News: UPDATE 1-Virgin Australia says China's HNA Aviation to buy major stake

(Updates throughout with more detail on alliance, CEO comment, shares dilution)

Virgin Australia (VAH) on Tuesday said China's HNA Aviation group will buy up to a fifth of the airline to tap into the rapidly growing tourism market between the two countries.

Virgin said HNA Aviation Group, the largest private operator of airlines in China, would invest A$159 million ($114 million) through an equity placement, giving it a 13 percent stake with plans to go up to 19.99 percent.

The pair planned to introduce direct flights between Australia and China and co-operate on operations such as frequent flyer programmes, code-sharing and lounge access.

"The Chinese travel market represents Australia’s fastest growing and most valuable inbound travel market," Virgin Australia Chief Executive John Borghetti said in a statement.

"The alliance will see us leverage the opportunities offered by China as well as the synergies of HNA’s comprehensive aviation supply chain."

Shares will be issued at A$0.30 each, representing a 7.1 percent premium to Monday's closing price, Virgin said in a statement.

The HNA deal to issue new shares is separate to Air New Zealand's plans to sell its 26 percent stake in Virgin Australia. That sale is still open.

However, it will have the effect of diluting the stakes of other major shareholders, possibly including Air New Zealand Ltd (AIR). ($1 = 1.3916 Australian dollars)