Chinese airline giant HNA Group moves on 13pc of Virgin Australia

China’s biggest privately owned airline, HNA Group, has emerged as a potential saviour for Virgin Australia.

Virgin Australia chief executive John Borghetti: ‘For such a large company to recognise the potential of Virgin Australia — and Australia generally — is enormous.’ Photo: Hollie Adams

China’s biggest privately owned airline, HNA Group, has emerged as a potential saviour for Virgin Australia after it took a placement of 13 per cent of the No 2 airline and declared its intention of moving to nearly 20 per cent.

Amid a capital review aimed at dealing with Virgin’s US dollar debt and moves by Air New ­Zealand, its largest shareholder, to exit its 25.9 per cent stake, HNA will pump in $159 million through a placement as part of a new commercial ­alliance.

But the deal is understood to have angered Air New Zealand, the government-backed national carrier that will see its stake in Virgin diluted from 25.9 to 22.5 per cent at a time when it is looking to sell down its stake.

Singapore Airlines, Etihad and Virgin’s shareholdings have also been diluted in the placement.

HNA could take a further placement to get to 19.99 per cent of the company as part of the ­capital review ordered by new Virgin chairman Elizabeth Bryan and conducted by investment bank UBS.

Virgin chief executive John Borghetti said HNA would probably move to increase its stake to 19.99 per cent “as quickly as practical”.

Air NZ chief Christopher Luxon quit the Virgin board in March after the Kiwi carrier ­declared its plans to sell a stake it spent $500m acquiring that is now worth about $275m.

Virgin Group founder Richard Branson told The Australian this week that a deal for the Air NZ stake was imminent, with Singapore Airlines and a mystery airline believed to be in the race.

It is not clear whether HNA sought to enter the register via a deal with Air NZ but it has been linked on numerous occasions. A spokesman for Air NZ ­declined to comment.

Mr Borghetti said the agreement with HNA was not dis­cussed with Air NZ and he did not know its view. “Air New Zealand is not on the board and this was a board decision,” he said.

Virgin had no input into the continuing exit strategy of Air NZ, he said.

The placement at 30c a share was a 7 per cent premium to the pre-deal market price, but the market quickly pushed up Virgin shares 2c to close in line with the placement price.

HNA, which owns Hainan Airlines in mainland China and 10 other airlines including Hong Kong Airlines and West Asia Airlines, as well as tourism, freight and logistics operations, will take a seat on the Virgin Australia board.

Virgin and HNA have struck a partnership that will give Virgin better access to the 1.2 million ­Chinese tourists coming to Australia each year, as well as allowing direct flights to China for Virgin planes.

The agreement covers code sharing, loyalty programs, lounge access and promotion of tourism and business travel. Virgin may also lease aircraft from HNA to fly to China.

“This is a big coup,” Mr Borghetti said, adding it would be positive for profitability.

“For such a large company to recognise the potential of Virgin Australia — and Australia generally — is enormous.”

The code share flights to China would probably run daily, Mr Borghetti said, with Beijing and Hong Kong the likely destinations.

Mr Borghetti said Virgin was targeting operations to China in the latter part of next year, while Virgin’s Velocity frequent flyer members would over time receive reciprocal rights for HNA-backed airlines such as Hainan. He said the deal would help Virgin ­improve its share of domestic flights for the fast-­growing Chinese inbound tourism market.

The strategic alliance will ­require approval from competition authorities in both Australia and China, while the placement is seen as unlikely to need support from local regulators.

But the deal will also help ­address a growing debt problem that has blunted Virgin’s ability to capitalise on lower fuel prices.

Before the deal, Virgin’s short and long-term borrowings were forecast by Macquarie Wealth Management to hit $2.963bn, ­including a shareholder loan of $245m provided after March ­quarter trading showed a major cash outflow.

A capacity war with Qantas and a heavy investment program to upgrade lounges and aircraft has ended. But the falling Australian dollar has blunted the benefit to Virgin from the falling fuel price while blowing out the cost of US dollar-denominated debt.

Virgin has foreshadowed a second-half loss for this financial year, with underlying pre-tax ­profit forecast at $30m to $50m, and it is facing a recovery in fuel prices at a time when domestic and international markets are showing signs of weakening.

In its third quarter update last month, Virgin reported an $18.6m underlying pre-tax loss and said capacity had been cut in response to weak demand.

Virgin said it would cut final quarter capacity by 5.1 per cent compared with the previous ­corresponding period amid election ­uncertainty and weak consumer demand.