Virgin Blue Needs to Raise Airfares, JPMorgan Says (Update1)

June 5 (Bloomberg) -- Virgin Blue Holdings Ltd., Australia's second-biggest airline, needs to raise airfares atleast 10 percent, rather than sell new stock, if it wants to remainviable, analysts at JPMorgan Chase & Co. said.
Record fuel prices mean the ``ideal scenario'' is for theBrisbane-based carrier to implement a 10 percent price riseimmediately, analysts Matt Crowe and Russell Crichton-Browne said in a report to clients today.Increasing fares 5 percent this year and in 2009 would save VirginBlue, although leave the company with a ``not very attractive''growth profile.
``If jet fuel stays at current levels for several years and VirginBlue cannot significantly increase fares it would not survive,''Crowe and Crichton-Browne said. ``Equity injections would be futileas prices would not cover costs. Even with A$1 billion ($957million) in equity Virgin Blue would not remain solvent.''
Virgin Blue , 62 percent-owned by Toll Holdings Ltd., slashed its fiscal 2008earnings forecast in April as jet-fuel prices more than doubled inthe past year. Virgin Blue increased fares last month and largerrival Qantas Airways Ltd. cut routes and reduced its fleet size as airlines try to limit theimpact of fuel costs.
Shares of Virgin Blue rose 3.5 Australian cents to 63.5 cents at the 4:10 p.m. marketclose in Sydney, valuing the company at A$668 million. The stockhas slumped 70 percent this year and reached a record low of 60cents yesterday.
Heather Jeffery , a spokeswoman for Virgin Blue, didn't return a message left onher cell phone by Bloomberg.
Industry Losses
Jet-fuel prices reached a record $173.55 a barrel in Singapore May 27. Airlinesworldwide may report combined losses of $6.1 billion this year, theworst since 2003, as spiraling fuel costs and slowing economieswipe out earnings, the International Air Transport Associationindustry group said June 2. The group cut the earnings forecast forthe fourth time in nine months.
UBS AG analysts this week said the Virgin Blue is ``currentlylosing money'' and has been unable to raise prices as much as itwants because of excess airline capacity in the Australian market.
Toll Holdings, Australia's biggest freight company, scrapped plans to sell itscontrolling stake in Virgin Blue in April. Richard Branson 's Virgin Group holds a 25 percent stake.
Qantas today said it will reduce routes to Japan and the U.S. andcut jobs in response to surging fuel costs. Last month theSydney-based carrier said it will eliminate some domestic services.
To contact the reporter on this story: Robert Fenner in Melbourne rfenner@bloomberg.net Last Updated: June 5, 2008 02:30 EDT