Virgin Australia set to sell off Velocity Frequent Flyer scheme?

By David Flynn, July 11 2019

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
David

David Flynn

David Flynn is the Editor-in-Chief of Executive Traveller and a bit of a travel tragic with a weakness for good coffee, shopping and lychee martinis.

Boof

Boof

29 Aug 2013

Total posts 60

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% ;-)

moa999

moa999

Qantas - Qantas Frequent Flyer

02 Jul 2011

Total posts 1372

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.

resolute

resolute

Virgin Australia - Velocity Rewards

20 Feb 2017

Total posts 15

Now Scurrah is selling off the crockery -

no confidence in this CEO.

desafinado74

desafinado74

Singapore Airlines - KrisFlyer

02 Dec 2016

Total posts 23

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 ?

JKH

JKH

Qantas - Qantas Frequent Flyer

23 Sep 2017

Total posts 127

Scurrah seems like another “slash ‘n’ burn” Rod Eddington.

DanV

DanV

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 105

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.

Bob Burgess

Bob Burgess

13 Sep 2016

Total posts 184

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.

MELflyer

MELflyer

03 Nov 2015

Total posts 9

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.

DanV

DanV

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 105

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.

desafinado74

desafinado74

Singapore Airlines - KrisFlyer

02 Dec 2016

Total posts 23

It will be a terrible move. Hopefully it is just unfounded rumours.

UpUpAndAway

UpUpAndAway

QF

11 Jul 2014

Total posts 279

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.

Darren_A

Darren_A

20 Oct 2016

Total posts 2

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.

abr

abr

Etihad - Etihad Guest

03 May 2019

Total posts 4

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.


Cruise2097

Cruise2097

Virgin Australia - Velocity Rewards

04 Sep 2015

Total posts 7

Will it mean I cant use my Velocity points on Virgin ?

bolling

bolling

Virgin Australia - Velocity Rewards

24 Jan 2014

Total posts 2

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?

Rembrandt

Rembrandt

Etihad - Etihad Guest

11 May 2019

Total posts 6

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.

daktari

daktari

26 Apr 2018

Total posts 10

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.

Rod H

Rod H

Virgin Australia - Velocity Rewards

06 Mar 2015

Total posts 111

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.

UpUpAndAway

UpUpAndAway

QF

11 Jul 2014

Total posts 279

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.

bagpuss

bagpuss

18 Jan 2017

Total posts 20

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.

tonyw

tonyw

Qantas - Qantas Frequent Flyer

18 Jul 2015

Total posts 19

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!


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