Virgin Blue shares have plunged by more than 20 per cent after the carrier posted a 55 per cent drop in annual profit due to higher fuel prices and warned of a challenging year ahead.

Virgin Blue fell 32.5c, or 27.9 per cent, to 84c.

The cut-price airline booked yesterday a net profit of $97.7 million for 2007-08, down from $215.8 million in the previous year.

Australia's second-biggest airline said it would face its most difficult operating environment this financial year, but was still expecting a positive result from its two key business units.

Chief executive Brett Godfrey said, ''Pacific Blue and Virgin Blue ... we expect those to be profitable.''

Virgin Blue's new long-haul offshoot, V Australia, is expected to break even within 12 to 18 months, after its launch this coming December.

Virgin Blue said the business's key drivers fuel costs and capacity demand remained highly volatile.

''The current fuel prices have swamped the industry [to a greater degree] than SARS [sudden acute respiratory syndrome, which broke out in 2002] and 9/11 combined.''

Mr Godfrey said Virgin Blue's fuel bill would increase by $250 million in the current financial year.

The fuel bill for 2007-08 was $589million. It paid an average of $95 a barrel, 17 per cent more than a year earlier.

Mr Godfrey said, ''During the second half to June, jet fuel, in particular, broke more records than the Australian swimming team.''

Virgin Blue said its balance sheet remained strong and it required no extra equity funding.

During 2007-08, the company's business was affected by slowing economic growth in Australia, which affected traveller numbers, and by unprecedentedly high oil prices.

Oil prices peaked at $US147.27 a barrel on the New York Mercantile Exchange last month.

The carrier's total revenue increased by 8.4 per cent to $2.35billion. But earnings per share fell by 54.9 per cent, from 20.6c to 9.3c, mostly due to record high fuel costs putting pressure on margins.

Mr Godfrey said, ''With fuel costs at never-before-seen record highs for much of the year and airlines around the world struggling to cope, this result is a testament to our team and business model. We have implemented a range of measures in recent months to mitigate the impact of increased fuel costs.''