SINGAPORE/SYDNEY: Virgin Australia Holdings Ltd said that Affinity Equity Partners is seeking to exit its 35 per cent minority stake in the carrier’s Velocity frequent flyer programme, five years after its A$335 million ($233 million) purchase.
Australia’s second-largest airline said that it intended to stay a majority investor in Velocity, which competes with the larger Qantas Airways Ltd frequent flyer programme for Australian customers.
The potential Affinity exit is a fresh test of investor demand for loyalty programmes after airlines Air Canada and Brazil’s Gol Linhas Aéreas Inteligentes SA, which had spun off their frequent flyer programs, last year bought out minority shareholders to regain full control.
It also comes as Virgin is re-examining its broader strategy under the leadership of new CEO Paul Scurrah, who took over from CEO John Borghetti in March.
Virgin said Affinity, a private equity firm, had requested it explore various options for the stake sale. No time-frame or terms have been set, Virgin added in a statement to the stock exchange.
In a bond prospectus issued in 2014, Virgin said there was a potential for Affinity to exit via a float or trade sale within three years of the purchase date.
Virgin has a first right of offer in relation to Affinity’s stake in certain circumstances and has the right to participate in other exit mechanisms available to Affinity, according to the prospectus.
By the first half of the 2019 financial year, Velocity had 9.5 million members and was on track for annual EBIT of around A$120 million.
Based on its earnings, Velocity could be valued at around A$2 billion, The Australian Financial Review reported on Wednesday, citing analysts. A source familiar with the matter told Reuters that estimate was too high but declined to provide a figure.
Akshay Chopra, a portfolio manager at Melbourne’s Karara Capital said Virgin would probably seek to buy the Affinity stake or bring in another partner rather than lowering its stake.
“As long as you can expand the membership base... then it’s an attractive business,” he said, citing the relative stability of the earnings relative to the more volatile airline business.
The value of loyalty schemes lies in the steady income from banks, retailers and other partners who pay up front for points and then pass them on to customers who typically do not redeem them with airlines for many months. — Reuters
Oman Observer is now on the WhatsApp channel. Click here
