Australian discount airline Virgin Blue said its annual net profit fell 13 percent, cut by increased competition and a 60 percent rise in fuel costs.
Profit is expected to be lower again this year as Virgin pays more for fuel and as it competes with Qantas Airways and its no-frills carrier Jetstar.
Virgin's yields fell 5.6 percent in the year to end March.
Under the guidance of Chris Corrigan, Chief Executive of majority Virgin Blue shareholder Patrick Corporation, Virgin Blue is targeting higher fare business and government customers to counter a sharp capacity increase in the domestic market, where Virgin earns 92 percent of its revenue.
"It was a very, very tough year for us. We came down a peg in our expectations," Chief Executive Brett Godfrey told reporters. "This year, we quite frankly start behind the eight ball," he said.
The airline, which warned in January its 2005 profit would fall 10 to 15 percent due to "sluggish demand," has no hedging protection against oil price rises. It said in March its 2006 profit would be slashed by around USD$70 million after tax if record aviation oil prices persisted.
Virgin forecast capacity growth of around 12 percent and passenger demand growth of 7 to 9 percent this year.
Patrick, which releases its first-half earnings on Thursday, owns around 62 percent of the airline after a takeover bid earlier this year. Richard Branson's Virgin Group holds a 25.6 percent stake.
The no-frills carrier earned AUD$138.1 million (USD$104.4 million) in the year to March 31, compared with AUD$158.5 million (USD$119.8 million) in 2004. Revenue rose 22 percent to AUD$1.67 billion (USD$1.26 billion).
Virgin has snared about a third of the domestic market from its main competitor, Qantas, but Qantas has fought back by launching no-frills Jetstar.
Virgin now plans to pull business passengers with new airport lounges, refundable fares, priority check in, improving take-off timings and frequency of flights, and new routes, Godfrey said.
"If Jetstar's going to try and eat your lunch, you've got to take some of Qantas' dinner," Godfrey said.
Involvement from Patrick was "taking us from... a leisure player to being a serious new world airline, or a value-based proposition, as opposed to a cheap-as-chips (carrier). We're not like Jetstar," he said.
Virgin expected to decide within 12 months whether to introduce a loyalty scheme, a proposal Godfrey said was "on the front burner" but had to prove itself cost-effective.
While Virgin would continue with a user-pays strategy -- resisting "giving away hot foods and newspapers" -- it wanted to raise awareness that it could compete with the full-service Qantas offering.
"We do have leather seats, we do have just as much seat room in the front of the plane as Qantas," Godfrey said.
Virgin was considering flying to the US, pending government competition rulings on the Sydney to Los Angeles route. A Virgin team looking at Asia was disbanded this month after talks on a low cost airline in the Chinese gambling enclave of Macau were abandoned.
