S&P downgrades Virgin Oz as Rex reports profit fall

February 28, 2020
Photo: Rex.

The Australian aviation industry’s uncertain outlook was reinforced Friday when S&P Global Ratings downgraded Virgin Australia’s outlook to negative and Regional Express reported a 30 percent fall in profit.

The rating agency expects Virgin to be hit by a combination of issues — the COVID-19 outbreak, bushfires and a softer economy — that have reduced passenger demand in Australia.

It downgraded Virgin from stable to negative on concerns these factors would affect earnings and push its earnings-to debt ration beyond 6X for the full year.

READ: Coronavirus delivers “ridiculously good” $NZ69 Tasman fares.

This was despite moves to reduce capacity, exit loss-making routes and accelerate cost reduction.

But there was hope that the financial cloud could lift in the 2021 financial year.

“In our view, the length and severity of COVID-19 will largely determine Virgin Australia’s earnings recovery,” S&P said.

” At this stage, we expect the bulk of the COVID-19 fallout to occur over the first two quarters of calendar 2020.

“This implies that external conditions should recover in fiscal 2021. In addition, we expect benefits of the group’s transformation program to flow through earnings for fiscal 2021.”

Separately, Australia’s biggest independent regional airline blamed the nation’s worsening economic malaise for a 30 percent fall in interim after-tax profit but expressed confidence it would weather the storm.

Regional Express saw its net profit fall from $9.8 million last year’s first half to $6.9 million in the current period, despite a 1.5 percent rise in group revenue to $166.2 million.

Passenger numbers for the half fell almost 1 percent to 659,053 and the load factor fell 1.7 percentage points to 62.5 percent.

However, average fares were slightly higher at $A223 and fuel costs fell by 1.5 percent.

The airline group had predicted the fall at its annual meeting but said in its second-half outlook that it hoped profits did not fall further.

On the plus side, it predicted longer-term tailwinds would come from an NSW Air Ambulance contract awarded in February and that it would benefit from the acquisition of a pilot academy in Victoria.

“Since the start of the financial year, the economy was severely impacted by the US-China trade war with a series of natural disasters further compounding the situation,’’ chairman Lim Kim Hai said.

“The very weak AUD also impacted earnings severely.”

“Although earnings were down by 30 percent in 1H FY20, we believe that the Rex Group remains fundamentally strong to weather the temporary setback.

“The devastating bush fires of the last three months and the COVID-19 outbreak since the end of January did not appear to have a very big impact on regional travel on Rex’s network.”

Although the airline expects the bushfires and COVID-19 outbreak to have “a significant negative impact” on the economy in the second half of fiscal 2020, it said the environment was too volatile to give an accurate forecast.