JPMorgan backs off critique of Virgin Blue * Font Size: Decrease...

JPMorgan backs off critique of Virgin Blue

* Font Size: Decrease Increase
* Print Page: Print

Rebecca Urban | June 07, 2008

INVESTMENT bank JPMorgan has backed away from controversial comments made by its research department this week suggesting Virgin Blue was at risk of collapsing in the face of surging fuel prices.

Following a verbal spray from the airline's chief executive, Brett Godfrey, JPMorgan analyst Matthew Crowe yesterday blamed the media for misinterpreting his report that claimed if jet fuel stayed at current levels, and Virgin Blue did not significantly increase fares, it would not survive.

Mr Crowe said it was one of several scenarios featured in his research report, and it had been incorrectly interpreted as a suggestion that Virgin Blue was at risk of insolvency.

"This scenario does not represent our view of Virgin Blues future earnings," he said.

"The scenario in question reflected an unlikely combination of factors, including permanently high fuel prices and no increase in airfares or any other revenue or cost-saving measures."

The bank's clarification came soon after a furious Mr Godfrey slammed the report in an interview with The Australian, describing it as simplistic for considering increasing airfares as the only solution to the problem.

"(The report) says, your only choice is to increase fares, and that in itself is economically moronic because the fact is there are several other options, which we're exploring at the moment," Mr Godfrey said.

"And quite simply, raising fares is not going to work if there's going to be a reduction in economic demand, so we need to look at a couple of things."

Virgin Blue has recently flagged that it is considering a range of initiatives to combat the jet fuel prices, including cutting capacity, redeploying planes to more profitable markets, delaying arrival of new aircraft and selling existing aircraft.

The airline plans to make an announcement next week about its strategy to deal with the pricing pressures.

JPMorgan expects Virgin Blue to increase its fares by 3 per cent in fiscal 2009 and 1.5 per cent in fiscal 2010. It has tipped that jet fuel prices will fall from $US156 a barrel to $US98 over the same period.

"If fuel prices stay high we would expect further fare rises by all carriers, including Virgin Blue," the bank said.

JPMorgan said Virgin Blue recently announced an increase to fuel levies "that we expect to boost fares by about 3.5 per cent".

The bank expects Virgin Blue to report a profit of $82 million this financial year, followed by $19 million next year, before rebounding substantially to $133 million in 2010.

"Our actual forecasts for Virgin Blue, which form the basis of our neutral recommendation, reflect very different assumptions including higher air fares over several years and lower jet fuel costs."

Recent domestic capacity cuts by Qantas were expected to tighten domestic supply conditions assisting airfare growth, the bank said.

Virgin Blue shares closed at 62c, down 1.5c yesterday.

Additional reporting: AAP