May 16, 2019 / 11:23 PM / 4 months ago

UPDATE 2-Virgin Australia forecasts annual loss on softening demand; shares drop

* Virgin forecasts FY19 underlying loss of at least A$35.6 mln

* Weak domestic demand, rising fuel costs weigh

* Shares hit four-month low, Qantas shares also drop (Writes through adding market reaction, analyst quote)

By Tom Westbrook

SYDNEY, May 17 (Reuters) - Virgin Australia Holdings Ltd on Friday said it expected to swing back from profit to loss this financial year, hurt by softening domestic demand and rising fuel prices, sending its shares to a four-month low.

The announcement marks a sharp reversal for Australia’s second-largest airline, which posted its best half-year profit in a decade in February on the strength of that domestic business.

But the carrier said demand had flagged in both corporate and leisure sectors, weighed by weakness in consumer spending and business confidence as economic growth in Australia falters - an ill omen also for bigger rival Qantas Airways Ltd.

Virgin said the expected demand drop was enough to wipe out profit because costs had climbed. Its share price subsequently fell 8% in early trade to its lowest since January. Qantas shares fell as much as 3% to a seven-month trough in a rising broader market.

Virgin also said it has cut flights and is reviewing its network.

“Virgin’s outlook is worse than Qantas’,” Credit Suisse analysts said in a note to clients. “We expect both Qantas and Virgin to continue to manage and cut capacity to address the challenging conditions.”

BACK TO EARTH

Virgin has posted annual profit just twice in the past 10 years - most recently in 2018, which was followed by half-year results in February featuring strong profit and bullish remarks from outgoing Chief Executive Officer John Borghetti.

On Friday, Virgin said underlying earnings for 2019 will be at least A$100 million ($69 million) lower than the A$64.4 million it reported for 2018.

Revenue growth would slow to a crawl over the next two months, the airline said, with uncertainty around Australia’s election staying corporate travel growth. The forecast earnings drop includes annual fuel and foreign exchange “headwinds” in excess of A$160 million, it said.

“While we have continued to grow revenue, this announcement shows that our business needs to become more resilient,” said CEO Paul Scurrah. “In the meantime, we are focused on short-term improvements including capacity and network reductions.” ($1 = 1.4507 Australian dollars)

Reporting by Tom Westbrook in SYDNEY; Additional reporting by Ambar Warrick in BENGALURU; Editing by Richard Pullin and Christopher Cushing

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