Virgin Australia facing heavy loss after overhaul costs

A Virgin Australia Boeing 737-800 at Wellington International Airport. Photo /  Mark Mitchell
A Virgin Australia Boeing 737-800 at Wellington International Airport. Photo / Mark Mitchell

Virgin Australia will book a big annual net loss after disclosing it will cost as much as A$450 million ($471 million) to get the airline's house in order.

Australia's second biggest airline is streamlining its fleet by removing smaller planes and cutting jobs and debt as it targets the Chinese market for growth.

Virgin announced the latest restructuring costs as it launched its previously flagged A$852 million capital raising, which is in addition to a recent A$159 million share placement to China's biggest private airline operator, HNA Group.

The airline will spend around half of A$1.01 billion in new equity capital on repaying a shareholder loan from Air New Zealand, Etihad Airways, Singapore Airlines and Virgin Group. The remaining capital will be used to pay down debt and improve operations.

Virgin reaffirmed its guidance for pre-tax underlying profit of A$30 million to A$60 million for the year ended June 30, but its bottom line will be hit by costs and writedowns of between A$410 million and A$450 million.

That includes A$100 million of fourth-quarter restructuring costs, and A$155 million to A$175 million of non-cash impairments associated with a three-year cost-cutting programme announced by the carrier last month. The remainder of the costs and writedowns confirmed include A$59.4 million already announced in the group's interim results, plus an additional A$100 million to A$115 million related to an overhaul of its fleet.

Virgin unveiled its restructuring plans on June 15 following a three-month review of its finances, shortly after two major Chinese companies bought shares in the Brisbane-based carrier. At the time, the company said it would spend between A$200 million and A$250 million on restructuring costs, and to incur between A$150 million to A$200 million in non-cash impairments over the next three years.

Virgin expects net free cashflow savings to increase to A$300 million annually by the end of fiscal 2019 as a result of its cost-cutting.

Chinese conglomerate Nanshan Group, which operates Qingdao Airlines, recently snapped up a 19.98 per cent stake in Virgin from Air New Zealand for A$301.4 million.

At the end of May, Virgin and HNA struck a strategic commercial alliance under which the two companies will start direct flights on the increasingly busy China-Australia route from next year.

HNA bought a 13 per cent stake in Virgin for A$159 million, with plans to increase its share to 19.99 per cent over time. Virgin swung to an interim net profit of A$45.7 million from a year ago as it benefited from 12 year-low oil prices and higher domestic airfares.

- AAP

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