The shares of Virgin Australia Holdings Ltd (ASX: VAH) have been an early mover this morning following the release of its second-quarter trading update.
In early trade its share price is down 2.5% to 20 cents after the airline revealed yet another weak quarterly performance.
Unfortunately the subdued domestic demand which has plagued Virgin and rival airline Qantas Airways Limited (ASX: QAN) in the last 12 months has persisted, leading to a 38% drop in second-quarter underlying profit before tax.
For the quarter Virgin Australia posted underlying profit of $45.9 million, down from the $73 million it delivered in the prior corresponding period.
The company has attempted to combat the difficult trading conditions and limit the damage to its bottom line by actively managing capacity. During the quarter the airline reduced the total sectors flown domestically by 5% year on year.
But this reduction isn't going to stop the airline from posting a disappointing full-year result. Management has forecast an underlying earnings before interest and tax (EBIT) margin of between 3% and 6% for the 2017 financial year.
The way things are going for its domestic business, I can't help but expect to see its EBIT margin coming in at the low end of the range provided.
In fact, it could even come in lower than that if OPEC's decision to limit oil output results in higher oil prices this year. This would almost certainly eat into the margins of both Virgin Australia and Qantas.
For this reason I would suggest investors give Virgin Australia a wide berth and focus on other areas of the market instead.
