Virgin Australia set to sell off Velocity Frequent Flyer scheme?

Virgin Australia set to sell off Velocity Frequent Flyer scheme?

Updated July 11, 2019 | Virgin Australia's partner in the airline's Velocity Frequent Flyer scheme, Hong Kong-based Affinity Equity Partners, plans to ditch its 35% stake in the loyalty program.

The move comes as speculation mounts that Virgin will seek to float Velocity on the Australian Stock Exchange, and could potentially tip some of its own shares into the sale depending on their estimated market price.

Velocity is Australia's second-largest airline loyalty program, with an estimated 9.5 million members compared to the near 13-million members of Qantas Frequent Flyer.

The program raked in $63.8 million in pre-tax earnings in the six months to December 31, off a revenue of $208.9 million, and is on track to double its earnings to $120 million when Virgin declares its 2019 financial year results towards the end of August – although the airline overall is expected to report a loss.

Affinity paid Virgin Australia $335 million for its cornerstone Velocity stake in October 2014.

In a statement issued this morning, Virgin said it remained committed to the long-term growth of the Velocity business and expects to remain the majority investor.

Spinning out the Velocity scheme, even if Virgin retains majority ownership, would present a tempting option for newly-minted CEO Paul Scurrah as he continues to run a ruler over the airline.

Qantas considered selling off its frequent flyer scheme in 2014 in the face of record losses, with the program then valued at up to $2.5 billion, but decided to keep its hands on the scheme and find other ways to turn back the riding tide of red ink.

In the 2018 financial year, the Qantas Loyalty division which is headlined by Qantas Frequent Flyer returned $372 million in revenue.

PREVIOUS | Virgin Australia is reportedly gearing up to spin out and sell its Velocity Frequent Flyer program, which competes with Qantas Frequent Flyer for the hearts and wallets of Australian travellers.

The loyalty program could be worth several billion dollars to the right buyer, according to The Australian Financial Review, with that money being a welcome injection into the coffers of the parent airline.

Virgin Australia holds a 65% stake in the Velocity loyalty scheme, following the acquisition of a 35% stake by Asia-based private equity firm Affinity Equity Partners in 2014 for $336 million.

Analysts expect Velocity Frequent Flyer will report around $120 million in pre-tax earnings for the 2019 financial year, with AFR reporting that Velocity "could be worth 15 to 20-times earnings" depending on "the strength of Velocity Frequent Flyer's long-term contracts with its parent, Virgin Australia."

Recently-appointed Virgin Australia CEO Paul Scurrah "is said to have hit the ground running and is looking for ways to shore up Virgin Australia's profitability and funding position," according to the AFR, which describes Velocity Frequent Flyer as "arguably the stand-out asset in Virgin Australia's portfolio."

Virgin Australia is expected to count around $70 million in pre-tax earnings for the 2019 financial year.

Approached by Australian Business Traveller, the airline declined to comment on the potential sale of its frequent flyer program, other than describing the AFR report as “media speculation”.

For context, Qantas considered selling off its 'river of gold' frequent flyer program in 2013-2014 as the airline struggled against strong financial headwinds, leading up to a dramatic loss of $2.83 billion over the 2013-2014 financial year.

At the time, analysts valued the Qantas Loyalty division as high as $3 billion – making it worth significantly more than the airline itself.

However, selling the business was eventually seen as a quick-fix solution to bolster the balance sheet in the short term, at the cost of undermining the airline as a whole over the longer term.

"After careful consideration our judgement was that Qantas Loyalty continued to offer major profitable growth opportunities, and there was insufficient justification for a partial sale" Qantas CEO Alan Joyce said at the time.

In the 2018 financial year, Qantas Loyalty tipped $372 million into the airline's record $1.6 billion pre-tax earning, contributing almost as much as Qantas' entire international operation.

David Flynn
David Flynn is the editor of Australian Business Traveller and a bit of a travel tragic with a weakness for good coffee, shopping and lychee martinis.
 

23 comments

  • Boof

    Boof

    14 May, 2019 09:33 am

    This would be a poor decision. It came back to bite Air Canada who ended up buying Aeroplan back 13 years after they sold it.

    The QF view that it would be a short term fix should be carefully considered.

    Also @David: Affinity Equity Partners didn’t complete a buyout with 35% ;-)
    Members who gave thanks

    RosBL, JKH

  • moa999

    moa999

    14 May, 2019 11:26 am

    That was after Air Canada had essentially announced a competing program, destroying the value of Aeroplan.

    The history of Aeroplan makes me question whether anyone will pay top dollar for Velocity.
    No member give thanks

  • Boof

    Boof

    14 May, 2019 01:11 pm

    Smart play by AC. They slowly worked out they sold a valuable asset being the FFP base and so the choice was to start a new one, buy back Aeroplan at a premium, or get back the original customer base cheaply by destroying (legally) the Aeroplan price of acquisition.

    VA cannot afford to buy back the 35% at the moment. If they sell off velocity it would need some tight contracts and some long term planning to ensure this isn’t an AC repeat.
    No member give thanks

  • Tim Canning

    resolute

    14 May, 2019 09:36 am

    Now Scurrah is selling off the crockery -

    no confidence in this CEO.
    Member who gave thanks

    JKH

  • Marcus

    desafinado74

    14 May, 2019 08:32 pm

    Looks like a dodgy CEO if he really sells off Velocity. What's the point of getting $$$ from the sale when you piss off many customers ?
    No member give thanks

  • Jason Hamilton

    JKH

    14 May, 2019 11:27 am

    Scurrah seems like another “slash ‘n’ burn” Rod Eddington.
    No member give thanks

  • Dan

    DanV

    14 May, 2019 11:39 am

    Eddington however actually made AN profitable after years of losses, before the hostile "NZ" takeover (by blocking the SQ bid) due to egos (namely the then Chairman of Brierley Investments) running NZ at the time.
    No member give thanks

  • Jason Hamilton

    JKH

    14 May, 2019 05:54 pm

    ...the hostile NZ takeover that Eddington had unfortunately set up that way. The deal had been set up so that NZ had the pre-emptive right to that second half of AN and SQ were not to get a look in directly.
    No member give thanks

  • Bob Burgess

    Bob Burgess

    14 May, 2019 01:36 pm

    Let's be realistic about this. Sure, keeping Velocity will probably make sense in the long term but does Virgin actually have a long-term future without a solid injection of money right now? Maybe not! If Velocity can be sold for 15x earnings as per AFR speculation then that's $1.8bn, of which Virgin's 65% would be worth $1.3bn. There's a LOT that Scurrah could do with that money to get Virgin back into the black and onto a growth trajectory. Short-term thinking? Well he probably can't afford to think 'long-term' on this.
    No member give thanks

  • MELflyer

    MELflyer

    14 May, 2019 01:45 pm

    Bob, I came here to make the same comment. People need to think of this from the perspective of a business.

    Qantas decided to keep QFF even though it reported a $2.8 billion loss in 2014 but that was mostly a paper loss based on write-down of the international fleet plus a big one-off hit for redundancies, the actual loss was around $650 million. And Qantas had plenty of room to cut because it was a much larger company with a much bigger network and more legacy costs than Virgin. So Qantas could afford to keep QFF because it could see a clear path back to profitability.

    Virgin doesn't really have any fat left to trim, its network is so much smaller, so Scurrah has to look at this option, if he didn't then he should be CEO because that job is about considering all the options and making the best choice for the company and shareholders, even if it's a tough choice and doesn't please everybody.

    Look, with even $1bn from the Velocity sale Scurrah could take Virgin fully private, which has been discussed on and off and would save them money, totally be rid of debt, make smart investments and become more competitive against Qantas.
    No member give thanks

  • Dan

    DanV

    14 May, 2019 03:40 pm

    With a "disunited" boardroom e.g EY, HNA, SQ, Virgin Group et al, it would be very difficult to take VA private unless the likes of SQ or DL launches an outright takeover.

    However, SQ hasn't exactly been happy with VA's financial performance of late, a Reuters article from November 2018 had SQ directly blaming VA for their own profit downturn in a recent quarter (This directly contradicts articles "claiming" SQ wants a larger stake over the years, which of course have all turned out to be fizzers).

    There's a better chance of a DL takeover of VA than with the "so-called" saviour SQ those days.
    No member give thanks

  • Marcus

    desafinado74

    14 May, 2019 08:30 pm

    It will be a terrible move. Hopefully it is just unfounded rumours.
    No member give thanks

  • UpUpAndAway

    UpUpAndAway

    15 May, 2019 06:39 am

    The current Virgin CEO stuck around for 2 -3 years at previous companies therefore his plans are very short term. Slash and burn and move on.
    No member give thanks

  • Darren A

    Darren_A

    15 May, 2019 07:52 am

    If we wants to add revenue from Velocity, they need to drive redemption of points. They need to make point usage more widely available on VA and Partner Airlines. This may mean finally joining an Alliance to be able to generate revenue from demand to travel to places they can't serve directly.
    No member give thanks

  • abr

    abr

    15 May, 2019 09:51 am

    Joining any Alliance costs money, plus the ongoing membership expenses. Money that VA doesn't have.

    In addition, there's only one Alliance option (SkyTeam) available to VA, as Oneworld or Star Alliance are not options for them due to rivals in both alliances who would not vote them in.


    No member give thanks

  • Fred Seitzinger

    Cruise2097

    15 May, 2019 02:56 pm

    Will it mean I cant use my Velocity points on Virgin ?
    No member give thanks

  • bolling

    bolling

    15 May, 2019 04:13 pm

    So what will happen to all our points we have accrued plus the Platinum status? We always fly Virgin or SQ or Etihad. Should we make bookings to use the points or transfer to say KrisFlyer?? Any suggestions on a strategy if this sell off happens?
    No member give thanks

  • Rembrandt

    Rembrandt

    15 May, 2019 06:45 pm

    Well firstly, just remember this is just speculation. Secondly, I'm guessing the 'Velocity' rewards points program would still be the same as it currently is. Any major changes would need to be well communicated and time allowed for members to adjust etc etc. Part of the takeover would need to include no loss of points and so on for members. However, it would also depend on the terms and conditions of the current Velocity rewards program.

    Frankly, I'm not sure how a buyer would make money out of purchasing a rewards points program?!

    Once again this articile is just speculation and I'm sure Virgin Velocity or Virgin Australia are not too impressed by it.
    No member give thanks

  • daktari

    daktari

    15 May, 2019 04:49 pm

    If you want happy customers who have confidence in your airline, part of the equation is to have ownership of your own FFP. No one knows if this story is accurate or just another case of journalistic speculation. I would guess that at the very least Virgin will keep a majority ownership stake.
    No member give thanks

  • Rod Harmer

    Rod H

    21 May, 2019 06:18 am

    Looks like VA will hold on to the majority share of Velocity FF. This storyfFrom The new CEO " Virgin Australia boss Paul Scurrah has given his clearest indication yet that the airline intends to retain a majority stake in Velocity, the airline's frequent flyer program, even as it weighs a float of the lucrative loyalty business.
    No member give thanks

  • UpUpAndAway

    UpUpAndAway

    11 Jul, 2019 01:18 pm

    Smart move when you consider all the options, I'm not a keen fan of the Australian Stock Market but this would tempt myself to buy in.
    No member give thanks

  • bagpuss

    bagpuss

    11 Jul, 2019 04:30 pm

    It's quote simple, Affinity Equity Partners invested into the product because they believed that they could add value and sell their stake to make a profit at a later stage.
    They are ready to pull the trigger and reap the benefits of their investment which was always going to happen.
    No member give thanks

  • tony walker

    tonyw

    13 Jul, 2019 07:18 pm

    We choose to fly VA rather than QF.
    Why can't VA appreciate and reciprocate our loyalty?
    If it's only about $$$, say so! and we'll fly cheaper.
    PQQ to International is so expensive and unreliable becoming easier to drive!
    No member give thanks

Guest

21 Jul, 2019 12:56 pm

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