Virgin Australia to sell Velocity loyalty?

According to the Australian Financial Review, Virgin Australia Holdings is preparing to test the appetite of the market for the spin off its reputedly 1.5 billion dollar rewards program.

Velocity Frequent Flyer is owned 65% by Virgin and 35% by Affinity Equity Partners. Apparently, both sides are interested in exploring possibilities – anything from a total or partial float, through to a total or partial sale.

Paul Scurrah – the new Virgin CEO has been looking at various ways of shoring up Virgins profitability – so spinning off the Frequent Flyer program may be an option. The program had an EBIT of $120 million last financial year.

The AFR speculates that the scheme could be worth a few billion dollars to the right buyer. That money would certainly be useful to shore up Virgins bottom line and to mollify its small in number, but big in ambition coterie of reputedly squabbling airline shareholders.

Qantas played this game before

Way back in 2013, when Qantas had its own financial troubles (do I wish I had bought shares then – Yes I do!), it too considered selling off its loyalty program. At that time, some valued the Loyalty program as being worth more than the airline!

Sensibly, they decided against this option dismissing the idea of a short term fix against a long term revenue stream, and with Qantas Loyalty pouring $372 million into the airlines 2018 earnings – it contributed about as much as Qantas’s international operations.

So new CEO Paul Scurrah, could be a devil or a saint depending on what he decides, and which way the market sees it.

Virgin will be debt laden for a while

The AFR article finishes thus:

‘Virgin Australia is expected to report $70.6million EBITDA in the 2019 financial year – according to UBS analysts – and have net debt worth close to 85% of its total equity.’

Australian Financial Review, Tuesday 14 May

Ouch!