This morning’s Virgin Blue profit downgrade to a loss of -$30 million to -$80 million before tax for the full year to June 30 raises question over the strategy of CEO and former Qantas executive general manager John Borghetti.
The announcement implies that in the current second half of its financial year, Virgin Blue could lose up to $116.8 million, as it reported a pre-tax profit of $36.8 million for the first half ($24 million after tax).
This means that if the worst loss figure ($80 million) included in this morning’s downgrade guidance happens,, it would lose an average of $19 million a month for the six months to the end of June.
The soaring price of oil ( adding an extra $50 million on second half fuel charges) floods and cyclone Yasi in Queensland ($50 million “impact”) and the Christchurch earthquake ($15 million “impact”) are blamed for the worsened outlook, but shareholders might wish for more precision from Virgin Blue, as to whether it is talking impacts on gross revenue, profit before tax or profit after tax. Vagueness in ASX announcements are not a virtue.
There was nothing vague about the market reaction, which wiped 8% off the VBA share price within minutes of the downgrade being posted.
In his downgrade statement, Borghetti said: “We have witnessed an unprecedented number of significant events in an extraordinarily short period of time, including natural disasters and a sharp spike in fuel prices.”
He also said: “These market conditions have further validated our game change strategy, which will see us less dependent on the leisure sector …”
That is debatable. There is no real evidence that the business accounts that Borghetti has targeted are going to embrace higher fares or fancier products than either Virgin Blue or Qantas have in the market at present.
If anything, the trend in business travel may be more to the middle ground, including premium economy rather than luxury business-class quality, which is where Qantas and Virgin Blue, under co-founder and Borghetti predecessor Brett Godfrey, have been headed.
There is no reason to believe that a recession in leisure demand will not be accompanied by a contraction in business demand, which has always been the case in the past.
If this happens this year, all of the Australian carriers are going to be badly burnt, and Virgin Blue’s investment in Qantas-beating business-class cabins will become a game loser rather than a game changer.