What: Shares in Virgin Australia Holdings Ltd (ASX: VAH) have closed around 7% higher on Tuesday after the airline operator announced a strategic alliance with China-based HNA Group.
So What: According to the announcement, under the alliance Virgin and HNA will:
"Look to introduce direct flights between Australia and China and co-operate on commercial functions including code-sharing, frequent flyer programs, lounge access and promotion of tourism and business travel."
To support the alliance, HNA is set to invest $159 million into Virgin via the issue of shares at a price of 30 cents per share.
On completion of the share placement, HNA will own approximately 13% of Virgin with the announcement also noting that HNA intends to, over time, increase its shareholding to 19.99%.
Now What: The deal could be great news for shareholders in Virgin who have suffered a share price decline of close to 40% in the past year. The stock is currently changing hands at 30 cents which is barely above the one-year low of 26 cents and a long way from the one-year high of 50 cents.
Given the growing volume of tourists from China to Australia, Virgin's announcement looks like a sensible way to tap into this growth opportunity by partnering with the largest private operator of airlines in China.
Virgin's announcement arguably has consequences for Qantas Airways Limited (ASX: QAN) too. As the CEO of Virgin, Mr John Borghetti noted:
"The Chinese travel market represents Australia's fastest growing and most valuable inbound travel market, with inbound passengers from China increasing by approximately 18% since 2010. In 2015, over 1 million Chinese travellers visited Australia, spending approximately A$8.3 billion in total on their journeys. By 2020, almost 1.5 million Chinese travellers are projected to visit Australia in a market expected to be worth up to A$13 billion."
Qantas certainly won't be pleased to have a stronger competitor in this space!