V Australia Launch and Movements

[Brad Myer]

http://www.news.com.au/heraldsun/sto...50-664,00.html

Launch of V Australia in shaky market

VIRGIN Blue launches its trans-Pacific offshoot V Australia this week into the worst market ever for international airlines.

The gambit is seen by industry sources as make-or-break for Virgin chief executive Brett Godfrey.

Virgin Blue is a business the share market values at $329 million, yet its new fleet of seven Boeing 777s will cost at least $1.5 billion.

The first jet will be leased but the next three have US Government-backed finance.

Questions remain about how Virgin will fund the four remaining aircraft at a time when airlines worldwide are under intense financial pressure.

A global aviation specialist told BusinessDaily that Mr Godfrey faced "the brutal reality" of the times.

"He is coming into the route when Qantas is flooding the Pacific with extra seats on its A380 super jumbos," the specialist sai.

New competition also looms from US based Delta Airlines, the world's biggest carrier, which surprised the aviation market last month by announcing a daily Sydney-Los Angeles service from July.

"The Pacific no longer looks like the gold mine it once was when the Qantas-United Airlines duopoly creamed the profits," the specialist said.

He argued that if he was Godfrey, he would quickly arrange to push back aircraft deliveries.

"Going onto the Pacific and challenging incumbents Qantas and United Airlines is no longer the safe play it once seemed," he added.

Macquarie Bank has also warned that V Australia could face weak demand, particularly from the lucrative business and premium economy market.

A research note issued late last month flagged the likelihood of a trans-Pacific discount war.

Virgin flagged that likelihood last month when it offered a one-off Los Angeles return fare of $1199 causing Qantas to respond with a four-day $US999 package for the US market.

Macquarie says it expects more aggressive pricing as V Australia and Delta jostle for market share.

"If things weren't sufficiently challenging for Virgin Blue, the entrance of Delta on the trans-Pacific route will only make things harder," Macquarie said in its December research note.

"We believe V Australia's product will be superior to that offered by the US carriers, however the presence of four carriers on the US route could push out the expected break even period even further," Macquarie said.

Qantas, which has run its ruler over Godfrey's projections, believes V Australia could take at least three years to break even.

Last week, just seven days from taking delivery of the first 777, Mr Godfrey was refusing interviews and not responding to claims by market analysts.

Heather Jeffery, VirginBlue's public relations chief, acknowledged that the airline was launching into a difficult market.

"We know we could not have chosen a worse time to launch, but (we) are realistic about our position and the evironment we are in," she told BusinessDaily.

"What we are doing is not a gamble, there is no gambling," she declared.

Ms Jeffery says the new airline will be the final piece in the puzzle for the Virgin brand.

Apart from the looming dog fight with a cashed-up Delta, Virgin Blue begins the battle handicapped by a share price seriously eroded by the market turmoil.

Back in February 2007, before the economic downturn and at the time when V Australia was mooted, Virgin Blue stocks traded around $2.80.

On Friday they sold at 31, valuing the business at $329.9 million, about $70 million more than the cost of each 777 jet.

Costing between $US250-to-$US270 million at current list prices, three of the planes are being financed by the US Government-owned Export Import Bank.

Macquarie suggests the arrangement may not have been a first choice for Virgin.

While it notes that Virgin had $602 million in cash reserves last October, the on-balance sheet financing of three new aircraft exposed the airline to residual risks.

It notes that aircraft values are continuing to fall and that secondhand prices will recede further.

Macquarie says that with debt financing for the three planes secured and start-up costs of $55-$65 million, the airline is unlikely to suffer cash shortfalls over the next two years, even after taking account of likely operating losses.

But it adds that non-core assets, such as the company's Brisbane head office and three unencumbered Boeing 737's could be sold as a potential source of capital.

Admitting that selling these assets might be difficult in the present market, Macquarie says they illustrate the "relative flexibility" Vigin Blue has if operating conditions detriorate further.

Airlines confront the worst earnings periods in aviation history, according to the International Air Transport Association.

IATA, the world body for airlines, reported last week that the sharpest falls were likely to occur in the Asia Pacific and US markets.

"2009 is shaping up to be one of the toughest years ever in international aviation," said IATA director general Giovani Bisignani.

He forecasts $US2.5 billion in losses by global carriers in 2009 with a total $US35 billion fall-off in revenues.