Value of Virgin Australia frequent flyer scheme slashed

Virgin Australia’s frequent flyer scheme Velocity has had its value written down from AUD2 billion Australian dollars (USD1.4 billion) to between AUD640-704 million (USD458-504 million) in an independent report given to the country’s Federal Court, the Sydney Morning Herald reported. The value of Velocity was axed as part of the process to clear the way for private equity firm Bain Capital to take full ownership of Virgin Australia Holdings, the newspaper explained. Washington DC-based multinational business advisory firm FTI Consulting prepared the report, which administrator Deloitte then presented to the court. Deloitte is activating a rarely used section of the Corporations Act 2001, 444GA, to perform the transfer of shares to Bain. Under the section, the court must conclude that the shares have little economic value. Virgin Australia has an enterprise value of AUD3.1-3.5 billion (USD2.2-2.5 billion). Yet, its equity after factoring in almost AUD5 billion (USD3.58 billion) in liabilities owed to banks, bondholders, lessors, and employees is worthless, the report claimed. The equity value the report gives Velocity is significantly below both an AUD960 million (USD687 million) valuation implied in the sale in 2004 of a 35% stake in the scheme to private equity firm Affinity Equity Partners, and AUD2 billion (USD1.4 billion) implied when Virgin Australia repurchased the stake in September 2019. Evert de Boer, the managing partner of management consulting firm On Point Loyalty, told the newspaper that even in a pandemic-struck aviation sector FTI’s valuation of Velocity, which boasts 10 million members, “seems low, for all intents and purposes” and “hard to understand.” He valued Velocity at AUD1.7 billion (USD1.2 billion) in January 2020 and now, post-covid, at around AUD900 million to AUD1 billion (USD645-715 million). In an era where major airlines have used their frequent flyer schemes as collateral to raise capital, “all of a sudden these loyalty programmes have been thrust into the limelight because they turn out to be very resilient and stable even when people stop flying but continue to spend on their credit cards. It’s led to this ‘aha’ moment for people realising these loyalty cards are very profitable and consistent.” The Federal Court will stage a final hearing on the administrator’s 444GA application on November 10. Shareholders have until November 5 to challenge the application, the Sydney Morning Herald reported.