Virgin Australia's own frequent flyer arm will chase down its parent airline for up to $200 million, based on a $150 million loan plus interest, as one of some 10,200 creditors owed an estimated $6.8 billion by the failed airline.
Velocity Rewards runs the Velocity Frequent Flyer scheme as a wholly-owned division of Virgin Australia but is cast as a separate legal entity and an independent trustee.
It will join a long line of lenders and financiers, aircraft leasing firms, airports and other landlords, suppliers and airline employees at the first meeting of creditors to be held on Thursday April 30 at 11am.
On April 14, as uncertainty mounted over the fate of Virgin Australia and one week prior to the airline being placed into administration, Velocity Rewards emailed all 10 million members of the frequent flyer program to reassure them "that Velocity is set up in a way that safeguards member value by having a trustee that looks after the interests of members."
However, a spokesperson for Velocity has today confirmed that the program extended "a secured loan of $150 million to the Virgin Australia Group" in 2014 – the same year that the airline sold a 35% stake in Velocity to private equity firm Affinity Equity Partners for $335m, and recorded an overall loss of $355m.
The loan, which was never repaid, has been rolling over every 12 months and accruing interest at a commercial rate" for at least five years.
Velocity says its $150m loan was "an investment"
"The Velocity Frequent Flyer program has always had a trust to protect the interests of members," the Velocity spokeswoman said.
"The independent trustee, Velocity Rewards Pty Limited, has general fiduciary duties which exist as a matter of law and a governance structure that includes an independent director and policies directing how trust funds can be invested. The trust holds a portfolio of investments, one of which is a secured loan of $150 million to the Virgin Australia Group."
In Virgin's 2019 annual report, auditors KPMG estimated the outstanding value of unredeemed Velocity points or "unearned loyalty revenue" – based on "the stand-alone selling price of reward points", including points likely to lapse before being spent, to be $497m.
Virgin Australia CEO Paul Scurrah, who remains at the helm of the airline during the administration process, said last week that Velocity member's frequent flyer points "are not at risk, they are covered, cash-backed in a trust, so our customers can be assured those points are safe."
The Australian Financial Review reports that "Velocity Rewards will also pursue Virgin Australia for $10 million worth of pre-bought seats set aside for frequent flyer members."
However, it notes that "the scale of the loan and decision to pursue the airline as creditors will intensify the pressure on independent trustee Jonathan Sweeney to outline more detail around the specifics of the loan agreement, and why making it was in the best interests of members of the loyalty program."
Fully-owned, but frozen
In September 2019 Virgin Australia spent $700m to buy back Affinity's 35% stake in Velocity and resume full ownership of the scheme, which across the first half of the 2020 financial year delivered the airline slightly more in pre-tax earnings ($69m) than its entire domestic and international flying operations ($66m).
Virgin has now frozen the Velocity program to prevent points being spent on anything from flights to gift cards until at least late May, following a run on points which threatened to weaken the airline's already-precarious cash balance.
Scurrah said the rush to redeem points was sparked by a "reduction in confidence" once the airline's request for a $1.4bn government bailout was made public.
"When our original request to the government made its way into the newspaper there was a run on Velocity points that we weren't able to slow down," he told media during a briefing on the airline's decision to go into voluntary administration. "We need to make sure that we preserve as much value as we can as we get through this process."