Virgin had better pray it can make Los Angeles pay

A report in The Sydney Morning Herald flying by the seat of your pants may be an old saying, but it is proving to be particularly apt for Brett Godfrey at Virgin Blue.

And while it may be extending the use of cliched phrases too far, there is also little doubt that not only has Godfrey got far too many wings (if you count the number of Virgin planes in the air), he also has very few options when it comes to the odd prayer or two.

For, as much as it is essential to the economy that Virgin Blue continues to thrive – or at this point in time, survive – you won’t find many people disagreeing with the view that the company is facing the most turbulent period in its eight-year history.

From a cheeky start-up airline which had just two aircraft on one route at the end of August 2000, Virgin Blue has grown (thanks, in effect, to the failure of Ansett) into the country’s second most important domestic airline, if you count Qantas and Jetstar as one.

Putting to one side the publicity-seeking stunts of its co-founder and still significant shareholder, Richard Branson, Virgin has grown to take a third of the local market and built up an ultra-modern fleet of 55 Boeing 737 and Embraer short-haul aircraft serving 22 cities and towns.

If that wasn’t enough, it has also become a significant player in New Zealand and the surrounding Pacific region, and is shortly due to launch its first fully international services to Los Angeles from Sydney and Brisbane with its new offshoot, V Australia.

But just as Branson’s and Godfrey’s timing was both exquisite and fortunate in launching the airline and getting Chris Corrigan’s then Patrick Corporation to come in as a major investor, they are now finding that that same factor is working against Virgin Blue.

To be fair to the company, it wasn’t to know a year or so ago, when it took on extra capacity in the shape of more expensive new planes to serve even more destinations, that the oil price was going to go through the roof.

Nor could it have fully appreciated the knock-on effects of that massive rise in domestic spending and consumer confidence, both of which are suddenly heading south. But Virgin now finds itself squeezed between the two. In particular, its costs – in the shape of jet fuel that is now about $US170 a barrel – have gone sky high.

Merrill Lynch, one of the most bearish brokers on Virgin’s ailing stock, reckons in its latest research that if the oil price remains at this level the airline could lose as much as $75 million next year, depending on the actions it takes to offset those costs.

Merrill has also cut its profit forecasts for this year and for 2010, based on the latest evidence that Virgin’s load factor (the number of people it carries on its flights) fell to 72.5 per cent in May, which is some way short of where it needs to be – especially with fuel prices so high.

Virgin has so far responded by announcing it will cut capacity by 6 per cent from September, but the question is whether that will be enough.

Qantas, of course, is having the same problem, just as it is embroiled in various industrial disputes and enduring significant delays on the ground and in the air, which may just help Virgin in a small way.

But the real test for both will be the forthcoming battle over the Los Angeles route, which is by far Qantas’s most profitable. Virgin needs to make that a success, and a quick one, after its December launch to bolster its once hugely profitable – but now thought to be loss-making – domestic network.

Some industry watchers believe suspending the service before the first flight would make more short-term financial sense. But Virgin has little choice but to go, given how much its short-to-medium future depends on it. A wing and a prayer, indeed.

A Report by The Mole from The Sydney Morning Herald