CEO John Borghetti says Virgin will cut capacity; profit down

Virgin Australia will post a lower-than-expected profit for the full year after revealing it was cutting capacity.

Virgin Australia CEO John Borghetti with Virgin crew members at a company announcement this year. Picture: Hollie Adams

Virgin Australia will post a lower-than-expected profit for the full year after the airline revealed it was cutting capacity across its operations as election uncertainties and the waning resources sector weighed on its business.

Its intent to cut capacity by 5.1 per cent for the June quarter means the airline will post a loss in the second half that will take a chunk out of its full-year underlying pretax profit, which is now expected to come in between $30 million and $60m.

That compares with an average estimate among five analysts of $84m, according to data compiled by Bloomberg.

Investors punished Virgin for the outlook, sending shares tumbling 5.71 per cent to 33c against a 0.18 per cent dip in the broader market.

Yesterday’s share price hit means that the airline’s stock has plummeted 27 per cent since the start of this year while the benchmark S&P/ASX 200 has shed just 1.1 per cent. Qantas shares also took a battering this financial year, falling 21 per cent on the back of similar capacity cuts.

Virgin chief executive John Borghetti yesterday blamed the airline’s financial outlook on the election uncertainty, weak consumer sentiment and the continued collapse of the resources sector.

The profit forecast came as Virgin revealed that its statutory loss for the three months to March 31 had more than doubled to $58.8m as it continued to restructure its aircraft fleet that will see it rid itself of five of its 98-seater Embraer E-190s, six E-170s and its Regional Airlines’ Fokker 50s.

“The fleet restructure charges ... along with further initiatives to come, will provide us with significant cost savings,” Mr Borghetti said.

The cut to its capacity will see Virgin’s domestic operations take a 3 per cent hit in the June quarter, while the remainder of the total 5.1 per cent cut will come from its international business.

Its international business has seen a reduction in capacity as the airline upgrades its Boeing-777 aircraft, which are flown to Los Angeles and Abu Dhabi, with new business-class seats that will ­remove 6 per cent of its seat ­numbers.

Virgin is not alone in cutting capacity as a softening of demand for flights affects the sector.

Last month, Qantas revised plans to add seat capacity in the June quarter and warned that domestic capacity would ease.

But Macquarie Securities analyst Sam Dobson remained unconcerned by the cuts and described Virgin’s decision to pull back on capacity as “rational”, saying it would help all domestic carriers to stimulate yields. He also said Virgin’s “swift, rational response to demand weakness” highlighted the airline’s focus on profitability.

“Encouragingly, this reflects a positive intention to preserve profitability rather than pursuing market share gains,” Mr Dobson said. “Both Qantas and Virgin will benefit from cuts, which will support load factors and stimulate yield growth.”

CAPA Centre for Aviation analyst Will Horton said the ­capacity cuts meant the Australian aviation sector was firmly back to a “duopoly situation”.

“Neither airline group is looking to get substantially ahead — which might provoke a response — and nor is there a defensive market share situation. Yet the prospects for a third entrant remain dimmed. Asian airline groups have looked, but there are bigger and more strategic opportunities in Asia,” Mr Horton said.

“The opportunity remains international growth for the Australian market. North America is growing. The Gulf market was looking to cool but has been reinvigorated by Qatar. Chinese airline capacity puts pricing pressure on the market. Xiamen Airlines can only offer Sydney/Melbourne-Amsterdam one-stop service a few days a week, but that causes others to react.”