Air New Zealand needs $2.2 billion to recover from the pandemic, with the airline planning to raise the funds in a complicated mix of shares and borrowing that will keep the government's majority share.
Chair Dame Therese Walsh said the time was now right to bolster its balance sheet to repay the loan it received from the government when COVID-19 first emerged.
Current shareholders will be offered the right to buy two new shares for every one they currently own at 53 cents each, a 61 percent discount to the airline's last market price, which will raise $1.2 billion.
It will also issue $600m worth of special shares to the government and look to raise a further $400 million in debt from the government as back-up finance.
Finance Minister Grant Robertson said the government had pre-committed to participating in the $1.2 billion equity capital raise by purchasing the number of new shares needed to keep its 51 percent holding, worth up to $602 million.
He said a portion of the capital raised will be used to repay loans it received from the government during the pandemic.
"It has been an incredibly challenging time for Air New Zealand over the past two years. We have provided significant support to Air New Zealand to recognise its critical role in keeping the country connected to the rest of the world, including the Crown loan facility which has been drawn down by $850 million."
He said the government will also provide the standby loan facility of $400 million to ensure financial stability over the next few years.
"While it is not expected to be drawn upon, it is available to Air New Zealand if needed through to 2026. The arrangements for the facility have been benchmarked against equivalent private sector lending to airlines."
The airline was put on a trading halt on the NZ stock exchange this afternoon ahead of the announcement, which it had promised to make by the end of the month.
Air NZ twice deferred its equity raising last year as borders remained closed because of the pandemic, causing it to post massive losses.
The airline has been kept afloat through a standby government loan.