[Greg McDonald]

Not good:

A LEADING brokerage house has slashed its profit forecast for Virgin Blue as it warns the airline is highly vulnerable to a possible oversupply in the domestic market.

UBS cut its pre-tax profit estimate this week by a third, from $135 million to $90 million, following the airline's own downgrade earlier this month. UBS also trimmed its share price target from 80 cents to 70 cents.

Virgin shares fell 3 to a six-month low of 46.5 cents yesterday.

UBS aviation analysts Simon Mitchell and Ramoun Lazar believe the Brisbane-based carrier should wind back its planned 7 per cent growth plans on short-haul routes to head off a likely fall in demand.

"Virgin is heavily exposed to any oversupply, deriving (about) 60 per cent of revenue from domestic leisure travel," they wrote in a client note.

"Virgin is also facing significant capacity expansions in the order of 20 per cent on some of its more profitable routes, such as the Gold Coast, from Tiger and Jetstar.

"We see current capacity plans in fiscal year 2011 by domestic airlines as too high and believe Virgin's aim of 7 per cent short-haul capacity growth could be scaled back."

While the overall domestic aviation sector is tipped to grow 11 per cent in the next financial year, UBS said Virgin Blue would have to count on a turnaround in the profitability of overseas carrier V Australia as its "main driver of improvement".

UBS expects V Australia to suffer a $40 million loss this year but deliver a $20 million profit in 2011. The analysts also believe Virgin Blue's net profit will improve from

$60 million to $150 million over the same period.

The outlook continues to brighten in 2012, with UBS tipping a $55 million profit for V Australia and a $120 million profit for Virgin Blue and sister operation Pacific Blue.

CommSec found last week the cost of domestic flights hit record lows this month.

John Borghetti, the veteran Qantas executive who replaced Brett Godfrey at the helm of Virgin a few weeks ago, has revealed little about his strategy.

"You'll see us compete more aggressively in segments of the market that make more sense," he said in a recent interview.