vba takeover - prk rating cut by jbwere

Virgin Blue Says Fuel Prices May Slash 2006 Earnings (Update8)

March 22 (Bloomberg) -- Virgin Blue Holdings Ltd., the only rival to Qantas Airways Ltd. in Australia's domestic market, said record jet fuel prices may wipe out two-thirds of profit next fiscal year. Shares of Patrick Corp., which last week bought control of the carrier, had their biggest decline in two months.

Virgin Blue's fuel bill may strip about $70 million from after- tax earnings in the year starting April 1, the Brisbane-based airline said in a statement today. Virgin Blue in January said this year's profit would fall as much as 15 percent to about A$135 million ($105 million) amid a price war with Qantas.

Patrick Chief Executive Chris Corrigan, 57, plans to revive earnings growth by slowing the expansion strategy pursued by founder Richard Branson and ending the price war. Virgin Blue said it may increase fares after jet fuel prices rose to about $70 a barrel, 55 percent higher than the average this fiscal year.

Virgin Blue hasn't hedged fuel purchases for next fiscal year, meaning ``earnings forecasts are highly leveraged to fuel prices'' said Paul Ryan, an analyst at Goldman Sachs JBWere, who today cut his rating on Patrick shares to long-term ``hold'' from ``buy.''

Taking a controlling stake in the airline ``increases Patrick's earnings volatility'' and reduces the company's capacity for acquisitions in its other businesses of rail freight and port cargo handling, Ryan said.

Patrick shares slumped 24 cents, or 3.8 percent to A$6.15 at the 4 p.m. market close in Sydney, the lowest since Virgin Blue cut this year's earnings forecast on Jan. 19. Virgin Blue shares were unchanged at A$1.90, the same as Patrick's offer price.

Patrick said March 18 it snared a controlling 50.3 percent share of Virgin Blue after buying an additional 4.9 percent stake, under a A$1.1 billion bid made Jan. 28 for the rest of the airline it didn't already own.

Shares May Fall

Virgin Blue's independent directors said shareholders with a ``long-term view'' should reject the offer. The independent directors include representatives of Branson's Virgin Group, which has a 25 percent stake in Virgin Blue, and has said it won't accept the offer.

Virgin Blue Chief Executive Brett Godfrey, 42, owns 33.2 million shares, or 3.2 percent of the company. His stake is worth A$63 million at Patrick's offer price.

Grant Samuel & Associates, which is advising Virgin Blue, said the airline's shares may fall below A$1.90 after Patrick' offer expires on April 1. Short-term shareholders should consider whether accepting the bid or selling their shares on the stock exchange will provide a higher-price, Virgin Blue said.

``There are risks associated with holding Virgin Blue shares,'' acting chairman David Ryan said in the letter. ``Virgin Blue is well positioned to benefit from improvement in market conditions, although when improvement will occur is not clear.''

Virgin vs Jetstar

U.K. billionaire Branson, 54, started the airline in 2000 with $10 million and two planes. The collapse of Air New Zealand's Australian unit Ansett in September 2001 helped Virgin Blue increase its share of the domestic air travel market to about 30 percent. Virgin Blue now has 50 planes flying 59 routes.

Qantas Chief Executive Geoff Dixon responded by starting his own discount carrier, Jetstar, in May, saying he ``must defend'' a market share of between 65 percent and 70 percent. Jetstar offered 100,000 seats on its first flights for as little as A$29. Virgin Blue retaliated by selling 200,000 seats at the same price.

Virgin Blue said it is considering a ``range of initiatives'' to combat higher fuel prices, including increasing the fuel surcharge on tickets. The carrier has a A$10 levy on domestic tickets and A$20 on international tickets.

Hedging

Fuel accounted for 17 percent of Virgin Blue's operating costs in the first-half ended Sept. 30. Low-fare airlines, because of their lack of capital, are less able to hedge their fuel purchases.

AirAsia Bhd., Southeast Asia's largest law-fare airline, said in May its fuel purchases are hedged until 2007, without disclosing the price. Qantas said Oct. 14 that it's hedged 70 percent of its fuel requirements until July 2005. Singapore-based Valuair Ltd., a low- fare airline with two planes, last year said it has a three-month hedging policy.

High fuel prices won't come as a surprise to Corrigan, said Paul Trainor, who manages the equivalent of $130 million at Direct Portfolio Services in Sydney. ``He would have been well aware of it and that's probably why he's made a move.''

Corrigan, who called Virgin's expansion ``suicidal'' and the price war with Qantas ``catastrophic,'' should be able to manage the increased jet fuel prices, said David Maywald, who helps manage the equivalent of $655 million at Constellation Capital Management in Sydney.

Corrigan first invested in Virgin Blue in March 2002, and was the airline's chairman before stepping aside when he made the bid to buy the rest of the company.

He ``has had the stake for quite a long time and he operates in industries where oil and fuel are important,'' said Maywald. Constellation sold its Virgin Blue shares after the company previously cut its earnings forecast.