Days after the broker UBS warned the airline could need a cash injection from its shareholders in 2009-10, if jet fuel prices fail to retreat, JPMorgan said a capital raising would be "pointless'' and would fail to keep the airline solvent.
"A 5% [air fare] rise is not enough to cover fuel costs. A $500 million equity injection would buy some time in hope that fuel costs fall but if fuel did not fall Virgin Blue on our analysis would eventually become insolvent despite the equity injection,'' the broker said.
If fares do not rise, JPMorgan predicted the airline's negative cash flows would result in its net debt to spiral from $1 billion to $3.2 billion by 2015.
The only way to "save the company'' JPMorgan said would be for Virgin Blue to impose a 10% fare increase.
"While we would expect Virgin Blue to survive under this scenario, its earnings profile hardly looks attractive,'' the broker said, noting the airline's profit would never reach its 2006-07 record net profit of $232 million.
Even in this situation, JPMorgan said Virgin Blue would post a meagre $30 million profit next financial year.
The main obstacle Virgin Blue has in raising fares is the likely impact of demand and its ability to fill its growing fleet.
If Virgin Blue raises fares, it could be forced to cut some aircraft out of its fleet to deal with the likely fall in demand. The airline has 33 jets on order.