Virgin Australia Holdings Ltd’s share price takes off on Chinese investment

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!

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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