VAH Virgin Australia Holdings Ltd

   By Rebecca Thurlow 
 

SYDNEY--Chinese conglomerate HNA Group plans to buy a 13% stake in Virgin Australia Holdings Ltd. (VAH.AU) for 159 million Australian dollars (US$114 million) as part of a strategic alliance that will have the companies start direct flights between China and Australia.

Virgin Australia, the country's second biggest airline behind Qantas Airways Ltd. (QAN.AU), has been looking to bolster its balance sheet since Air New Zealand Ltd. (AIR.NZ) said in March it was considering selling part or all of its near-26% stake in the carrier.

On Tuesday, Virgin Australia said it will issue the new shares to HNA at an issue price of 30 Australian cents a share, a premium of 7.1% to Monday's closing price. Under the alliance, the companies will also cooperate on code sharing, frequent flyer programs and promotion of business and leisure travel.

The deal is the latest in an aggressive push by HNA to expand its travel-to-property empire beyond China's borders, and closely follows Air France-KLM's (AF.FR) Monday announcement that it is in exclusive talks to sell a 49.99% stake in its airline catering unit, Servair, to HNA.

In February, HNA made one of the biggest acquisitions ever by a Chinese company abroad when it agreed to buy U.S. technology distributor Ingram Micro Inc. (IM) for about US$6 billion. Last month, it cut a deal to buy the owner of the Radisson hotel chain and a reached a separate US$1.5 billion agreement for Swiss air-travel logistics company gategroup Holding AG (GATE.EB).

The Chinese travel market represents Australia's fastest growing and most valuable inbound travel market, with inbound passengers from China increasing by about 18% a year since 2010. In 2015, more than a million Chinese travelers visited Australia, spending about A$8.3 billion in total on their journeys.

In recent years, supported by its big shareholders, Virgin Australia has invested heavily in transforming its business from a budget carrier to a full-service airline, competing head-to-head with larger rival Qantas. The two airlines engaged in a damaging price war that caused losses for both companies before pressure from investors spurred them to scale back on capacity.

Qantas's finances have since rebounded. For the year ended June 30, the company swung to a profit of A$557 million from a year-earlier loss of A$2.84 billion. In the first half of the current fiscal year, the company's profit more than tripled, helped by a cost-cutting program. That has allowed Qantas to return cash to long-suffering shareholders and start buying more planes and increasing capacity on popular routes. The carrier's investment-grade credit rating has also been reinstated by Standard & Poor's and Moody's Investors Service.

Virgin Australia's recovery has been slower and less spectacular. In February, the airline reported a net profit of A$62.5 million for the six months through December, up from a year-earlier loss of A$47.8 million. In spite of falling fuel prices that have proved a boon elsewhere, Virgin's heavy investment in recent years has left it more highly geared than Qantas, making it harder to compete. During its first-half results, Virgin Australia announced plans to sell several aircraft to help pay down debt. Analysts have remained concerned about its weak balance sheet and shares are down nearly 40% year to date.

In March, Virgin Australia secured a A$425 million loan facility from Air New Zealand and three other major shareholders, Etihad Airways, Singapore Airlines Ltd. (C6L.SG) and Virgin Group, to give it liquidity while it reviews its capital structure. Air New Zealand said it intends to coordinate its plans with Virgin Australia's broader review of its capital structure.

Virgin Australia said the review is ongoing. The airline said HNA is "committed to supporting the outcomes of the capital structure review" and intends to increase its shareholding over time up to 19.99%.

- Write to Rebecca Thurlow at rebecca.thurlow@wsj.com

(END) Dow Jones Newswires

May 30, 2016 20:31 ET (00:31 GMT)

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