This week’s first quarter growth figures will tell how the economy went in the March quarter, but we already have some indications that for some parts of business it was tough.
We’ve seen weaknesses appear in consumer demand in retailing, but not in motor vehicles (as yet) as retailers report a fall in sales momentum in March and April.
Building approvals and housing finance are not strong and now it sees the budget and bottom end of the travel market has taken a hit after Virgin Blue’s surprising earnings downgrade on Friday.
(But not offshore travel given the strong earnings upgrades from Webjet and Flight Centre.
The Virgin downgrade was as shocking to investors as any of the spate of downgrades that have come from companies in recent weeks, such as Sonic Healthcare, Primary Healthcare and Ausenco.
It is much worse than what Virgin was saying only three weeks ago.
Investors are now waiting to see if Qantas follows suit with an update on its trading position.
The market punished Virgin Blue (VBA) harshly, marking down the shares by 30% at one stage.
At the start of May the shares were trading at 55c each.
That’s a fall of around 40%, and no query from the market watchdogs.
Qantas shares were caught up in VBA’s downdraught and lost 4% early on Friday, before they ended up 3c at $2.45 by the close of trading.
In guidance issued earlier this month, Virgin Blue said it had been expecting a profit of $80 million, after earlier forecasting it to be in the range of $80 million to $100 million.
But that changed dramatically on Friday with the airline saying that it "now estimates its reported Net Profit before Tax and Exceptional Items for the 2010 financial year will be in the range of $20-40 million, compared to previous guidance of $80 million".
"Since the guidance given earlier this month, we have continued to see rapid deterioration and increased volatility in the operating environment, particularly in respect of the leisure segment both domestically and internationally," Virgin Blue said in a statement.
Virgin Blue said this was consistent with the weakening trend seen recently in the broader retail market, as well as the "unexpected and sudden decline in consumer confidence" last month.
"The decline in demand has coincided with a period of increased industry capacity," Virgin said.
Despite the sharp downturn, Virgin said the short haul business was expected to make net profit before tax and exceptional items "in the order of $100 million" in fiscal 2010.
"The company will continue to monitor market conditions and, should these prevail, we have flexibility to adjust capacity through lease returns," Virgin said.
"However, we remain focused on defending our core strategic routes."
Virgin Blue lost $160 million in 2008-09, but the company swung back into profit in the first half of 2009-10, recording net profit after tax of $62.5 million in the six months to December 31, 2009.
Friday’s revised guidance is the second time the airline group has lowered expectations for 2009-10 earnings.
At the half-year results announcement in February, the airline said it expected profit before tax and excluding ineffective cash flow hedges and non-designated derivatives to come within the range of $80 million and $100 million for 2009-10.
On May 3, when Virgin Blue released its operating statistics for March, the company said it expected profit before tax and exceptional items to be at the ‘‘lower end’’ of the $80 million to $100 million range due to weaker forward bookings and increased volatility.
The airline warned it expected ticket prices to fall (as the competition on our domestic routes with Qantas and Tiger intensifies).
"We expect average fares to decrease by over 10%, in line with the trend seen in the recent data for discount economy fares."
Even though domestic budget travel might have weakened, those still wanting to travel will end up with lower fare costs.
