Virgin Blue to raise $231m, CEO quits

Virgin Blue launches equity raising of around $231.4 million to improve liquidity and provide increased financial flexibility

Virgin Blue has launched a fully underwritten equity raising of around $231.4 million to improve liquidity and provide increased financial flexibility.

CEO Brett Godfrey – who today confirmed his intention to retire in 2010 after 10 years’ leading the airline’s start-up – says it represents an opportunity to invest in "one of the industry’s most-expected airlines brands".

The equity raising consists of an institutional placement of 105.2 million shares to raise $21 million; and a one-for-one renounceable pro-rata entitlement offer to raise $210.4 million. Both are at an offer price of 20 cents a share.

The offer is fully underwritten by Credit Suisse and JP Morgan.

By using the proceeds to improve liquidity and provide increased financial flexibility, the Brisbane-based airline will be in a position to quickly pursue growth opportunities when market conditions improve, including flying new routes and the purchase of aircraft on favourable terms, Godfrey says.

Already this financial year Virgin Blue has invested $850 million in the business and expanded its network with the launch of 22 new routes. It has also achieved sustainable cost reductions.

"These initiatives, combined with the proceeds of this capital raising and our new code-share agreement with planned joint-venture alliance with Delta Air Lines, will ensure we are well placed to move quickly to participate in the upside as markets recover," he says.

Excluding one-offs, the underlying trading result for financial year 2009 – including VAustralia – is expected to come in between break-even and a $10 million loss after tax, earned on slightly higher revenue of $2.63-2.64 billion.

Godfrey says the airline’s short-haul operations are expected to make a net profit after tax of $25-30 million, reflecting a strong performance in what has been aviation’s most challenging period.

This has been achieved by cutting capacity growth to 4.5 percent against a budgeted increase of more than 20 percent, as well as deploying aircraft to international short-haul markets. All up, the airline delivered cost savings of $80-90 million in FY09.

Load factors have held up at 79.1 percent, down only 1.4 percentage points over the prior year, while capacity is expected to decline a further 5 percent in financial year 2010 and remain flat the following year.

While yield for the short-haul business fell by 2.4 percent for the year, with the exception of May and June which showed improvement, Virgin Blue’s business fared better than rivals which have reported greater yield declines to date. Market share rose by 0.6 ppts to 30.7 percent as at May 31.

In contrast, the airline’s long-hail business, VAustralia, is forecast to post a trading loss of $30-35 million for the year ended June 30, 2009, with a further $60-65 million in associated start-up and foreign exchange losses.

Encouragingly, load factors are expected to exceed 75 percent for July 2009.

Godfrey says the planed alliance with Delta will further enhance the competitive position and future profitability of VAustralia, with group cash flows expected to be sufficient to fund the losses forecast for FY10.

Financial instruments expenses – that is, the non-cash cost of ineffective fuel and currency hedges – are predicted to hit $90-95 million for the year.

Following the equity raising, the group’s cash balances are expected to increase from $475 million to around $705 million on a pro-forma basis.

In addition, the company’s asset realisation program has already delivered $133 million to date through the sale and lease back of unencumbered aircraft, with a further $215 million targeted in 2010.

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