The Virgin Australia Holdings Ltd (ASX: VAH) share price is tumbling lower on Friday.
At the time of writing the airline operator's shares are down 16% to 5 cents.
Why is the Virgin Australia share price sinking lower?
As well as being dragged lower by the broad market selloff, investors have been selling Virgin Australia's shares following the release of a coronavirus update this morning.
That update reveals that Virgin Australia has followed the lead of Air New Zealand Limited (ASX: AIZ) and Qantas Airways Limited (ASX: QAN) by cutting its capacity to address the impact of COVID-19.
According to the release, the airline has increased its total capacity reduction from 3% to 6% in the second half of FY 2020. After which, it will cut its total capacity by 7.7% in the first half of FY 2021.
The biggest cuts are unsurprisingly being made to its international capacity. That will be reduced by 8% in the second half and 10.3% in the first half of FY 2021. Whereas domestic capacity is being cut by 5% during the current half and 6.2% in the following half.
These reductions include routes to Los Angeles, Japan, and Trans-Tasman services, and the exit of its Auckland International Airport Limited (ASX: AIA) services between Tonga and Rarotonga.
Cost cutting.
As with its rivals, the company has revealed that it will be aiming to cut its costs to limit the impact on its earnings.
Virgin Australia will reduce its marketing spend, stop all discretionary spending and non-critical capital expenditure, target a reduction in hotel accommodation charges, and undertake leave initiatives. These include using accrued annual leave or unpaid leave and reducing standard working hours where operationally available.
The company will also put a freeze on all external recruitment and the use of consultants for the remainder of FY 2020.
Virgin Australia's chairman and independent directors will reduce their base fees by 15% temporarily and all bonuses will be reduced to zero across the company for FY 2020.
The airline's CEO and Managing Director Paul Scurrah said: "We have already announced a number of measures to mitigate the impact from COVID-19, however the pace of the global spread and decline in demand has required us to implement further changes today to minimise the future financial impact."
"As a largely domestic airline, we are less exposed to the impact on international travel, however we remain disciplined in our focus on managing capacity in response to forward bookings and continuing to reduce costs across the business. It's worth noting that domestic operations account for 88 per cent of our passengers and 78 per cent of our flight revenue," he added.
However, the company has suspended its earning guidance due to the uncertainty and the evolving nature of the COVID-19 situation.
