16 April 2008

TollÃ¢â¬â¢s Little looks at big picture after Virgin setback

The Australian says that Toll Holdings Managing Director Paul Little has indicated the company will remain an unwilling majority holder of troubled airline Virgin Blue for at least 18 months.

The logistics giant is expected to make a second attempt to sell its holding once the turmoil in investment markets has dissipated.

Toll last week took its 63 per cent stake in the airline off the market after bids from potential buyers fell short of expectations.

The move coincided with a profit downgrade from Virgin Blue, which warned that higher fuel costs would slash $76 million from its profit this financial year.

Mr Little said indicative bids were "significantly'' below Toll's target selling price, which he attributed to the rocky short-term outlook for Virgin Blue.

"The airline is likely to go through a tougher period right at the moment but is also just as likely to come out of it in the next year or two, which is the cyclical nature of the business,'' he said.

"Toll will hold on to its stake in the airline for now but still intends to dispose of the asset in the long term."

"It's difficult to say how long the credit squeeze and the volatility that we're experiencing across both equity and debt markets is going to be around ... if that means 18 months then that's how long it will take,'' he said.

Mr Little said higher fuel costs across Toll's other businesses, which include trucking, rail and shipping, were being recovered through surcharges, but pursuing a similar strategy at Virgin Blue risked losing market share.

"We're obviously less confident with surcharging on Virgin Blue than we are with the rest of our business, but that doesn't mean we won't do it,'' he said.

Virgin has flagged an air fare price increase of up to $12 per ticket, starting next month, if the price of aviation fuel does not subside over the next two weeks.

In the interim, Mr Little said Toll would focus on improving Virgin Blue's financial performance by tweaking the airline's price hedging program and expanding its air freight relationship with Toll to include flights between Australia and the US.

Toll, which has clocked up almost 50 acquisitions over the past 18 years, will continue to seek out businesses to buy.

However, Mr Little said that the size of any potential targets would be small given the lack of debt funding available for investment.

"The banks at the moment aren't tripping over themselves to do deals, but the smaller ones where we can add volumes to the business and enhance service levels, we'll continue to do those,'' he said.

"Our fundamentals are very, very good." "Fundamentally, this is one of the strongest airlines in the world and we continue to believe our cost base is still very, very good"

A Report by The Mole from The Australian