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From negative to stable, Moody’s says Virgin Australia’s prospects are brightening

written by australianaviation.com.au | May 3, 2018

Virgin Australia aircraft at Sydney Airport. (Rob Finlayson)
Virgin Australia aircraft at Sydney Airport. (Rob Finlayson)

Virgin Australia’s recent lift in financial performance has been reflected in an improved outlook from Moody’s Investors Service.
The ratings agency said on Monday it had lifted its outlook for Virgin Australia to stable, from negative previously, in response to a strengthened balance sheet. The agency also maintained its B2 corporate family rating on Virgin Australia, while the company’s senior unsecured debt rating was also unchanged at B3. Both ratings were below investment grade.
Virgin Australia reported at its 2017/18 first half results in February its total debt was $2.4 billion at December 31 2017, down 13 per cent from a year earlier. Meanwhile, the airline group said financial leverage – which it defined as the adjusted net debt to earnings before interest, tax, depreciation, amortisation and and aircraft rentals (EBITDAR) ratio – was the lowest level in a decade at December 31 2017.
Moody’s, which lowered its outlook for Virgin Australia to negative in June 2016, said it expected Virgin Australia’s debt to EBITDA ratio to be between 4.9 times and 5.2 times in 2017/18 and 2018/19, compared with 5.8 times in 2016/17.
“This is largely due to the equity raising in 2017 which was used to strengthen the balance sheet, as well as an improvement in EBITDA, driven in part by the company’s Better Business initiative, which is a three-year program launched in July 2016 targeting $350 million of annualized cash flow savings,” Moody’s said.
“This level of leverage provides Virgin with headroom versus the 6.0x downgrade threshold for the rating.
“The outlook could return to negative if debt to EBITDA starts to trend upwards, with the catalyst being the trajectory rather than the absolute number approaching the threshold of 6x.”
In 2016, Virgin Australia undertook a capital raising to help reduce debt and made efforts to simplify its fleet as part of the Better Business transformation program.
The equity raising yielded $1.1 billion, comprising an $852 million capital raising from existing shareholders and a separate share placement to at-the-time new shareholder HNA Group worth $159 million. The proceeds were used to repay a $425 million shareholder loan and reduce debt.
More recently, Virgin Australia has withdrawn all 18 Embraer E190 regional jets from operations, with the last flight taking place in January. Seven E190s were leased, while 11 were owned, according the airline’s financial reports from previous years.


The airline also ended turboprop operations in Queensland in 2017 when it removed eight ATR 72 turboprops, comprising six 72-500s and two 72-600s. That left six ATR 72-600s in the fleet, of which are leased.
The moves were designed to reduce costs through fleet simplification and operational efficiencies.
While the 18 E190s and eight ATRs were no longer being operated, not all aircraft have found new owners and some remain in storage – with a number subject to ongoing lease payments – while being remarketed for new operators.
Virgin Australia chief financial officer Geoff Smith said at the company’s 2017/18 first half results in February there had been interest in the E190 and ATR fleet from other operators.
“We’re obviously downsizing the size of the ATR fleet so they are indeed leased aircraft and we are looking at market opportunities to place those elsewhere at the moment,” Smith told reporters during Virgin Australia’s results presentation on February 28.
“We are actually in a very advanced stage of signing indeed LOIs [letters of intent] on up to three of the [aircraft] across ATRs and E190s, LOIs on those fleet leases.”
Moody’s noted Virgin’s free cash flow, which in general terms is the company’s operating cash flow minus capital expenditure requirements, had improved.
However, it said Virgin Australia’s free cash flow had “not improved to a level where Moody’s believes it can maintain its B2 rating without further improvements in operating cash flow, reductions in capital expenditure, or reliance on shareholder support”.
“While Virgin’s EBITDA has been improving and is expected to continue improving, operating cash flow remains insufficient to fund capital expenditure, including for aircraft, and therefore the company remains free cash flow negative,” Moody’s said.
Further, Moody’s said it would consider upgrading Virgin Australia’s corporate family rating if the airline could demonstrate that it was able to “maintain its credit metrics at a B1 level on a sustained basis without shareholder support, and has reached a level where it is free cash flow positive”.
“Specifically, Moody’s would expect to see debt/EBITDA below 5.0x for at least 12 months,” Moody’s said.

Moody’s joins S&P in lifting Virgin Australia’s ratings outlook

Moody’s is the second ratings agency to give Virgin Australia an improved outlook. S&P Global Ratings, formerly known as Standard and Poor’s, lifted its ratings outlook on the company to stable from negative last June.
“The stable outlook reflects our growing confidence that Virgin has a realistic deleveraging path as the airline turns to generating cash, supported by steady market conditions,” S&P Global Ratings said at the time.
“Virgin Australia’s investment in repositioning itself as a full-service airline is substantially complete, and we believe its focus has now turned to cash generation.”

A Virgin Australia ATR 72-600 at Sydney Airport. (Seth Jaworski)
Virgin Australia has six ATR 72-600s in operation. (Seth Jaworski)

Virgin Australia’s 2017/18 first half results presentation noted the company had achieved a “significant improvement in operating cash flows and reductions in aircraft maintenance and non-aircraft capex”.
It also flagged a reduced aircraft capital expenditure over the next 18 months, adding that the company was “working with Boeing to further optimise the delivery timing of Boeing 737 MAX”, with a “positive impact on the balance sheet” expected in 2018/19. Virgin Australia has ordered 40 737 MAX narrowbodies.
Smith said there was no change to the previously targeted first delivery date of the final quarter of calendar 2019. However, the airline is talking to Boeing about the schedule for subsequent aircraft.
“We are always in constant contact with Boeing on the delivery dates on the whole order book, including those lead aircraft,” he said.
An artist's impression of a Boeing 737 MAX 8 in Virgin Australia livery. (Boeing)
An artist’s impression of a Boeing 737 MAX 8 in Virgin Australia livery. (Boeing)

Virgin Australia posted a statutory net loss of $10.3 million for the six months to December 31 2017, while underlying profit before tax – which removed one-off items and was regarded it as the best indication of financial performance – came in at $102.5 million, more than double the $42.3 million in the prior corresponding period. It was the highest underlying profit before tax result in 10 years.
 
Virgin Australia’s last full year statutory profit was in 2011/12, which covered the time rival Qantas grounded its entire fleet as part of a dispute with unions.
The company said in February it was targeting a financial leverage “consistent with a BB credit rating”.
Virgin Australia aircraft at Sydney Airport. (Seth Jaworski)
Virgin Australia’s domestic network posted a 91 per cent increase in earnings. (Seth Jaworski)

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Share buy back completed

Separately, Virgin Australia said on April 16 its offer to shareholders holding less than $500 worth of shares to buy back those shares had been accepted by 92.88 per cent of eligible shareholders.
Its statement to the Australian Securities Exchange (ASX) said 19,834 shareholders had elected to accept the offer to buy back their shares at 30 cents per share.
Meanwhile, 1,220 shareholders holding a combined 956,194 shares had chosen to retain their stake in the company. A further 55 eligible shareholders had left the share register during the buy back period.
The buy back cost $3.87 million, Virgin Australia told the ASX on April 23.

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6 Comments

  • Lechuga

    says:

    Now if they could order/convert some of their current MAX orders to the -9 or -10 they could start getting back up.

  • DavidByrne

    says:

    Interesting that the analysis seems to focus on fleet rationalisation and strict financial criteria, without touching on the potentially significant consequences of the coming divorce with Air NZ. Given that Virgin will lose many Air NZ passengers from their Transtasman operations, and at the same time is increasing capacity very significantly, the forecast for the Tasman has to be either planes flying with significantly fewer passengers on board, or deep discounts in fares to fill both their current flights and the newly-announced increases. Either way, this surely is a serious risk which investors need to be alert to.

  • Scott

    says:

    Aust has a population of 23 million Nz 5 million, Airnz stand to loose much more than Virgin out off this.

  • Dan

    says:

    VA also still has the codeshare/interlines with the HNA group airlines and the codeshare agreement with Delta Air Lines on their Trans-Tasman flights. Thus some of the seats sold on the VA flights past October may actually be HNA group or Delta passengers. Thus VA isn’t exactly alone on the Trans-Tasman flights past October 2018.

  • Baxter

    says:

    Scott
    I don’t think it has much to do with how many people are in each country. Singapore is a smaller country then both Australia and New Zealand and have bigger airlines then both

  • Brent

    says:

    This is true about Singapore but at the same time New Zealand isn’t really an international transit hub.

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