Airlines business Virgin Australia Holdings Ltd (ASX: VAH) has joined Qantas Airways Limited (ASX: QAN) in expecting to post a strong final quarter of 2014 on the back of a falling fuel bill and execution of a general cost reduction program.
For the quarter Virgin delivered an underlying profit before tax of $55.3 million, with a $7 million benefit from falling fuel prices in the quarter compared to the prior corresponding period. However, the statutory profit after tax which accounts for one-off costs and restructuring was $11.3 million.
The chief financial officer, Sankar Narayan, said the result represented a continued turnaround with some improvement in domestic trading conditions.
Virgin has been in a dogfight with Qantas for its share of the domestic corporate and budget travel markets, with both airlines posting big losses in recent reporting periods.
Virgin has also announced that it is to acquire the remaining 40 per cent of shares in Tiger Airways it does not already hold. Tiger has also been a loss-making operation recently and the acquisition price reflects this.
With full control Virgin will have a better shot at making it sustainably profitable, although investors should not hold their breath as Tiger Australia has only posted one profitable quarter since December 2010.
Virgin stock has climbed 1.5 cents, or 3.37% to 46 cents on today's news, presumably as investors bet it will continue to benefit from falling fuel prices and its cost-cutting strategy.
Given the competitive environment and capital-intensive nature of the business, Virgin does not look like a great long-term investment. It also doesn't pay a dividend and smart investors know the best investments are income payers with an outlook for growing profits and capital gains.
