Virgin Australia's reach into China will change the airline and the tourism industry
Virgin Australia’s reach into China will change the airline and the tourism industry

Virgin Australia has placed $159 million worth of stock with China’s HNA Aviation Group at 30 cents per VAH share, or two cents higher than yesterday’s close on the ASX.

The deal equates to a 13 percent equity in the Virgin Australia Group, where it will join Air New Zealand, Singapore Airlines and Etihad on the share register.

However Virgin Australia CEO John Borghetti emphasised the importance of the commercial alliance with HNA, which owns Hainan Airlines, which flies to Sydney, and is the parent company of Hong Kong Airlines, which serves Cairns and the Gold Coast.

“This fills in a hole in the map for Virgin Australia as far as China is concerned by providing for the future development of more direct flights to that country which is of such importance to Australian business and tourism interests,” Mr Borghetti said.

It is understood this might result in some Virgin Australia flights in its own aircraft to China, as well as the expansion of Hainan Airlines services to Australia.

The deal is separate from the on-going VAH capital structural review, and the ASX filing says “HNA is committed to supporting the outcomes of the capital structure review and intends to increase its shareholding over time up to 19.99 per cent.”

This is the summary of the ASX announcement earlier this morning.

It is a heads of agreement to form a strategic commercial alliance with HNA Aviation Group Co. Ltd (‘HNA’), a division of HNA Group, that will accelerate the Virgin Australia Group’s access to the rapidly growing Chinese travel market.

HNA Group is a Fortune Global 500 conglomerate and the largest private operator of airlines in China.

Under the commercial alliance, the companies will look to introduce direct flights between Australia and China and co-operate on commercial functions including code-sharing, frequent flyer programs, lounge access and promotion of tourism and business travel.

In support of the alliance, HNA will make an equity investment in the Virgin Australia Group. The investment will be made in the form of an A$159 million placement of shares at an issue price of A$0.30 per share, which represents a premium of 7.1 per cent to the last close on 30 May 2016. Following the placement, HNA will have a shareholding of approximately 13 per cent in the Virgin Australia Group.

The capital structure review to optimise the Virgin Australia Group’s balance sheet and capital structure is ongoing. HNA is committed to supporting the outcomes of the capital structure review and intends to increase its shareholding over time up to 19.99 per cent. The outcomes of the capital structure review will be announced when finalised.

Air New Zealand is currently seeking to sell its nearly 26 percent stake in Virgin Australia.

By way of backgound:

Australia – China travel market

  • Travellers from China are Australia’s fastest growing and most valuable inbound travel market.
  • Vists from China to Australia have been increasing by approximately 18 percent per year since 2010.
  • As a destination, Australia ranks ahead of any other country in terms of aspiration, intention and awareness for Chinese travellers.
  • Recent LEK survey found that 46% of surveyed Chinese visitors to Australia are repeat visitors.
  • In 2015, spending by Chinese travelers on their journeys to Australia increased by 45% on 2014 to $8.3 billion.
  • By 2020, Australia is expected to receive almost 1.5 million inbound Chinese visits in a market expected to be worth up to A$13 billion.

HNA Group

  • A Fortune 500 multinational conglomerate based in China
  • A global leader and extensive investments in aviation, tourism, logistics, financial services and real estate

Aviation

  • Holdings in more than 10 member airlines

Through its member airlines, HNA:

  • Is the largest private operator of airlines in China
  • Operates 1150 aircraft
  • Flies over 77 million passengers annually on nearly 700 routes to more than 200 destinations in China and around the world.
  • Has an extensive Chinese domestic aviation network, covering many Tier 1 and Tier 2 cities in China

Aviation supply chain

  • 16 airports under management
  • Strategic investments in other aviation supply chain businesses, including aircraft leasing (Avolon), ground handling services (Swissport), hotels and travel agencies.
  • Currently owns or manages over 450 hotels.

Comment: The Virgin Australia-HNA agreement has the potential to add even more growth to inbound tourism from China  and give Australian business travellers an opportunity to fly non-stop to more centres in the PRC .

The HNA Irish based Avolon leasing enterprise and the large scale direct involvement of the China conglomerate in airlines and downstream investments in tourism could encourage more cooperation between Qantas/Jetstar and both Cathay Pacific and China Eastern.

The deal has the power to change the nature of airline competition between Australia and the PRC and SAR as well as add to growth on those routes.

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