Airlines reject return to high fares
A report in The Age says that the financial turbulence Virgin Blue has flown into may signal that the sweet spot in the domestic airline market has suddenly turned sour.
But the airlines reject suggestions that any downturn would spell the end of cheap air fares.
In an investor note to clients, analysts at JPMorgan predict that Virgin’s earnings will not improve until the 2009-10 financial year. The airline announced on Friday that its net profit for 2007-08 would not exceed $140 million, a $76 million drop over last financial year’s result of $216 million.
The outlook for Qantas is also far from rosy. JPMorgan has dropped its estimated earnings for 2007-08 by 5% due to high fuel prices. It has also cut its 2008-09 outlook on Qantas by a further 7% on weaker yields.
“Virgin Blue’s recent profit warning shows the domestic aviation market continues to deteriorate,” said JPMorgan analysts Matt Crowe and Russell Crichton-Browne.
The profit downgrade is also dragging down shares in Virgin’s 62.8% owner, Toll Holdings. Mr Crowe and Mr Crichton-Browne have told clients it would be some time before positive sentiment returned to Toll, given the likelihood of a slowdown in the domestic economy.
Qantas shares fell to a year low of $3.49 before ending trade down 11¢ at $3.51 and Virgin closed at 89¢, recovering 2¢ of Monday’s 24¢ drop. Toll extended Monday’s $1.43 loss to close at $7.81, down 24¢.
The domestic carriers were quick to reassure passengers that any slump in the market would not mean the end of discounted air travel.
Virgin Blue spokeswoman Heather Jeffery said: “Special fares are Virgin’s forte.
“We introduced Australia to the relief of realistic air fares after years of opportunistic pricing, and other airlines have since had little choice but to follow.”
“The extraordinary cost of fuel may force a rising fuel surcharge but that won’t mean the end of sensational spot fares, fast and furious sales and the like.”
“As long as capacity growth is stronger than market growth, you will always see promotional fares as a way to stimulate demand.”
The chief executive of Tiger Airways, Tony Davis, agreed.
“Tiger Airways … is committed to offering the lowest possible air fares,” he said.
“As a result, we will not be matching the increased fares being imposed on consumers by Virgin Blue.”
Tiger was confident of its hedging position and did not believe it would need to pass on costs in the form of a fuel surcharge.
Virgin has said it will move to raise one-way tickets by as much as $12 by the end of the month if fuel prices stay high.
Qantas is also likely to increase its fuel surcharge.
A Report by The Mole from the Age
John Alwyn-Jones
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