28 July 2009

Thereââ¬â¢s still some Blue sky for Virgin

BRISBANE ââ¬' Reaction to the news that Virgin Blue is set to raise $231 million in new equity appears to have been absorbed by the market with few qualms.

The consensus among analysts is that Virgin Blue needs to absorb some short-term pain for long ââ¬'term gain.

The support of Sir Richard Bransonââ¬â¢s Virgin Group in supporting the fund raising by injecting up to $80 million for new shares is seen as crucial.

Derek Sabudin, CEO of the Centre for Asia Pacific Aviation, said the raising would reassure investors.

ââ¬ÅâœWe think they (Virgin Blue) will need a strong airline partner in the longer term but this capital raising takes the pressure off in the short term.ââ¬~

Writing in the Business Spectator, Stephen Bartholomeusz said the launch of V Australia services to the US had hit Virgin Blue hard.

ââ¬ÅâœThe start-up costs for V Australia ââ¬' $60 million to $65 million ââ¬' and operational losses of another $30 million to $35 million on the route have been destabilising, although the overall near break-even result for the group at an operational level is a fair achievement in the turbulent industry circumstances,ââ¬~ Bartholomeusz ââ¬~¨Ã¢â¬~¨wrote.

He added, ââ¬ÅâœUnfortunately for Virgin Blue it was irrevocably committed to launching V Australia just before the crisis emerged and then the economics of the route, once Qantasââ¬â¢s most profitable, were further compromised by the re-entry of United Airlines and then Delta Airlineââ¬â¢s decision to make it a four-cornered and quite bloody contest that has decimated yields, particularly at the premium end.ââ¬~

ââ¬~¨Ben Sandilands, writing in his Plane Talking blog, added, ââ¬Å✠If V Australia does better in the next year, the upside for Virgin Blue is obvious, and the more so if an operational merger with Delta Airlines gains regulatory approval.ââ¬~

The announcement of the Virgin Blue equity raising coincided with news that chief executive Brett Godfrey will step down next year after 10 years.

Sandilands noted, ââ¬ÅâœGodfreyââ¬â¢s term New World Carrier surprised everyone, including maybe himself, by finding a new source of growth in single person businesses, and small to medium enterprises that never had access to the corporate travel account discounts available to the big end of town.

ââ¬ÅâœIt is precisely the segment that allows Southwest and easyJet to run rings around legacy carriers like American Airlines and British Airways, while Jetstar and Tiger pursue the Ryanair model of being cheap but customer and business travel unfriendly.

ââ¬ÅâœSo, in his last year at Virgin Blue, Godfrey has an airline that knows what it is while its main competitor comes across as having lost its way.ââ¬~


by Ian Jarrett

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