Virgin Australia is raising $1 billion in new equity

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Virgin Australia is raising more than $1 billion in equity as well as targeting deep cost cuts of $300 million a year from aircraft retirement, crew, catering and maintenance.

In early trade, Virgin’s shares dropped more than 14% to $0.252 in reaction to the news.

Australia’s second domestic airline today announced the result of a capital structure review and implementation of a new operational and capital efficiency program.

The moves are designed to strengthen Virgin’s balance sheet, improve earnings and cash flow and support new opportunities for growth.

Virgin announced an equity raising of about $852 million through a 1 for 1 entitlement offer to shareholders at $0.21 a share, a 28.8% discount to yesterday’s close of $0.295.

Singapore Airlines, HNA Innovation and Virgin Group have also made binding commitments to contribute to the sub-underwriting of entitlements not taken up by other shareholders.

In total, the latest offer and the previously announced placement to HNA Innovation for $159 million will raise $1.011 billion in new equity capital.

Last month Virgin announced that HNA Aviation Group, China’s largest private airline operator, is buying a 13% stake in Virgin at 30 cents a share.

The shares last traded at $0.29.

Restructuring

Virgin will also implement a new cost cutting program, including the removal of all E190 aircraft from the fleet over the next three years.

The target is cash flow savings increasing to $300 million a year by the end of the 2019 financial year. The restructuring costs are expected to be between $200 million and $250 million.

Based on the latest half year operating spending of $2.56 billion, the $300 million target represents about 5.8% of full year costs.

The areas named for “efficiency initiatives” include maintenance and engineering, crew, ground operations, fuel handling and catering.

Cost cutting since 2013 has already resulted in an accumulated $408 million in annual overheads being stripped from the business.

“Our renewed capital structure will strengthen our balance sheet, provide additional liquidity and help fund initiatives to improve earnings and cash flow,” says CEO John Borghetti.

“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.”

In February Virgin posted a $62.5 million half year profit compared to a loss of $47.8 million the year before. The result, an improvement of $110.3 million, was the strongest since the first half of 2010.

Revenue was up 11.8% to $2.7 billion, reflecting a strong performance by Virgin’s domestic operations following the end to the seat war with Qantas.

Virgin has been positioning itself as more of a full service competitor to Qantas. It has a target of 30% of domestic revenue from corporate and government travellers by the end of 2017.

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