comm bank equities assessment

AIRLINES in Australia may fly above the consumer spending strike afflicting the retail sector, with Virgin Australia showing solid profit growth potential, according to leading aviation analysts.
The assessment from Commonwealth Bank Equities gave a firm endorsement to Virgin Australia as a growth investment, while also recommending investors hold off on Qantas in light of its credit rating downgrade by Moody's to the lowest investment grade.
Virgin Australia's growth strategy, including its new business class expansion, puts it in best position to take advantage of potential improvement in the economy while Qantas was weighed down by its industrial issues and a heavy capital expenditure schedule on new aircraft.
CBA Equities upgraded its recommendation on Virgin Australia from hold to buy while reversing that stance for Qantas, which it said may face the need for a capital raising in the next two years.
Analysts Matt Crowe and Andre Fromyhr said Virgin Australia had the best exposure to the recovery in aviation earnings expected over the next two years as it bounces back from Queensland's floods and cyclone, which badly hit its business in 2011.
They also noted that Virgin's business market grew 47 per cent in the second half of 2011 on the previous year's period and said feedback from the travel industry indicated it "continues to make solid inroads''.
Mr Crowe said Virgin Australia's issue with its on-time performance since formally launching business class this month was likely to be a short-term teething problem.
But the high profitability of the business market was set to be eroded as Virgin Australia's entry contributed to lower fares at the pointy end of the plane.
Qantas and Virgin are engaged in a fierce battle for corporate accounts, with Virgin winning accounts with revenue guarantees although Qantas recently acquired Telstra's $40 million corporate account, along with Mirvac.
"Overall, people still seem to be spending in accommodation, travel and holidays, that part of the economy seems not to have been as affected by the collapse in other areas of the economy like retail,'' Mr Crowe said.
He also said Virgin Australia had an international service with a minimum of capital spend.
"They've put together a fantastic team of international partners, including Singapore and Etihad, without having to spend on aircraft. It's John Borghetti's greatest achievement so far,'' Mr Crowe said.
By contrast, Qantas faced a bill of up to $12 billion over the next five or six years on new aircraft and needed a strong credit rating.
"We don't see the economic recovery as being strong enough to give them the metric to upgrade their credit rating, so what is left is a capital raising some time in the next two years,'' he said.