VAH Virgin Australia Holdings Ltd

Air New Zealand said it may sell part or all of its near-26% stake in Virgin Australia Holdings Ltd. just as Australia's second-largest carrier by revenue searches for funding options to shore up its balance sheet.

Virgin Australia shares fell more than 9% Wednesday after Air New Zealand—Virgin Australia's biggest shareholder—said First NZ Capital and Credit Suisse would advise it on its options for the stake, which is valued at around 348 million Australian dollars (US$266 million).

Tony Carter, Air New Zealand's chairman, said that the company didn't want a large minority equity stake in Virgin Australia as it focuses on its own expansion opportunities.

Grant Williamson, investment adviser at Christchurch brokerage Hamilton Hindin Greene, said Air New Zealand's reluctance to be a minority shareholder made sense. "They should probably focus on their own business without getting tied down with shareholdings in other companies, which take up management's time and resources."

Last week, Virgin Australia secured a A$425 million loan facility from Air New Zealand and three other major shareholders, Etihad Airways, Singapore Airlines Ltd. and Virgin Group, to give it liquidity while it reviews its capital structure. Air New Zealand said it intends to coordinate its plans with Virgin Australia's broader review of its capital structure.

In recent years, supported by its big shareholders, Virgin Australia has invested heavily in transforming its business from a budget carrier to a full-service airline, competing head-to-head with larger rival Qantas Airways Ltd. The two airlines engaged in a damaging price war that caused mounting losses for both companies before pressure from investors spurred them to scale back on capacity.

Qantas's finances have since rebounded, swinging from a A$2.84 billion loss to a A$557 million profit in the year ended June 30, 2015, before its profit more than tripled in the first half of the current fiscal year, helped by a tough cost-cutting program that has made it a leaner operation. That has allowed it to return cash to long-suffering shareholders and start buying more planes and increasing capacity on popular routes. The carrier's investment-grade credit rating also has been reinstated by Standard & Poor's and Moody's Investors Service.

Virgin Australia's recovery has been slower and less spectacular. In February, the airline reported a net profit of A$62.5 million for the six months through December, up from a loss of A$47.8 million for the year-earlier period. Despite falling fuel prices that are proving a boon for airlines around the world, Virgin's heavy investment in recent years has left it more highly geared than Qantas, making it harder to compete. During its first-half results, Virgin Australia announced plans to sell several aircraft to help pay down debt, but analysts remain concerned about its weak balance sheet.

"It has been obvious the company is in need of some funding, and today's announcement just reinforces that view," said Bell Potter analyst John O'Shea.

Virgin Australia in a brief statement Wednesday said that it would continue its capital-structure review.

If Air New Zealand sells its stake in Virgin Australia, it will be exiting an investment that has underperformed its own business. The New Zealand carrier reported a net profit of 338 million New Zealand dollars (US$231 million) for the six months through December, up from NZ$133 million in the year-earlier period.

Air New Zealand Chief Executive Christopher Luxon has resigned from the board of Virgin Australia as part of the company's review of its shareholding.

Write to Kate Geenty at kate.geenty@wsj.com and Rebecca Thurlow at rebecca.thurlow@wsj.com

(END) Dow Jones Newswires

March 30, 2016 02:05 ET (06:05 GMT)

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