Virgin Blue to go international

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[ 5th option for US - Australia/NZ? possible. -Ed. ]

http://www.theage.com.au/news/busine...685752919.html

Virgin Blue profits fund international flights

Rod Myer
December 14, 2006

VIRGIN Blue has used a confidence-building profit upgrade to commit to
flying internationally by late 2008 using wide-bodied planes.

On the day Qantas rejected an $11 billion private equity offer and
Virgin Blue's major shareholder, Toll Holdings, announced a huge
restructure, the airline told the market it was expecting a 40 per cent
jump in net profit to more than $158 million for 2006-07. Last year's
result was $113 million.

Like Qantas, which two weeks ago said its result would be up 30 per
cent, not flat as previously expected, Virgin Blue is making hay in an
environment of relatively weak oil prices and strong passenger demand.

"The revised forecast follows an improvement in market conditions and
the airline's performance as a result of initiatives under its New
World Carrier strategy," the company said in a statement. The New World
Carrier strategy is based on building a low-cost airline with access to
high-margin business traffic as well.

The Virgin Blue board has now approved plans to launch international
operations provided it gains regulatory approval. Under the offshore
strategy, the airline will initially introduce three wide-bodied jets
to fly on the US route. Flights to Asia are expected to follow quickly.
The airline is negotiating with major manufacturers to acquire three
wide-bodied jets, either the Boeing 777 or Airbus A340.

Analysts were surprised at the strength of the Virgin upgrade.
CommSec's Adrian Lemme said it was "more than we forecast . their
earnings are very sensitive to fuel pricing as they have till recently
had lower hedging than Qantas".

The market added to recent gains in Virgin Blue shares, pushing them up
another 3? to $2.18. The stock is up 20 per cent in the past month,
with most of the gains coming since the announcement of the potential
Qantas bid.

Virgin's mooted launch of offshore services in late 2008 depends on
successful negotiations with the US. Under Australia's bilateral
airline treaties with the US, Virgin has rights to four weekly flights
to Los Angeles.

However, managing director Brett Godfrey has said there will be no
service unless this is raised to at least seven. Negotiations are under
way.

Deutsche Bank analyst Jason Bloom said Virgin Blue had already overshot
his price target of $2.10. To continue its growth path, the airline
needed to do a tie-up with a major international carrier such as Air
New Zealand, Singapore Airlines or Virgin Atlantic, Mr Bloom said.

That would allow it to develop a feed of high-margin business-class
passengers into its domestic network. Without a tie-up and membership
of Star Alliance, the competitor to the OneWorld international
alliance, which includes Qantas, Virgin Blue is unattractive to
business customers. Mr Bloom said this was because businesses wanted to
do all flying with one air network to allow seamless use of frequent
flyer points and travel lounges.

Toll Holdings, the airline's 62.4 per cent major shareholder, did not
announce any change in the structure of its Virgin Blue holding with
its restructure. "We will continue to extract added value from the
airline," said Toll chief Paul Little.

BL.
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