Virgin Australia Holdings [ASX:VAH] has come a long way. Over the past five years Virgin has evolved from a low cost carrier to a diversified airline group. Yet the airline industry is a harrowing environment to be in. In an article in Time Magazine published last year, they stated that airlines might only make $8.27 per passenger. And this is an average; sometimes it’s even lower.
A major driver of profits actually isn’t passengers at all. Fluctuating oil prices can sometime increase or decrease profits dramatically. This is why airlines put so much money into hedging oil prices.
But sometimes airlines need a little more help from their shareholders. And this is why Virgin has secured a new 12 month loan totalling $425 million. The funds are not coming from banks but from other airlines, who happen to be shareholders. New Zealand Air, Etihad Airways, Singapore Airlines and Virgin Group all contributed towards the $425 million total.
The loan is the first step in Virgin’s review. The purpose of the review was to assess and determine the appropriate mix of debt and equity. The aim is to enhance cash flows, and this loan is the initial step to achieve this.
Chairman of Virgin Australia, Elizabeth Brayn, commented on the strategic review:
‘The broad is focused on optimising the Group’s balance sheet and capital structure to support the ongoing execution of its strategy and will lead a capital structure review. The Group has secured loan facilities from its major shareholders that provide a flexible source of funding while the review is undertaken. This review will ensure the Virgin Australia Group has the best capital structure in place to achieve its strategic goals and generate long-term growth and value for shareholders.’
The company did not provide a time frame on when the review would be completed. But nevertheless, they have ‘now largely completed one of the most successful transformations in Australian corporate history,’ Byran said.
Virgin’s Chief Executive Officer, John Borghetti said:
‘Having achieved a significant transformation in the last five years, the Virgin Australia Group is now well placed to deliver ongoing growth and choice to Australian travellers.’
Virgin’s share price opened up 8.57% this morning to 38 cents per share. However the group is still down 18.42% for the year, even with this morning’s jump.
Source: Google finance
Virgin was in trouble just two weeks ago, when they were scrambling to plug a $500 million hole. Their balance sheet left a lot of be desired. Cash flow was lacking severely. But hopefully Virgin can turn things around from here on.
Junior Analyst, Money Morning
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