Virgin Blue in new alert

DAYS after control of Australian discount airline Virgin Blue changed hands from founder Sir Richard Branson to transport group Patrick, the company has issued a profits warning - its third in six months - saying that earnings will fall next year as well as this.

Virgin Blue chief executive Brett Godfrey, widely expected to be dumped by the new owner, warned in January that 2005 profits would crash by up to 15% as the company failed to rise to the aggressive challenge by rival Qantas.

Now the company says US$70m (£36.8m) will be wiped off the 2006 result too, if jet fuel prices remain at or near their current record highs.

'The consequence of the rise in aviation fuel prices will be to decrease performance for the year to 31 March 2006 to a profit which is below that expected for the year to 31 March 2005,' Virgin Blue's acting chairman David Ryan said in a letter to shareholders. The group maintained its reduced 2005 financial year profit forecast.

Godfrey's earlier warning spurred Patrick boss Chris Corrigan to pounce on the company after its share price plummeted. He has been warning for months that the Branson strategy of slashing fares to gain market share was suicidal and the company should instead focus on profitable routes.

'We've tended to have a model, which was excellent for the times,' Corrigan said when asked about his plans. We now have a completely different competitive environment and we need to make some changes in that model.'

Branson's Virgin Group tried desperately to fight off his A$1.1bn (£455.3m) bid, but to no avail. Corrigan won 50.3% of the company last week and is expected to consolidate that hold as hedge funds cut their losses and sell their holdings.

Virgin Blue, once the darling of the local stock market, earned net profits of A$158.5m in 2004. In November, the airline reported a 2% dip in first-half net profits to A$63m. But competition from Qantas' no-frills arm Jetstar has continued to erode Virgin Blue's performance and full-year profits are expected to be as low as A$135m.

Trading conditions have worsened further since Patrick made its run. Fuel prices have risen by about 28% since then and the company is considering an increase in its fuel surcharge on tickets.

Ryan held out some muted hope of recovery. 'Virgin Blue is well positioned to benefit from improvement in market conditions, although when improvement will occur is not clear,' he said. 'There are risks associated with holding Virgin Blue shares.'