Virgin to slash costs and raise a fresh $850m

Singapore Airlines looks to up its stake in Virgin as the airline flags a fresh capital raising and cost-cutting measures.

A Virgin Australia plane landing at Brisbane Airport. Photographer: Liam Kidston.

Virgin Australia will undertake an $852 million capital raising and an ambitious cost-saving program to boost its dwindling cash pile and repair its balance sheet.

The $852m raising will be issued as a 1 for 1 non-renounceable offer to shareholders at a price of 21c a share. Shares in Virgin closed trade yesterday at 29.5c a share.

A cost saving program that will see the airline reduce the number of its smaller capacity aircraft and “efficiencies” in maintenance and engineering roles, will see Virgin incur restructuring costs of as much as $250m along with non-cash balance sheet impairments of as much as $200m over the period to 30 June 2019.

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.

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

The decision to execute the $852m capital raising has come from the airline’s wide-ranging review of its capital structure. That review, which began in late March, came as the airline’s then four major shareholders — Air New Zealand, Etihad Airways, Singapore Airlines and Virgin Group — agreed to hand over a 12-month $425m loan to give the company’s balance sheet some breathing room as the review runs its course.

As part of its participation in the capital raising, HNA — China’s biggest privately owned airline — will be allowed to increase its stake in Virgin to 19.99 per cent to a maximum investment by the group of $US300m.

Singapore Airlines said it would spend up to $US200m to buy as many shares in Virgin as it could in the capital raising including those not taken by airline’s other major shareholders.

Singapore Airlines currently holds about 815m shares in Virgin or 23.1 per cent of the carrier. However, that stake will fall to 20.1 per cent when HNA receives regulatory approval to invest in the carrier meaning Singapore’s commitment to the capital raising will be about $171m.

However, the company said it was committed to increasing its stake through the purchase of any shares not bought up by its fellow shareholders in the capital raising to a maximum stake of 25.9 per cent.

“The commitment will enable the company to remain as a substantial shareholder of Virgin Australia, and is in line with the company’s intention to ensure that its stake in Virgin Australia is not significantly diluted as a result of the HNA Placement and the Virgin Australia Entitlement Offer,” Singapore Airlines said.

“The company is confident of the long-term prospects of Virgin Australia and is committed to supporting its long-term growth.”

If Singapore is to snap up extra shares in Virgin Australia, it could come from the absence of Etihad Airways in the capital raising.

Etihad, with a 21.8 per cent stake in Virgin (post the HNA dilution), said it remained a “long-term strategic investor and partner to Virgin” and that it was “fully committed to this partnership and to remaining as a shareholder.”

However, unlike Virgin’s other major airline shareholders, it has made no commitment to participate in the capital raising.

“We will continue to review our option to take up the pro-rata entitlement, and will announce our decision at the appropriate time,” an Etihad spokesman said.

The HNA top-up placement is subject to shareholder approval. Existing shareholders Singapore Airlines, Etihad Airways, Virgin Group and Air New Zealand have advised the Virgin Australia Group that they currently intend to vote to approve any additional top-up placement to HNA.

Proceeds from the proposed placement to HNA will be used to repay the outstanding balances of $425m loan to Virgin as well as other debt facilities.

The capital review was conducted by Virgin Australia’s in-house strategy team and assisted by investment bank UBS.

The review has focused on how Virgin, after an intense period of investment to transform its business to battle Qantas’s dominance of the corporate and business markets, could find new sources of funding to continue growing.

The review has also recommended that Virgin should reduce its aircraft fleet. This will see the airline reduce the number of its ATR aircraft and sell off all of its E190 aircraft over the next three years.

Virgin expects these moves will allow it to target net free cash flow savings of $300m per annum by the end of the 2019 financial year.

Virgin Australia boss John Borghetti said the new capital structure would strengthen the airline’s balance sheet, provide additional liquidity and help fund initiatives to improve earnings and cash flow.

“Additionally, the new program of operational and capital efficiency initiatives will further deepen our focus on having a low, sustainable cost base. Going forward, we will continue to stay focused on delivering an excellent customer experience to travellers in Australia and around the world,” he said.