Virgin Australia counts the cost of restructure

Virgin will take a one-off $450m whack to its full-year profit as it feels the pain of an expensive restructure.

Virgin CEO John Borghetti says cuts will involve all areas of the company. Pic: Hollie Adams

Virgin Australia will take a one-off $450 million whack to its full-year profit result as the airline begins to record the financial pain of an expensive restructure and cost-cutting program.

The airline (VAH) has recorded $100m in restructuring costs and as much as $175m in non-cash balance sheet impairments from its massive, three-year cost saving program that will see Virgin sell underused aircraft, rationalise its supply chain and reduce jobs across crew, ground, maintenance and engineering operations.

Virgin has decided to record those costs in the last quarter of the 2016 financial year so they don’t weigh on the airline’s balance sheet going forward.

Another $175m in restructure costs and asset writedowns that were recorded earlier this financial year will mean the airline will take a hit of as much as $450m in its full-year result.

Despite the one-off costs, Virgin still expects to post an underlying profit before tax of between $30m to $60m for the 12 months to June 30.

Virgin is expecting to bank annual savings of as much as $300m from the end of the 2019 financial year as a result of the wideranging cuts that its chief John Borghetti has said would involve “all areas of the company”.

Those savings will mostly be born from the reduction of Virgin’s ATR aircraft and the sell-off of its Embraer 190 fleet used on regional routes. Aircraft fuelling costs and the crews needed to man, maintain and operate the planes remain the biggest expense on Virgin’s books.

As part of the restructure Virgin today revealed that it will attempt to sell the entire fleet of Airbus A320s used by its low-cost carrier Tigerair. Those 14 A320s will be gradually replaced with Boeing 737-800s from Virgin’s fleet.

The details of Virgin’s fleet changes and restricting costs came as the airline revealed the terms of its $852 million capital raising that will be used to boost its dwindling cash pile after years of heavy investment to cast off its low-cost carrier facade and transform into a full-service airline with enough corporate class to take on Qantas.

The $852m raising will be issued as a 1 for 1 non-renounceable offer to shareholders at a price of 21c a share.

At the time of the announcement, the share offer represented a 28.8 per cent discount to Virgin’s closing price of 29.5c on June 14. But shares in Virgin have since fallen and are now trading at around 20c.

The capital raising will be used to repay a $425m loan to shareholders and tackle the $3bn in debt that Virgin carries on its books.

Virgin’s major shareholders — Singapore Airlines, Virgin Group and its newest additions HNA and Nanshan group — have made commitments to participate in the capital raising. Virgin’s other major shareholder Etihad, however, has made no commitment.

Eligible shareholders will be able to participate in the capital raising from July 11. New shares will be fully paid and rank equally with Virgin’s existing ordinary shares.