Virgin Raises Private-Equity Cash to Keep Qantas Pressure

Virgin Australia Holdings Ltd. (VAH), the country’s second-biggest airline, raised A$336 million ($314 million) selling a stake in its frequent-flier program, providing cash for it to keep harrying Qantas Airways Ltd. (QAN)

Affinity Equity Partners will buy a 35 percent stake in the Velocity loyalty program, giving the entire unit an enterprise value of A$960 million, Brisbane-based Virgin said in a statement today. Group losses before tax and one-time items were A$212 million in the 12 months ended June 30, the company said.

The funds will help Chief Executive Officer John Borghetti as he challenges Qantas’s 10-year dominance of corporate travel in Australia. Borghetti, who lost out to Alan Joyce in the race for Qantas’s top job in 2008, has added business-class seats and lounges to win corporate traffic and said today he’s planning to raise such business to 30 percent of Virgin’s sales by 2017.

“We’ve got the taste for it and we’re not going to stop,” he said in a phone interview after the announcement. “There will never be a time when we don’t feel we need to go further.”

Borghetti, a 36-year veteran of Qantas who took his first job in the carrier’s mail room, has worked to challenge his former employer in all its key markets since taking over as Virgin chief executive in 2010.

Market-Share War

He’s bought an airline providing services to rural and mining areas and took a 60 percent stake in Tiger Airways Holdings Ltd. (TGR)’s Australian unit to match Qantas’s spread of full-service, discount and regional carriers.

Today he announced he’d also be setting up charter and freight businesses targeting a combined A$400 million of revenue by the year ending June 2017.

The cash raised from the Velocity stake sale won’t be used for those major projects and will instead be saved to reduce Virgin’s interest payments, Borghetti said: “It’s going to go on the balance sheet and that’s it.”

Shares of Virgin Australia rose 2.5 percent to 41.5 Australian cents at the close in Sydney, extending a 9.2 percent gain this year, compared with the 5.1 percent advance in the benchmark S&P/ASX 200 index.

Raising Cash

The Velocity sale “raises some welcome cash for the company,” John O’Shea, an analyst at Bell Potter Securities Ltd. in Melbourne, said by phone after the announcement. “They continue to win market share versus Qantas.”

Virgin has also challenged Qantas’s 65 percent share of Australia’s domestic market, a level the airline has considered a “line in the sand” that it won’t surrender.

A market-share war, as Borghetti added Virgin Australia-branded flights to pick up corporate traffic and Tiger routes to win leisure travelers, sent Australia’s aviation market into losses for the first time since 1992 in the six months ended December.

“We had to go through this active capacity war,” he said. Qantas “tried to crush the opposition and it hasn’t worked. They’ve crushed themselves.”

Qantas yesterday posted a record A$2.84 billion in net losses, driven by a A$2.56 writedown of its fleet. Virgin’s net loss of A$356 million was also wider than the A$208 million median of six analyst estimates.

Corporate Market

Virgin “is making headway into the higher-yielding corporate market,” Mark Williams, an analyst at CIMB Group Holdings Bhd., said in an Aug. 5 note to clients. “We see this battle continuing for some time yet.”

The push has come at a cost: Virgin used up A$182 million on operations and investments over the past year, according to the company’s cash-flow statement.

Today’s stake sale is the second time Virgin has squeezed extra cash out of the business over the past 12 months. It raised A$349 million from selling new shares in November, giving its largest investors Air New Zealand Ltd., Singapore Airlines Ltd., Etihad Airways PJSC, and billionaire Richard Branson’s Virgin Group about 79 percent of the company.

That’s left Virgin as a business “that’s controlled and majority-owned by a collection of international airlines which have one main priority,” Peter Esho, managing partner at Sydney-based wealth management firm 100 Doors, said by phone, “and that’s to be a nuisance to Qantas.”

Key Platform

Qantas’s loyalty program is that company’s most profitable business, accounting for A$286 million of earnings before interest, tax, and one-time items last year, the company said yesterday.

“All we are doing is bringing more competition to the market,” Virgin’s Chief Financial Officer Sankar Narayan said in a phone interview after the announcement. The frequent-flier program is “a key growth platform for us.”

Qantas decided not to sell a share in its own frequent-flier program after a review of the business, the company said yesterday. The loyalty program has 10.1 million members, Australia’s largest carrier said in a presentation.

Virgin will try to lift Velocity’s membership to 7 million by 2017, that company said in a presentation today.

The investments will have to start paying off soon, Peter Harbison, executive chairman of CAPA Centre for Aviation, said by phone. Virgin’s airline shareholders, who’ve been supportive of Borghetti’s strategy so far, have their limits, he said.

“They don’t want to be continuing like this for two long,” he said. “Virgin have to explain to them why they’re losing money.”

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net

To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net Terje Langeland, Dave McCombs

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