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Virgin unable to take off

Having cited poor economic and trading conditions, Virgin Australia Holdings (ASX: VAH) – Australia’s second largest airline behind Qantas Airways (ASX: QAN) – has downgraded its annual earnings guidance, sending shares in the company into a nose-dive.

Whilst the company recognised a 5% increase in revenue in its half year report for the six months ending December 31, it also announced a 56% fall in net profit after tax (NPAT), due to the high costs involved in implementing its new Sabre reservation system in January. However, CEO John Borghetti also told investors that he expected underlying profit before tax for the year to exceed last year’s earnings, on the back of a strong second half.

Rather embarrassingly, the company has also backtracked on its profit guidance, and stated that it is no longer likely to exceed last year’s result of $82.5 million, resulting in Virgin’s shares falling to as low as 39.5c – 14.1% below their value at market close on Wednesday.

In its trading update, Virgin said: “The adverse impact to revenue from the introduction of the Sabre system in the third quarter is not likely to be recovered by the end of FY13, given the slower than anticipated improvement in trading and economic conditions.”

The Australian reported that whilst analysts were expecting underlying profit before tax to be between $62-83 million, that will now likely also be downgraded.

Coming as little compensation to investors was the company’s announcement that it still expected to record positive fourth quarter earnings. Furthermore, Virgin is anticipating having completed its 60% purchase of budget airline Tiger Airways by July this year.

Foolish takeaway

Air New Zealand (ASX: AIZ), which has a 19.99% stake in Virgin along with a code sharing agreement, has performed significantly better than its counterpart over the past 12 months. Compared to Virgin’s 7% loss, Air New Zealand’s share price has gained 82%. With a 5.7% dividend yield and the best looking debt to equity ratio out of the big 3 airlines, Air New Zealand may be a safer place for your money.

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More reading

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 contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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