Australians are debating how much a 22% drop in Virgin Blue's net profit for the June quarter is due to the influence of Qantas low-cost start-up, JetStar.
Analysts generally blame JetStar, which launched in late May and already claims to be profitable. Virgin Blue, Australia's second airline, admits some yield erosion from lower fares, but cites its own boost in capacity as the main cause for its drop in earnings.
Nevertheless, Virgin's shares have fallen below the A$2.25 ($1.58) issue price from their December float, wiping A$300 million off the airline's market capitalisation.
JetStar may at least be indirectly responsible for the downturn. Anticipating the start-up's arrival, Virgin accelerated its own growth plans ahead of its rival's launch.
For the financial year ending March, Virgin added 17 aircraft, boosting available seat kilometres over the previous year by 60%. Brett Godfrey, Virgin's chief executive, told shareholders at their annual general meeting in August that he had foreseen some drop in loads because this amount of capacity growth exceeded current demand. Godfrey expects a better balance in the second half of 2004 when Virgin is only adding three more aircraft.
But analysts worry that JetStar is also adding capacity fast as it starts to replace its 125-seat Boeing 717s with 177-seat Airbus A320s. Some claim total domestic capacity is growing 10% faster than long-term demand.
Virgin Blue's traffic results typify its pinch. In June it carried more than one million passengers a month for the first time, and that total continues to climb. Yet, while passenger traffic increased by 45%, available seat capacity grew by a faster 57%, resulting in a 6.3 point load factor drop from 82.5% to 76.2%.
After some A$29 introductory fares that were essentially give-aways, neither JetStar nor Virgin has launched any fare war. Nonetheless, analysts worry that their rivalry is still young. So far, JetStar's estimated 7% market share has come from diverting Qantas leisure passengers to JetStar and not from any erosion of Virgin's share. Virgin's market share has crept up from 30% to 33% in recent months.
The real face-off will come when JetStar and Virgin vie for the same passengers. Citigroup Smith Barney analyst Jason Smith says growth will then become harder and more costly for both airlines to achieve.
David Knibb Seattle
Source: Airline Business
