Airlines More flights between China and Australia Chinese giant buys into Virgin in 'coup' 'This sets us up for ...
very good growth.'
John Borghetti, Virgin Australia chief executive Patrick Hatch Jamie Freed Virgin chief John Borghetti says this was a Virgin decision and Air New Zealand is not on the Virgin board.
Photo: Peter Braig China's largest private airline operator will buy 13per cent of Virgin Australia in a deal the Australian airline says will help it capitalise on the growing Chinese travel market. 
While analysts praised the strategic value of the deal, questions remain about how much capital Virgin needs to raise to support its growth strategy and how it will manage five airline shareholders.
Virgin and HNA Aviation Group will fly directly between Australia and Chinese cities starting next year, and will co-ordinate code- sharing, frequent-flyer programs and lounge access.
HNA Aviation, which is part of the HNA Group conglomerate, will invest $159million in Virgin as part of the deal, and plans to increase its stake to 19.99per cent. Virgin Australia chief executive John Borghetti said China was Australia's fastest-growing source of tourists, growing about 18per cent a year since 2010.
"This is a big coup," he said. "For such a large company as HNA to recognise the potential of Virgin Australia, and for that matter the potential of Australia, is enormous.
This sets us up for ... very good growth ... in that very lucrative inbound, but also outbound, traffic between Australia and China."
Mr Borghetti said he hoped the Chinese flights would start in the first half of 2017, but had not yet decided whether it would do so with its existing fleet of A330s and Boeing 777s or with other aircraft.
He noted HNA owns Bohai Leasing, one of the world's largest aircraft leasing companies.
Mr Borghetti said at least eight flights a week would depart from major Chinese cities to Australia. HNA controls Hainan, China's fourth-largest airline, and budget airlines, and carries more than 77million passengers a year on 700 routes between 200 destinations within China and abroad.
Rival Qantas Airways has codesharing arrangements with China Southern and China Eastern that funnel a lot of Chinese passengers onto its domestic network. Virgin hopes for a similar outcome with the HNA-owned airlines.
HNA will be able to nominate one director to Virgin's board after the investment, which will need the approval of Chinese regulators.
The Chinese company will pay 30¢ for each Virgin share, which is 7.1per cent above the Monday closing price. Virgin's share price jumped 5.3per cent to 29.5¢ after the announcement.
Air New Zealand's 26per cent stake in Virgin will be diluted to 22.5per cent by the deal.
An analyst said the strategic deal with NHA to fly in and out of China would make it hard for Air New Zealand to sell its Virgin shares, because potential buyers such as China Southern could no longer be offered a similar arrangement.
Air New Zealand did not know about the HNA deal before it was announced to the public on Tuesday because chief executive officer Christopher Luxon quit Virgin's board in   March after failing to unseat Mr Borghetti.
"Air New Zealand is not on the board and this was a board decision," Mr Borghetti said.
A spokeswoman for Air New Zealand said her company was not in a position to comment on the deal at this time, but sources said the Kiwi carrier expected the deal would be completed as announced.
Mr Borghetti said Singapore Airlines, which has a seat on the Virgin board and had been viewed as a potential buyer of the Air New Zealand stake as a precursor to a takeover offer, was supportive of the HNA deal.
A spokesman for Singapore Airlines said his airline's 23.1 per cent stake in Virgin would fall to 20.1 per cent "should the transaction announced by Virgin Australia today be completed."
He added: "Singapore Airlines will have no further comment on the matter at this time."
Mr Borghetti said the reference to whether the deal would be completed simply referred to its dependence on regulatory approvals and was not an indication that Singapore Airlines could try to block the deal.
"You are reading too much into it," he said. "That is a normal Singaporean comment which is factual, short and to the point."
Virgin's other major shareholders will also be diluted: Etihad will fall from 25.1 to 21.8 per cent and Richard Branson's Virgin Group will fall from 10 per cent to 8.7 per cent. The portion of the company's shares in free float will fall from 17.2 per cent to 14.9 per cent.
Virgin wants to cut debt and optimise its mix of long-term debt, short-term debt and equity. Citi analysts this month said Virgin needed to raise another $607 million to $853 million to meet its debt leverage target.
Mr Borghetti said HNA had agreed to support whatever outcome the review reaches.
"There's no question it's helpful for Virgin from a funding perspective.
It's helpful from a strategy into China perspective," Merrill Lynch analyst Matthew Spence said.
He said major shareholder Singapore Airlines might see the deal as a challenge. "But it looked like they were going to be upset with whoever it was who came in," he said.
Macquarie transport analyst Sam Dobson said the $159 million investment was small compared with some estimates of how much Virgin needed.
He said it was a good strategic move that would open up a large number of destinations. It would also make for "interesting dynamics" within Virgin's management by bringing the number of other airlines on its share registry to five.
"It's going to be challenging because they'll each have their own objectives, their own incentives," Mr Dobson said.
"Having to think about things in the best interests of Virgin and Virgin shareholders is potentially a conflict."
Virgin took out a $164 million loan in the first half of the financial year as its unrestricted cash balance fell to $544 million from $839 million a year earlier. That was followed by a $425 million unsecured loan in   March from its four major shareholders.
Air New Zealand had sought to replace Mr Borghetti with its own CEO, Christopher Luxon, but it failed to receive support from other directors and Mr Luxon resigned from the board. The Kiwi carrier then appointed bankers to review its share, including the possibility of a sale.
with Michael Smith