Virgin Australia Holdings, which earned more than half its domestic profits from its loyalty program in the first half of the financial year, has delayed the start of a big partnership between its frequent flyer program and petrol retailer BP to “before June”.

The deal was announced in mid-November and meant as a counter to Qantas Airways’ partnership in Woolworths. BP customers were expected to be able to earn points at the bowser from swiping their Velocity cards by “early 2015”, but a Virgin spokeswoman said the date had been pushed back to “before June” as the partners worked out the details.

“You want to make sure all of your ducks are in a row so to speak,” Virgin chief executive John Borghetti told The Australian Financial Review. “This is huge for us. We’re very focused on making sure it is right.”

Under the agreement, BP will buy Velocity points from Virgin, adding to the loyalty program’s revenue from outside sources. The points earnings rate from petrol and other purchases at BP has not yet been revealed.

The work on the BP deal comes as Velocity head Neil Thompson has announced plans to resign when a replacement is found. It is understood Virgin does not have any suitable internal candidates for the role and therefore an external one will be chosen from Australia or overseas.

Virgin last year sold a 35 per cent stake in Velocity to private equity group Affinity Equity Partners for $336 million, in a transaction that valued the loyalty program at $960 million. Virgin, unlike Qantas, has never disclosed full earnings figures for its loyalty division. But alongside its first-half results last week, Virgin revealed that Affinity had received $5.3 million of earnings from $16 million in revenue between October 22,  when the transaction was completed, and December 31.

virgin tail

Macquarie Equities analyst Sam Dobson said that implied Velocity had pre-tax earnings of $56 million for the half, assuming it was debt free. That is more than half of Virgin’s overall domestic division earnings before interest and tax of $103.8 million, although clearly the operational performance also improved. The previous year it had reported EBIT of $25.7 million, including domestic, which means it may have been loss making without the relatively stable Velocity earnings stream. If Affinity had owned the stake for the entire first half this year, it would have received $16.6 million of Virgin’s pre-tax profits.

Virgin paid a dividend of $11.8 million to Affinity in late December. Virgin chief financial officer Sankar Narayan said the steep dividend payment was due in part to the basis and starting date of the transaction.

“Going forward we will have more of a normalisation [of dividends],” he said.

Mr Dobson said if that dividend payment rate were maintained annually, Affinity would receive a 14 per cent yield on its investment. Deutsche Bank analyst Cameron McDonald said based on the earnings alone, Affinity would receive a yield of more than 8 per cent after tax based on its purchase price.

Velocity has 4.8 million members, but Virgin is looking to increasethat figure to 7 million by 2017. Rival Qantas has 10.3 million members of its frequent flyer program.

In a bond prospectus issued last year, Virgin revealed there was the potential for Affinity to exit via a float or trade sale within three years of the purchase date. Virgin has a first right of offer in relation to Affinity’s stake in certain circumstances and also has the right to participate in other exit mechanisms available to Affinity.

Qantas last year considered selling or floating a minority stake in its division, which Mr Dobson values at more than $3 billion. But it decided against the move, in part because the sale would result in a loss of a big portion of a stable earnings stream that helped to offset volatility in the flying divisions.

Analysts expect Virgin will report a $62 million underlying pre-tax loss this financial year, compared with a $776 million underlying pre-tax profit for Qantas. The sale of the Velocity stake to Affinity helped boost Virgin’s cash balance in the first half. Deutsche Bank analyst Cameron McDonald said without that sale, Virgin would once again have consumed cash during the period.

Extracted in full from the Sydney Morning Herald.