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.