Virgin Australia Holdings (VGN) – Keeping it simple

Virgin Australia is the nation’s No.2 airline and offers domestic air services under its own brand and overseas travel via its international partners, which include Qatar Airways, Singapore Airlines, United Airlines, Air Canada, Air New Zealand, Hawaiian Airlines, and All Nippon Airways, and owns the Velocity loyalty business. The company was founded in 2000 and is headquartered in South Brisbane.

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Ord Minnett reviewed its Virgin Australia (VGN) model following the retirement of the carrier’s last remaining Airbus A320 in June, which consolidated its fleet into just two types – 104 Boeing 737s across various models and four Embrauer E190-E2 jets – versus the eight types flown before COVID-19 struck. Virgin has already taken delivery of at least 14 so-called next-generation Boeing 737 MAX 8, with firm orders for another 12 of the 737 MAX 8s and 10 of the MAX 10s, which have circa 10% more seats than the MAX 8. These deliveries – our model assumes 10 deliveries per annum, comprising four owned planes and six leased aircraft – that should drive the next-gen models’ share of seats to 50% by FY30 from only 15% presently, and allow the retirement of circa seven older leased aircraft per year.

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The increased share of seats for the newer aircraft models, said to have more than 17% better fuel efficiency than older models it will replace, should reduce fuel consumption per available seat kilometre (ASK) by 5% across the network, generating around $50 million in cost savings per annum. The airline’s balance sheet is robust enough for its fleet renewal plans, in our view, despite the large step-up in capital expenditure to more than $900 million annually and expected higher payments for ‘heavy’ maintenance work as leases expire. We also highlight a significant planned increase in the share of owned aircraft in its fleet to about 50% by FY32, up from 30% currently, with outright ownership affording Virgin improved lending terms and reduced costs in the longer term versus leasing.

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Ord Minnett forecasts the airline’s net debt-to-operating earnings (ND/EBITDA) multiple will hover near the lower end of its target range of 1–2x out to FY30. Note that this includes our expectations Virgin will commence dividends in FY28 of around $0.18 per share, implying a dividend yield of around 8% on a fully franked basis. Post our review, we have nudged our EPS estimate for FY26 higher by 0.2%, while our FY27 forecast increases 2.2% and our FY28 numbers are unchanged. This leads us to raise our target price on Virgin to $3.90 from $3.80, and we reiterate our Buy recommendation.