Virgin to prepare do-or-die fuel plan

A report in the Australian says that Virgin Blue CEO Brett Godfrey has flagged a strategic review of the nation’s second-biggest carrier as it moves to cope with high fuel prices.Elements of the review are due to be put to the airline’s board next month.

Taking the view that airlines will need to adapt to high fuel costs or die, Mr Godfrey yesterday predicted “a real shake in the aviation tree globally” as jet fuel stayed around the current price of about $US162 a barrel.

He said fuel when Virgin started out comprised about 15 per cent of costs, and this was now heading to 35 per cent, an increase of 20 basis points.

“Some airlines are going to go,” Mr Godfrey said, echoing comments made recently by Qantas chief executive Geoff Dixon.

“We’re not going to be one of them, I’m certain of that, but there are lot of weak airline models out there.”

“We’re in a position fortunately where we’re well established and we’re seeing year-over-year growing corporate trade, which is good for us.”

“On the retail side we’re susceptible, as is Jetstar as is Tiger, to a downturn.”

Virgin Blue shares are trading around 80c after the airline recently revealed net profit after tax for this financial year would be no more than $100 million, down from $216 million in 2006-07.

The estimate, which includes abnormals of about $40 million associated with new projects such as the start-up of V Australia, represented a fall of about 54 per cent and was less than half the previous analyst consensus estimate for fiscal 2008 of $207 million.

Mr Godfrey said there would be no further downgrades this year but predicted that Virgin would not be alone in issuing guidance if fuel remained at current levels.

He said the domestic market was still facing a combination of high fuel, a wavering demand and an 18 per cent capacity increase compared with historical rises of 5 to 7 per cent.

This made it hard to raise fuel surcharges or fares without seeing passenger load factors “fall through the floor”.

“We ended putting up fares between $5 and $10,” he said. “The net effect we’ll get, with the decrease in demand, will probably be about $2 to $3. Now $2 or $3 per passenger is about $40 or $50 million – our fuel bill is $300 million more next year.”

“It means a couple of things need to happen: we need to strategically look at how we re-engineer our business to take account of what we think will be current prevailing (fuel price) levels, which we think … have more potential to go north than down.”

Not that everything is doom and gloom.

Mr Godfrey still sees a silver lining that could present interesting opportunities.

Virgin’s first aircraft are leased and about 30 aircraft would need replacing from 2013 to 2016.

“We’re still looking at further orders to maintain the current fleet, let alone talking about growth,” Mr Godfrey said.

“As we’re sitting here, I think there could be some buying opportunities in the next 12 to 18 months.”

“I think at the moment the order books have never been fuller and that means there’s a lot of risk and there’s a lot of money out there that’s locked into aeroplanes that may not get delivered.”

“And if they don’t get delivered they end up being white tails or someone comes along and we’ve always been fairly speculative.”

“We’re not in a cashed-up position to waste it on aeroplanes but we’re in a comfortable position that we know strategically.”

“We’ve got a big session with the board not too far off where we’re going to present to them our plans for the future.”

“And that talks about being opportunistic in that we’re prepared to take some risks but we’ve got to see the market turn.”

“And I think the market will turn.”

Mr Godfrey was speaking last week at a ceremony at Hawker de Havilland in Sydney to mark the shipment to the US of Australian-made tail components for its first V.Australia Boeing 777-300ER.

The 10.7m carbon composite elevators were the 745th ship set to be made at HdH’s Bankstown facility, which makes all 777 elevators and will soon take over manufacture of rudders for the popular jetliner.

Mr Godfrey said he was confident that V.Australia would survive starting up in a high fuel price environment.

He said the important thing was having a hip pocket and a model that was resilient enough to look after itself in tough times.

He said modelling for V.Australia had been done when fuel was about $US70 a barrel but had looked at a scenario of about $US110.

He also believed V.Australia would have the best product on the trans-Pacific.

Staff had been working feverishly since Virgin’s profit guidance on ways to make the V.Australia model stronger and better.

“V Australia is on target,” Mr Godfrey said. “The model will stand up to this but we expected to lose money for a little while anyway, and if it turns out to be a little longer, so be it.”

“But the bigger picture is still pretty buoyant for us.”

by The Mole