The Virgin Australia Holdings Ltd (ASX: VAH) share price is currently trading at a 10-year low after closing more than 17% lower last Friday. Shares in Australia’s second-largest airline have tanked on the back of a combination of issues, including heightened fears of a coronavirus pandemic.
Here’s a closer look at what’s moving the Virgin share price and whether you should buy shares in the airline for the long term.
Analysts downgrade outlook
Global ratings agent S&P Global recently released a research report on Virgin Australia that provided a revised, negative outlook for the airliner on the back of an industry downturn. In the report, analysts cited that Virgin has faced a combination of issues including prolonged bushfires, soft economic conditions and the latest coronavirus outbreak. As a result, Virgin Australia has been on the receiving end of reduced domestic passenger demand.
According to the report, Virgin Australia is at risk of exceeding a debt-to-EBITDA ratio of 6, despite the airline’s initiatives to reduce costs and simplify its routes and fleet. As a result, analysts revised their outlook on Virgin Australia from stable to negative with industry conditions expected to impact the company’s earnings profile.
How has Virgin performed?
Late last month, Virgin posted a weak half year report for the 6 months ending 31 December 2019. Despite a 1.5% increase in revenue of $3.1 billion, the airline recorded an interim loss of $88.6 million, down 220% from the prior corresponding period.
Management cited weak trading conditions and high airport charges, fuel and oil costs as factors weighing on the airline’s first half performance. To add salt to the wound, Virgin also estimated that the coronavirus outbreak will cost the company between $50 and $75 million of its second half earnings. In a bid to lower its cost base, Virgin has plans to axe services run by its budget airline Tiger Air and shrink its fleet.
Should you buy?
There is a possibility that analysts could revise their outlook for Virgin Australia to stable if the company executes on its operations strategy and improves its debt-to-EBITDA ratio. In saying that, I would not advocate buying shares in Virgin Australia at the moment.
Instead, weakness in Virgin Australia’s share price could impact other companies in the sector. As a result, investors could see potential buying opportunities in other airliners such as Qantas Airways Limited (ASX: QAN) and Sydney Airport Holdings Pty Ltd (ASX: SYD). However, given the volatility we have seen recently, the most prudent strategy would be to keep stocks in the travel industry on a watchlist and wait for price action to improve.
Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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