Virgin Blue has pitched nose down into a steep, high-volume share price dive today after drastically cutting its profit guidance for the year to June 30 to $20 million-40 million profit before tax and exceptional items,  well down on its previous downgrade earlier this month to $80 million.

The airline is now dissecting its international operations, vowing internally to stop V Australia flights to Los Angeles and Johannesburg destroying the benefits of what remains a profitable domestic network.

Its chief financial officer, Keith Neate, said this morning; “A complete network review is now under way across the entire business.

“We will adjust capacity in markets we need to defend, and remove it, or change the equipped used, on non-performing routes.”

Neate said that overall 80% of the Virgin Blue group’s carriage was discretionary or leisure travel, which is coincidentally almost the reverse of the proportions of business to leisure traffic on the Qantas Cityflyer network.

He said Virgin Blue expected to reduce its average fares by about 10% to defend its share of the discretionary market.

Virgin Blue’s guidance is that domestic short-haul flights are still expected to make a net profit before tax in the order of $100 million for the full year, which is unchanged from its previous estimates.  The damage being done to its balance sheet from overseas flights is obvious.

Virgin Blue also says that leisure demand is particularly affected domestically and internationally, which points to the painful reality that its domestic business travel gains are being negated by falls in discretionary personal travel.

The words of Virgin Blue’s ASX statement, and the omens regarding other carriers, suggest that neither it nor major competitor Qantas is without options for dealing with a sudden deterioration in demand and yields.

Virgin Blue has jet leases it can terminate rather than replace or extend, and predicts in today’s note that its costs per available seat kilometre, excluding fuel, are expected to add to the cost reductions achieved in the first half of its financial year.

It can also further defer outstanding orders for Boeing 777 jets for V Australia.

But the inescapable message is that Virgin Blue is being dragged down by its overseas flights, and that its new CEO of three weeks (and former executive general manager at Qantas) John Borghetti, is going to make big changes in V Australia and perhaps its NZ subsidiary Pacific Blue.

The airline has already pinned much of its plans for more efficient international operations on approval pending deals to form a trans Tasman alliance with Air New Zealand, and a joint venture with US giant Delta on long-haul Pacific routes.

Of wider concern is the Virgin Blue statement’s reference to “an unexpected and sudden decline in consumer confidence in the last month”.

Australia’s major airlines have always been a reliable bellwethers for its broader economic conditions, and in that sense, what is bad for Virgin Blue or Qantas, is bad for the country.

At about noon, VBA had dropped 11 cents to 32 cents on a massive volume of 136 million shares. QAN was down 3 cents to $2.39 on a modest volume of  12.2 million  shares.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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