Air wars: Virgin has wings clipped

Virgin Australia Holdings (ASX: VAH) has reported a net profit after tax of $23 million for the six months to December 2012, on revenues of $2.1 billion – less than half of the $52 million the airline reported in the previous period.

Showing how tough airlines are as a business, that’s a profit margin of just 1.1% – less than inflation and below the official cash rate of 3%.

Following Qantas Airways’ (ASX: QAN) announcement last week, that its domestic division posted a 34% fall in earnings before interest and tax (EBIT), Virgin has reported that its domestic division suffered a 43% fall in EBIT, as the battle for Australian passengers intensifies. With overcapacity of airline seats already, one wonders how sensible Virgin’s plan is to boost Tiger Australia’s fleet of planes from the current 11 to 35 over the next five years. Virgin is in the process of acquiring a 60% in Australia’s budget domestic carrier, but is awaiting regulatory approval.

The carbon tax also had an impact on earnings, with Virgin copping a $24 million bill.

As part of its strategy to increase its diversity, and potentially defray the impact of the tough domestic competition with Qantas, Virgin has regulatory approval to takeover regional player, Skywest Airlines (ASX: SXR), and is ramping up its attack on the corporate market – which is controlled by Qantas. Qantas estimates it has 84% of the business travel market.

Foolish takeaway

In the second half of the 2013 financial year, both Virgin and Qantas plan to increase domestic capacity by between 5 and 7%, suggesting the only winners in this battle will be passengers, with the prospect of ongoing cheap airfares.

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The Motley Fool’s purpose is to help the world invest, better.  Click here now  for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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