Virgin Australia to raise $852m, cut cost and pare debt

Virgin Australia will raise $825m in fresh equity and has promised to cut costs and repair its balance sheet.

Raising commitment

Virgin Australia boss John Borghetti has pledged he will not “slash and burn” jobs at the airline as the carrier announced a $1 billion capital raising and a three-year cost-cutting program to repair its balance sheet and chip away at its mountain of debt.

The airline yesterday announced plans to tap its shareholders for $852 million in fresh equity in a bid 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.

With the recent deal to give Chinese conglomerate HNA a 13 per cent stake in Virgin’s for $159m, the total capital raising will exceed $1bn.

The capital raising was larger than some analysts had expected, with Morgan Stanley estimating ­Virgin would require $700m, but Mr Borghetti said the quantum was needed to repay a $425m loan to shareholders and tackle the $3bn in debt carried on its books.

“A lot of our initiatives have been funded over the last five years through debt. It is now time to strengthen the balance sheet and deleverage the company,” he said.

The capital raising will precede a three-year program to cut costs that will see Virgin sell under-used aircraft, rationalise its supply chain and reduce jobs across crew, ground, maintenance and engineering operations.

The cost cuts and balance sheet surgery will result in some financial pain for Virgin, which said it expected to incur restructuring costs of as much as $250m as well as non-cash balance sheet impairments of up to $200m over the three years June 2019.

But Mr Borghetti and his chief financial officer Geoff Smith said the impairment charges would not affect the airline’s underlying profit before tax forecast for this year of between $30m and $60m.

“The restructuring charges are excluded from our underlying earnings and won’t be considered part of those underlying earnings going forward. But the benefit that the program will deliver will drive earnings growth into the future,” Mr Smith said.

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 wide-ranging cuts that Mr Borghetti 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 we transform the fleet there will be a realignment of jobs. Management structure will be reviewed as well,” Mr Borghetti said.

“Yes, there will be some positions that will become redundant, just as there have been over the last five years as job descriptions have changed and structures have evolved. The same situation will be the case in this program (but) it’s an evolution not a slash and burn.”

The $852m raising will see Virgin sell new stock at 21c apiece for every share already owned. 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 Tuesday. But as investors punished Virgin yesterday over the large raising, that discount whittled away to 19.2 per cent.

“We see Virgin is raising capital more than needed but at a heavily discounted price providing some cash buffer,” said Citi analyst Anthony Moulder.

“We see the equity raising to be used to repair the balance sheet, and not for competitive purposes as with previous raisings.”

Virgin’s shareholders Singapore Airlines, Virgin Group, Air NZ and its two latest Chinese ­investors — Nanshan Group and HNA — all committing to buy into the raise. But the largest holder, Etihad Airways, did not make a commitment to participate.