DEUTSCHE BANK: Qantas And Virgin Will Make A Combined $818 Million Loss This Year, No Profits Until 2016

Qantas and VirginGetty / Ryan Pierse

Virgin Australia has been hammered on the market this week, falling in value by up to 16% yesterday amid analyst downgrades and some unusual trading patterns which prompted questions from regulators.

It can’t explain the trading (the stock was up some 7% today) but the company said this morning it expected to post a loss in line with analysts’ forecasts of $49 million for the first half of the year.

The capacity wars in Australian skies between Qantas and Virgin is proving bruising for both companies. Deutsche Bank also reduced its forecast today for Virgin for the half from a $27.5m profit to a loss of $46.2m, projecting a loss of $207.4m for the year.

Combined with anticipated losses for Qantas, DB is now anticipating a combined loss of $818 million for FY14 for the two major airlines. In a note today analyst Cameron McDonald wrote:

We always thought it was a $1b market – just not a -$1b market!

Today’s downgrade sees our forecast for the two major airlines total a FY14 pre tax loss of -$818m. This is a far cry from our estimate of circa $1bn of available profit to be made from the domestic market during times when supply and demand are balanced (market profit to be shared among the individual airlines). At this stage we struggle to see how the airlines will reverse these losses in FY15 and currently forecast them to make a combined pre tax loss of -$282m before reaching profitability in FY16.

The aviation sector especially prone to external shocks like oil price changes and currency fluctuations. The challenges facing the sector make for an interesting backdrop for Qantas management’s return to Canberra lobbying next week.

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