Affinity invests $314m in Virgin Australia frequent flyer business

With much of the focus on potential transactions involving Qantas Airways' frequent flyer program, AVCJ understands that Affinity was in negotiations with Virgin Australia for several months. The two parties had been talking intermittently for some time, and Virgin Australia's financial pressures ultimately prompted it to pursue a deal. It was not a competitive process.

Virgin Australia will retain a majority stake in the Velocity Frequent Flyer program and majority board representation, including the right to appoint the chairman. The transaction will be structured as a convertible note issue by Virgin Australia. It will reduce the parent company's balance sheet gearing by 8%. Virgin Australia has no option to buy back Affinity's stake.

Set up in 2005, the program has doubled in the last four years to 4.5 million members and Virgin Australia said that Affinity's involvement is intended to accelerate growth. It wants to boost membership to more than 7 million over the next three years, increase partner numbers and diversify partner mix, and strengthen member engagement. Qantas' older frequent flyer program has 10.1 million members.

Affinity's investment values the program at A$960 million. The market capitalization for Virgin Australia as a whole is currently around A$1.4 billion.

"Velocity Frequent Flyer embodies all of the key traits we look for in an investment - a solid base business, strong management and significant growth prospects," Brett Sutton, Affinity's head of Australia and New Zealand, said in a statement. "Through this investment together with Virgin Australia we hope to rapidly grow the program and drive further value in return."

Virgin Australia is the country's second-largest airline after Qantas with a fleet of 150. Founded in 2000 as Virgin Blue, the company went public on the Australian Securities Exchange in 2003. Its major shareholders are Air New Zealand, Etihad Airways, Singapore Airlines and Virgin Group.

Virgin Australia reported a net loss of A$355.6 million for the 12 months ended June 2014, compared with a loss of A$98.1 million the previous year. The pre-tax underlying loss was A$211.7 million. Total revenue increased 7.1% to A$4.3 billion.

The company blamed the widening losses on excess capacity, weak consumer sentiment, a charge for the 60% stake it bought in domestic budget carrier Tigerair, and Australia's now-abandoned carbon tax. Partly as a result of the frequent flyer program transaction, Virgin Australia's total cash position has improved to A$783.8 million, up from A$203.3 million a year earlier.

Qantas, which has been engaged in a price war with Virgin Australia, announced an annual net loss of A$2.8 billion, largely due to restructuring.

The transaction is subject to numerous conditions, including approval from Australia's Foreign Investment Review Board. It is expected to close by the end of October.

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• Topics
• Expansion
• Australasia
• Consumer
• Transportation
• Consumer
• Australia
• Growth capital
• Affinity Equity Partners