In its second earnings downgrade in three months, Virgin's performance has highlighted a marked deterioration in the domestic airline market in the latter part of the financial year, which meant it could not raise fares to recoup higher costs.

The airline revealed it will now record an after-tax loss of $95 million to $110 million for the year to June, compared with a $23 million profit previously. It blamed factors including the carbon tax, stiff competition and a new booking system. Virgin concedes the disruption caused by the new Sabre system early this year meant it handed as much as $50 million in revenue to rivals such as Qantas and Jetstar.

Australia's second-largest airline said yearly earnings would also be weighed down by pre-tax losses of up to $10 million from Skywest, the WA airline it acquired in April.

Virgin chief executive John Borghetti singled out the carbon tax as a main reason for the earnings slump, saying he wanted to see it abolished. ''We have said all along … that this carbon tax is not recoverable in a weak economic environment. It is purely a cost on the business.''

Virgin will book up to $50 million in costs from the carbon tax.

Mr Borghetti said the airline had its unit costs under control but the ''issue here was revenue because of the economic environment and the competitive environment''.

''April, May and June were certainly very soft,'' he said, and leisure travellers needed ''a lot of stimulating'' to get them to spend, due to the economic uncertainty.

For 18 months Virgin has been battling Qantas in the domestic market, the core of its earnings.

The second half of the year is typically the weakest for airlines.

Excluding one-off costs and the Skywest loss, Virgin now expects a pre-tax yearly loss of $30 million to $50 million. That figure includes the cost of the carbon tax.

Virgin estimated the one-off restructuring and transformation costs would be about $100 million for the year to June, including $36 million it announced in the first half.

Despite the ''very difficult economic conditions'' in the second part of the financial year, Mr Borghetti said, demand had been stronger last month.

But Deutsche Bank analyst Cameron McDonald said Virgin was unlikely to deliver a ''much stronger than break-even result'' in the new financial year.

Hot on the heels of Qantas a week ago, Virgin announced it would raise fares and fuel surcharges in light of higher fuel prices, including a 3 per cent rise in the base fares on domestic flights.

Mr McDonald said Virgin would find it difficult to pass on the fare increases to travellers.

Mr Borghetti dismissed suggestions Virgin might have to consider a capital raising through a rights issue or share placement given the difficult trading conditions. ''We have no plans to do a capital raising,'' he said, refusing to detail Virgin's cash position until its its annual results briefing on August 30.

Shares in Virgin fell as much as 6 per cent following the downgrade, before the tightly held stock recovered to close down 2¢ at 43.5¢.