Virgin Australia IPO Discussion

[Saab34]

I think VA needs a lot of capital investment to take on what Qantas will be in 10 years time when they finally have some new planes.

What difference will new planes make? Fares won’t be coming down. It’s about improving margin.

I really don’t think the landscape will be changing much in domestic. I don’t believe Virgin is at risk by competitor activity in the short or medium term. The competition have margin targets they have put to market which are much higher compared to today, they will get there by having newer aircraft, not by adding extra capacity or going into fare war mode.

 

[RooFlyer]

Some snippets from media.

Joe Aston's Rampart newsletter

Not a dollar of the $680 million float proceeds will be re-invested in the airline. They'll go straight back to Bain, adding to the circa $1 billion it has already taken in dividends and capital returns and the undisclosed sum (which had to be north of $500 million) in last year's sell-down to Qatar. That's at least $2.2 billion back from its original $730 million cheque and, as mentioned, Bain still owns 40 per cent of the company.

cf post above.

And on capex, from the AFR, various:

Virgin has also told investors it has capital expenditure plans of $1.1 billion in the next financial year. After some savings, net capital expenditure – maintaining its existing fleet and buying new aircraft and engines – will rise to $900 million in that time from $511 million this year.

It has also flagged a $1.1 billion gross capex, but reassured investors it can be funded out of Virgin’s operating cash flows and a modest increase in its $1.3 billion debt load.

 

[cove]

Ok did anyone get stock allocated in this float.
We got 6% and I heard many got zero.

 

[RooFlyer]

Ok did anyone get stock allocated in this float.
We got 6% and I heard many got zero.

I think that was more than you were expecting wasn’t it?

Are you planning to get some more when they open, or just sit back and see how they go?

 

[moa999]

Will be interesting to see how much the Air India incident mutes the float. A reminder of how quickly things can go wrong in aviation.

 

[RooFlyer]

Will be interesting to see how much the Air India incident mutes the float. A reminder of how quickly things can go wrong in aviation.

The IPO I was involved in has its initial sale period during September 2008.

The collapse of Lehman Brothers on 15 September came in the middle of it. We weren’t underwritten and were a speculative float, but we got there.

Teeth were gritted.

Given that all the shares have been allocated to and bought by brokers, we are talking about the aftermarket for Virgin and I think it will still be okay.

 

[cove]

Well @RooFlyer we can be patient with VGN shares.
We tend to buy shares when they are “cheap” so we can wait.

 

[moa999]

We weren’t underwritten and were a speculative float, but we got there.

Few Aussie floats truly are.. the underwriting is generally only signed once the commitments/book are there/covered.

Slightly different in sell-down where banks can end up on the hook, has has happened a few times recently.

 

[cove]

Morning Star just put a $2.60 value on the new Virgin listing. Should be interesting as jet fuel went up on the weekend.

 

[RooFlyer]

Prospectus says, sec.4.8:

Fuel hedging
• To mitigate the risk of short to medium-term unfavourable movements in jet fuel prices, Virgin Australia
maintains an active hedging program for crude oil, refining margins, and foreign exchange rate risk.
• The policy permits fuel hedging out to two years, with higher levels of hedging permitted in the shorter term
(0-6 months) and declining levels of hedging permitted beyond that.
• The policy permits the use of more widely traded crude oil contracts such as Brent as a proxy for the jet fuel
exposure given the lower liquidity in derivative markets for jet fuel.
• Virgin Australia has a portfolio of fixed-rate and option hedges through the forecast period to moderate the
EBIT impact of adverse movement in fuel prices for FY25F, whilst retaining significant levels of participation

Of course, we don't know the hedge structure or the average price. The 'forecast period' in this case is to the end of June.

 

[Brissy1]

I

Prospectus says, sec.4.8:



Of course, we don't know the hedge structure or the average price. The 'forecast period' in this case is to the end of June.

I recall Qantas earning more from it's fuel hedging than operations.
But of course things can go the other way.

 

[Saab34]

Would be interesting to see how Virgin can cover any crude oil spike with its new cost base. It is becomes financial vulnerable with medium ish fuel pricing then that won’t put much strength behind the share price.

Without any disrupters in the market, like Rex and Bonza, all three players would likely have the ability to raise fares to recover the spikes without much issue.

Velocity isn’t a power house like QFF to save the group on an earnings front. Still a bit of work to done at Velocity I think.

 

[moa999]

Velocity isn’t a power house like QFF to save the group on an earnings front. Still a bit of work to done at Velocity I think.

I would say a massive amount of work given the general reception to the recent changes.

 

[cove]

Sometimes when Qantas is scalping the business market we are forced to fly business class on Virgin.There is no way that we will pay about $3,000 to fly on a QF 737 between Perth and Sydney. Folks on the east coast can generally get flights that are about 90 minutes so they don’t care. The quality of the Qantas 737 is too low so they are exposed but Virgin is just matching Qantas with much newer 737s.