Virgin Australia Holdings Ltd., Australia’s second-biggest airline, posted a narrower-than- expected annual loss and sold a 35 percent stake in its loyalty program to Affinity Equity Partners.

Losses before tax and one-time items were A$212 million ($198 million) in the 12 months ended June 30, the Brisbane- based company said in a statement today. The transaction gives the Velocity frequent flier program an enterprise value of A$960 million, it said.

Chief Executive Officer John Borghetti set up the loyalty program and added business class seats and lounges to take on Qantas Airways Ltd.’s 10-year monopoly of corporate travel in Australia. He has wooed more domestic travelers after taking control of Tiger Airways Holdings Ltd.’s local budget carrier. Qantas, which yesterday posted its deepest losses since a 1995 listing, counts its frequent-flier program as its most profitable unit.

Virgin “is making headway into the higher-yielding corporate market,” Mark Williams, an analyst at CIMB Group Holdings Bhd., said in an Aug. 5 note to clients. “We see this battle continuing for some time yet.”

Today’s result compares with a loss of A$35 million a year earlier and the A$225 million median loss from six analysts’ estimates compiled by Bloomberg News.

Virgin posted a net loss of A$356 million, compared with the A$208 million median of six analysts’ estimates.

The frequent flier program is “a key growth platform for us,” Virgin’s Chief Financial Officer Sankar Narayan said in a phone interview after the announecment. “All we are doing is bringing more competition to the market.”

Shares of Virgin closed at 40.5 Australian cents in Sydney yesterday, marking a 6.6 percent rise so far this year. The benchmark S&P/ASX 200 index has gained 5.1 percent in the period.

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net

To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net Subramaniam Sharma, Edward Johnson

Photo Credit: People board a Virgin Australia aircraft on August 12, 2011 in Melbourne, Australia. Scott Barbour / Getty Images