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Virgin Australia Holdings has unveiled the surprise sale of a 35 per cent stake in its Velocity frequent flyer program to a private equity group after reporting a full-year underlying loss of $211.7 million in line with market expectations.
The airline said it would sell a 35 per cent stake in Velocity to Affinity Equity Partners in a deal that values the program at $960 million. The deal is expected to increase Virgin's cash balance by $336 million and reduce its gearing by 8 per cent.
The transaction, which will come as a surprise to the market, was announced a day after Qantas Airways said it would keep full ownership of its $2.5 billion frequent flyer program.
Virgin has 4.5 million members of its Velocity program, versus the 10.1 million members of the more mature Qantas loyalty program.
Virgin chief executive John Borghetti said Affinity had a wealth of experience in driving rapid and sustainable growth and the deal would allow Virgin to accelerate Velocity's strategy and realise its full potential as a world-class loyalty business.
Virgin has a target of growing the Velocity member base to 7 million over the next three years and to further diversify its partner mix, increase partner numbers and strengthen member engagement in points earned and redeemed.
In its results released on Friday, Virgin showed it managed to increase its yield, or returns on fares, by 1.2 per cent in contrast with a decline at Qantas, but Virgin's costs increased by 3.4 per cent, eroding the benefits of the yield increases.
Virgin said the cost increase rate slowed to 2 per cent in the second half as capacity growth slowed.
Virgin reported a $46 million loss from its 60 per cent stake in budget carrier Tigerair Australia and now does not expect the low-cost airline will be profitable until the 2017 financial year.
Excluding Tigerair, Virgin's capacity growth grew by just 0.1 per cent during the financial year.
Virgin said it ended the year with an unrestricted cash balance of $541 million, up $203 million from the previous year, but the Affinity deal, expected to close in October, will increase that further.
During the financial year, Virgin raised $350 million from shareholder, including Air New Zealand, Etihad Airways and Singapore Airlines. The chief executives of all three of those airlines joined the Virgin board in July.
Virgin did not give any forward guidance on earnings or capacity alongside its full-year results. Qantas expects to report an underlying pre-tax profit in the first half and will keep its capacity flat during that period.
In tandem with the results release, Virgin also announced its "Virgin Vision 2017" plan for the next three years.
"Now that we have completed the Game Change Program, this next period for us is about maximising the group's potential, by extracting value from the business and generating sustainable profitability," Mr Borghetti said.
"To do this, we need to increase the growing customer loyalty to the Virgin Australia Group. That is what will assure our business of a stable future revenue stream and enable us to deliver sustainable profitability as the market recovers."
Growing Velocity will be part of the strategy, but Virgin also expects to grow its charter business and freight business.
Virgin also wants corporate and government accounts to contribute to 30 per cent of its domestic revenue over the next three years, up from more than 25 per cent in the last financial year.
The airline will also bring forward the delivery of its more fuel efficient Boeing 737 Max aircraft to 2018 from 2019 and will retire its two oldest A330 aircraft.
Virgin will also introduce business class on all of its trans-Tasman and Pacific Island routes from early 2015.