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Virgin Australia finds new love as it goes through messy Air New Zealand divorce

05/31/2016| 9:09:24 PM|

Virgin Australia sees alliance with largest private Chinese carrier as a great growth option, yet cash injection from HNA, won't go far enough to solve Virgin's overgeared balance sheet.

Just when the aviation industry was watching for Virgin Australia boss John Borghetti to fall on his sword, the tenacious operator has found himself a new ally, a fresh airline partner and a USD 159 million wad of cash.

Borghetti's  deal with China's biggest airline group, HNA, has, at the same time, poked his existing partner-turned nemesis, Air New Zealand, in the eye.

But more importantly, Virgin's new partner has opened up the airline to the fastest-growing international market, China. Virgin will start flying to China next year and will secure new aircraft through HNA's aircraft leasing business.

Virgin, like other airlines and even Flight Centre, had been under earnings pressure having been hit by sluggish demand leading to an international air fare war. But Virgin has been under more pressure thanks in part to its inability to cash in fully on the weak oil price.

Having taken on significant licks of debt over the past year, it needs a capital restructure.

Virgin is in the throes of a divorce from its largest shareholder, and alliance partner, Air New Zealand, whose chief executive, Christopher Luxon, staged an unsuccessful management coup and is now attempting to sell the 26 per cent stake.

HNA will also take a placement of new shares in Virgin, giving the Chinese group 13 per cent initially, and has signalled it wants to take the holding to 19.9 per cent at 30 cents a share. This in effect puts a cap on the price that Air New Zealand can hope to get for its stake in Virgin - an outcome that will undoubtedly infuriate Luxon.

It also leaves Air New Zealand with one less potential buyer of its stake, as HNA had been speculated as a potential candidate. Whether another Chinese airline would still be interested remains to be seen. It's possible but probably less likely.

Under the alliance with HNA, the companies will look to introduce direct flights between Australia and China. The alliance will also involve co-operation on code-sharing, frequent flyer programs, lounge access and promotion of tourism and business travel. So the 10 domestic airlines owned by HNA will fly Virgin's customer internally in China and once the HNA begins flying to Australia, Virgin will code share domestically.

HNA will also get a seat on the Virgin board.

Brands owned by HNA include Hainan Airlines, Hong Kong Airlines and West Asia Airlines.

Virgin sees the alliance with the Chinese carrier as a great growth option, given inbound travel from China to Australia is the only part of the market that is really growing - and at a rate of about 18 per cent annually.

The cash injection from HNA, however, won't go far enough to solve Virgin's overgeared balance sheet

Virgin said on Tuesday that HNA will support changes to Virgin's capital structure - a move that is due to be announced over the coming weeks.

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TAGS: Virgin Australia | Air New Zealand | HNA Group
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