No stone left unturned in Virgin search for savings

Virgin Australia search all aspects of its business for savings in a review its capital structure.

Virgin’s market price for the past year.

Virgin Australia has embarked on a wide-ranging review of its capital structure in which it will search all aspects of its business for savings as the airline looks to boost its dwindling cash pile.

The review comes as the airline’s four major shareholders — Air New Zealand, Etihad Airways, Singapore Airlines and Virgin Group — agreed to hand over a 12-month $425 million loan to give the company’s balance sheet some breathing room as the review runs its course.

The capital review, flagged by The Australian last week, will be conducted by Virgin Australia’s in-house strategy team and assisted by investment bank UBS.

The review will primarily focus on how Virgin, after an intense period of investment to transform its business to battle Qantas’s dominance of the corporate and business markets, can find new sources of funding to continue growing. But it is understood Virgin’s ­review will also consider cost savings and new ways to eke out more operational efficiencies from its business and that no part of the airline’s operations will be placed in no-go zones.

“The board is focused on optimising the group’s balance sheet and capital structure to support the ongoing execution of its strategy and will lead a capital structure review,” Virgin Australia chairman Elizabeth Bryan said.

“The group has secured loan facilities from its major shareholders that provide a flexible source of funding while the review is undertaken.”

The announcement of the review and $425m loan sent shares in Virgin surging by more than 8 per cent yesterday to recover some ground from a 12 per cent slide on Friday.

Virgin’s share price dive on Friday came as the stock traded at more than 10 times its average daily volume. The ASX is now reviewing the fluctuation.

“ASX has been watching developments closely. As you know, we do not comment on any specific supervisory action that we may be taking. However, it is ASX practice to go back and review price movements and/or trading volumes after announcements,” an ASX spokesman said.

A spokeswoman for Virgin said the company could not comment on share price movements. She also did not confirm or deny that the ASX had asked for an ­explanation for the trade fluctuation.

The need to review Virgin’s capital structure comes after an intense period of transformation for the company, which has cast off its low-cost carrier facade to implement a full-service, two-class airline with upgraded product and lounges in direct competition with Qantas.

That transformation has helped underpin a strong half-year result for Virgin that was revealed last month when chief executive John Borghetti said the airline was on track to post a profit for the 2016 financial year and deliver a return on invested capital in line with its cost of capital.

However, analysts have not been thrilled with Virgin’s result and warned weakness in its operating cash flow, which came in at $10m at December 31, from $65m a year earlier, needed to rebound in the second half if the airline was to stay on track for a strong full-year profit.

All options to increase Virgin’s funding position would be explored in the capital review, including the possibility of the airline’s major shareholders increasing their stake in the ­company.

Air New Zealand owns just under 26 per cent of Virgin Australia, Etihad 24 per cent, Singapore Airlines almost 23 per cent and Virgin Group 10 per cent.

An increase in its major shareholders’ stakes is the most likely route for Virgin to shore up its capital position after Ms Bryan recently told The Australian that, given the volatility of the financial sector, it was not a good time to be raising money in international debt or equity markets.

The last time Virgin raised ­equity from its shareholders, in late 2013, its total cash balances were below $600m as the bloody ­capacity war with Qantas took its toll. Virgin then raised $349m in fresh equity and nine months later raised a further $336m by selling a 35 per cent stake in the Velocity loyalty program to Affinity Equity Partners.

However, it is understood that Virgin has no desire to sell off any more of its loyalty program.