Virgin Australia has unveiled a $850 million capital raising alongside an new cost cutting program as part of a major corporate restructure.
And the ambitious cost-cutting program will see losses of up to $450 million generated over the next three years – to 2018-19. For that reason the airline is likely to produce a string of loss-making results, which shareholders will have to wear.
The losses will be incurred to produce a $300 million improvement in operating costs, according to the airline.
The shares ended down 12% at 25.7 cents, 4.5 cents above the issue price of 21 cents. Virgin shares closed at 30 cents on Tuesday.
The equity raising will be supported by shareholders Singapore Airlines, Nanshan Group, HNA, Air New Zealand and Richard Branson’s Virgin Group, although shareholder Etihad Airways will not take up its rights under the offer, the airline said in a statement to the ASX yesterday.
Virgin chief executive John Borghetti said Etihad was "still going through there internal processes and we haven’t received the outcome of their processes as yet.
“Obviously they need to talk to their board.They are evaluating it and going through their normal processes. I’m not concerned because the $852 million is underwritten,” he told media yesterday after the release of the announcement.
Around $425 million of the capital raised will be used to repay funds loaned to Virgin in March by its shareholders, with the rest to be used to strengthen the airline’s balance sheet.
The announcement comes just a week after Virgin raised $159 million by selling a 19.9% to private Chinese airline operator HNA Group.
Last week another Chinese conglomerate, Nanshan Group, purchased a 19.9% stake in Virgin from Air New Zealand.
Singapore, HNA, Nanshan and Virgin Group have also committed to contribute to the sub-underwriting of entitlements not taken up by other shareholders.
UBS, which has advised Virgin on the capital raising, is the sole underwriter on the capital raising.
Virgin also revealed plans to rationalise its fleet of aircraft to cut costs over the next three years, and will also attack the cost structures across its maintenance and engineering, procurement and supply chain functions and staffing.
Virgin is targeting net free cash flow savings of $300 million by the end of the 2018-19 financial year but expects the structure program will incur cash costs of $200-250 million, plus non-cash balance sheet impairments of $150-200 million over the three years to June 30, 2019.
Mr Borghetti said Virgin’s "renewed" capital structure "will strengthen our 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 to having a low, sustainable cost base,” he said.
For Mr Borghetti this is the last throw to get Virgin ship-shape.
