Virgin Blue, which could result in, among other things, lower...

Virgin Blue, which could result in, among other things, lower capital spending,
reduced capacity, or an increased focus on alternative revenue streams such as
cargo.
But they said risks remain for Virgin Blue, including high fuel costs and
fierce competition from rival Qantas and its cut-price offshoot Jetstar, which,
depending on the final outcome of the bid, could result in a re-rating for
Patrick's stock.
Patrick said Friday its stake in the discount carrier had risen to 50.26
pct, compared to 45.4 pct before the group launched its bid.
Its 1.90 aud a share offer, which was launched in January, is now scheduled
to close on April 1.
The offer came just days after Virgin Blue warned its net profit for the
year to March would be down 10-15 pct year-on-year due to falling passenger
numbers amid hot competition from Qantas and Jetstar.
"The key issue from here is how will Virgin's strategy change, if at all,
under Patrick control," Macquarie Bank said in a note to its clients.
It said Patrick could begin to outline its strategy for the airline once the
bid lapses on April 1, and it expects the transport group's first move will be
to appoint another two directors to Virgin Blue's board of directors, taking the
number of directors to 10, of which five would be from Patrick.
Patrick chief executive Chris Corrigan has been quite vocal in the past
about the super-low fares offered by Virgin Blue as it seeks to capture market
share, and Macquarie suggested that Patrick may move to tighten capacity at
Virgin Blue over the next year or two.
Another possible outcome might see Patrick move to stop all capital
expenditure by the airline, Macquarie said.
Analysts said what Corrigan does with Virgin Blue will depend on the stake
Patrick ends up with under the hostile bid, which does not have the backing of
Virgin Blue's independent directors.
Citigroup said it expects Patrick could end up with around 60 pct of Virgin
Blue, given an estimated 10-15 pct of the group's free float is held by long
hedge funds.
The low cost airline's other major shareholder, British entrepreneur Richard
Branson's Virgin Group, which holds 25.5 pct, has indicated it does not plan to
accept the offer.
Sydney-based Center for Asia Pacific Aviation (CAPA) said the effective
change in management control is likely to signal a strategic rethink at the
airline.
"After four years foraging at the bottom of the Australian domestic market,
the new majority shareholder, is likely to steer the low-cost carrier in a fresh
direction, with the promise of more significant returns," the industry group
said in a note.
CAPA said this could come in the form of a greater focus on the domestic
premium market, chipping away at Qantas' dominance in the higher-yielding
corporate and government sectors, and perhaps a reduced exposure to volatile
offshore markets.
"Patrick's move to 50.3 pct of Virgin Blue is also likely to see a more
intensive pursuit of opportunities to leverage off its core transport
infrastructure and freight operations, by extending the lateral mix of related
ventures in areas such as cargo and service supply, including ground handling
and maintenance," CAPA said.
"If all goes according to plan, Virgin Blue will be less vulnerable to the
competitive pressures inevitable with an aggressive Qantas and its Jetstar
offshoot," it said.
But others, including Citigroup, believe no matter the outcome, Virgin Blue
continues to face significant short-term risks, including soaring jet fuel
prices, rising capacity in the domestic market and intensified competition from
both Qantas and Jetstar.
"Given Virgin Blue is unhedged for fuel in fiscal 2006, has limited upside
from the rising Australian dollar with currency hedging and domestic capacity
growth still likely to be between 6-8 pct, we believe the outlook for Virgin
Blue remains poor," Citigroup said in a research report.
"It's also questionable what airline experience Patrick could actually bring
to Virgin Blue," it said.
Citigroup said if Patrick secures full control of Virgin Blue, which has
about a one-third share of the domestic market, more than 50 pct of its net
profit would come from the airline.
"This would dramatically increase the risk profile of Patrick overall in our
view and could potentially result in a P/E derating for Patrick overall," the
broker said.
"Based on our international airline valuation summary, we believe the price
Patrick has paid to gain control may prove high given the uncertain outlook for
Virgin Blue's profit outlook," it said.
At 3.40 pm, Virgin Blue was steady at Patrick's 1.90 aud offer price.
Patrick was up 0.04 at 6.39.