Cost base reset, management refresh; IPO sales pitch starts for Virgin Australia Mark II

Virgin Australia has reset its cost base and refreshed its management team Picture: iStock

Fund managers interested in the float of Virgin Australia are being told that the airline’s borrowings were just under $2bn at December, as debt becomes a key focus in the current market environment.

Virgin Australia is this week briefing overseas institutional investors as part of a non-deal roadshow for an initial public offering of the carrier around May.

Expectations are that owner Bain Capital will put a $3bn-odd equity value on the airline, and given the tough economic backdrop, may opt to list only a small stake of Virgin Australia in order to get a deal away.

It may also look to list the airline with a reduced debt level to draw interest, as Goldman Sachs UBS and Barrenjoey attempt to get an IPO away amid a backdrop where banks like Credit Suisse and Silicon Valley Bank faltering under financial pressure.

A slideshow presented to investors highlights how the Virgin Australia’s gross debt was $1.97bn at December, down from $5.15bn at June 2020, just months before Bain paid $700m in equity to buy Virgin Australia out of voluntary administration.

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The airline entered voluntary administration in April that year when its fleet was grounded due to Covid-19 and it had been saddled with large levels of debt after buying a 35 per cent stake in Velocity for $700m just months earlier to give it full ownership of its own frequent flyer program.

The loyalty program is Australia’s third largest, and it has 11 million members with 80 partnerships and Virgin Australia says it has strong cash flow generation and significant growth potential ahead.

In the past year, Virgin Australia, the country’s number two carrier with 19 million passengers and 7000 staff, has experienced bumper conditions, with strong airline demand in the aftermath of the global pandemic.

The airline hopes to capitalise on leisure passenger demand being above pre-covid levels, continued pent up demand and the reopening of China to inbound tourism.

While available seat kilometres have rebounded, they remain slightly below pre-covid levels.

Fund managers were told that the underlying earnings before interest and tax margin was 11 per cent at the first half of the financial year compared to 3 per cent in 2019.

This is while operating in Australia’s domestic aviation market - one recovering well and one of the strongest globally, Virgin Australia says.

It plans to take a rational approach to post-Covid capacity with focus on profitable recovery.

Other highlights include a reset of the airline’s cost base and a refreshed management team, led by former Jetstar boss Jayne Hrdlicka, with deep industry expertise.

As part of its restructuring, Virgin Australia has discontinued its loss making Tiger Brand and long haul international routes, redesigned the network to be a value carrier in a world with less business volume, over hauled IT systems and transformed its commercial process and selling strategy.

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Bain has simplified the mainline fleet to 737s and optimised the route network to profitable domestic and short haul international.

The presentation says that Virgin’s transformation is not yet complete, with multiple strategic drivers for further growth and upside.

It has a strong domestic network of 66 routes, and its targeted short haul international network is financially accretive.

Its charter business is a successful, low churn and stable business, the company says in its slide presentation.

Virgin Australia Regional Airlines is focused on charter airline services across remote and regional Western Australia, serving customers within the resources and energy industries along with government.

Earnings are stable and defensive, Virgin says, underpinned by long tenure customers with track record of renewals.

Virgin Australia is understood to be generating about $400m in annual net income.