establishment of a Business Service Agreement (BSA) between Jetstar and Pacific Airlines will support new commercial and distribution arrangements for Jetstar Pacific, the development of a Vietnamese website at Jetstar.com as a core distribution and revenue channel in Vietnam, and the introduction of a fleet of up to 30 Airbus A320 aircraft by 2014.
The first A320 is proposed to enter Jetstar Pacific’s operations in August 2008, initially within Vietnam before expanding later this year into markets such as Thailand, Singapore, Malaysia and Cambodia, Qantas said.
The deal will add to capacity in the region where there are already a number of low cost airlines, including Qantas’ own Jetstar business run out of Singapore. The new airline will link with that operation.
The deal comes as the world’s airlines are heading into rough weather as Airbus and Boeing continue to turn out hundreds of brand new jetliners that could very well have to be mothballed if the growing crisis develops.
Virgin Blue’s profit downgrade and the failure by its owner, Toll Holdings to sell its 62.8% stake was triggered by high oil prices and maintenance and cash flow worries in the US.
Four carriers, all small to medium sized operations, have gone bust or filed for bankruptcy protection in the US, the latest being Frontier. In Hong Kong the budget long haul airline, Oasis went belly up. In Europe a number of budget carriers, including some well known names like Ryan Air and Easyjet are looking at sharp drops in earnings.
And in the US, the world’s major discounter, Southwest Airlines says its 2008 fuel bill will rise more than half a billion dollars, or almost all its 2007 profit.
Southwest’s comments are similar to forecasts of higher fuel costs from American Airlines and Continental Airlines and means its fuel bill this year will top $US3 billion, compared to an already high $US2.54 billion in 2007.
American says it expects to spend $US9.3 billion for fuel this year, up from $US6.7 billion in 2007.
That’s why the news that Toll has been unable to interest anyone in its 62.8% stake in Virgin Blue isn’t all that surprising. ABN Amro’s downgrade of Qantas on Friday adds to the feeling that the local aviation industry is on its way to joining the US. Virgin Blue said that its fuel costs could rise by $132 million over the next year, which would be close to its now downsized profit.
Now the question for investors is whether the downgrade at Virgin Blue is specific to that company, or whether Qantas will produce a new profit guidance statement shortly. It has already said it would earn a record profit in the year to June. Does that still hold, or rather the size of the expected profit rise?
Something is going to give, despite expectations of a record profit in the year to June from Qantas.
