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Government hires Morgan Stanley to advise on Virgin Atlantic bailout, talks ongoing

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Sky News reported this afternoon that Morgan Stanley has been appointed by the Government to give additional advice on Virgin Atlantic’s application for a bailout.

It has already been confirmed that Rothschild and EY are working with the Government, although EY is theoretically conflicted having been the auditor of British Airways and latterly IAG for more than 30 years.

It is unclear exactly what is being requested.  Whilst the report talks about ‘£500 million of public money’ being required, it is arguably more likely that the Government will provide a loan guarantee.  This would ensure than any banks which lent new money to Virgin Atlantic would have 80% to 90% of losses indemnified by the tax payer.   The upside of this approach is that it doesn’t require any public money to be handed over until (unless) the airline fails.

Government hires Morgan Stanley to advise on Virgin Atlantic bailout

The airline is also believed to be seeking a Government guarantee to allow it to access the substantial sums being held back by Visa, Mastercard and American Express.  As the credit card companies are liable to repay passengers under the Section 75 rules if the airline fails, they are refusing to hand over payment for ticket sales until after the date of travel.

It is also possible that the Government may take an equity stake, although this would primarily be for PR purposes to justify the guarantees.  Virgin Atlantic has never paid regular dividends to its shareholders and the level of debt in the business means that the equity has little value.  Air France KLM was only prepared to pay £220 million for a 31% stake back in 2017 – a deal which eventually fell through – and that was during a good point in the cycle.

Government hires Morgan Stanley to advise on Virgin Atlantic bailout

As we have covered before, Rolls-Royce, Airbus and Heathrow Airport have submitted letters to the Government stressing the importance of saving Virgin Atlantic.  Manchester Airports Group made a similar submission last week according to press reports.

To add to the confusion, Delta Air Lines – a 49% shareholder in Virgin Atlantic – received a huge bailout from the US Government this week.  It has been given $5.4 billion, of which just $1.6 billion is a loan.  This is despite spending almost $3 billion in 2019 alone on dividends and share buy-backs.  Do the US airline bailouts mean that the UK Government should do the same?  Or does it mean that Delta should use some of its free money to prop up Virgin Atlantic?

Virgin Group has already injected a reported $100 million into the airline in recent weeks.  Whilst it could clearly do more, it is also unclear how much of the value of Virgin Group is actually liquid as opposed to the value of its equity stakes in various businesses.

Virgin Atlantic also has a more uncertain future than British Airways because of its reliance on the US market.  If the US decides to impose tough restrictions on incoming flights for a couple of years, such as enforcing a two week quarantine period on arrival to anyone who could not prove coronavirus antibodies or vaccination, it will effectively end 90% of tourist and business travel.  The EU would be likely to impose parallel restrictions on US passengers in retaliation, cutting off the inbound flow. British Airways would be able to fall back on its short-haul network, whilst easyJet and Ryanair could operate a relatively normal schedule once European lockdowns end.

Without a guarantee that the UK-US aviation market will reopen soon without restrictions, it is hard to see how support for Virgin Atlantic could be justified.  Paying the airline to park most its aircraft for 18-24 months until the US allows tourism again is clearly not going to work, however strongly you want the airline to survive.

Talks with the Government are ongoing and expected to continue for a number of weeks.


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Comments (121)

  • Spaghetti Town says:

    EY’s consulting arm will be different to EY’s audit team that audits IAG. Nothing to worry about there. They’ll both be independent.

    • mr_jetlag says:

      Oh well thats alright then. As someone with direct experience of the big 4, that divide between consulting and audit is honoured more in the breach than in observance. I guarantee there will be an impact analysis sold by the Consulting Partner that “draws upon our unique perspective on the aviation industry”… cough.

      • Lady London says:

        You mean like the “Chinese Walls” in investment banks. Or is that a bad word now.

        • mr_jetlag says:

          we still use the term Chinese walls, I think that’s generally not frowned upon…

      • Spaghetti Town says:

        @ mr jetlag. As someone who works for the big 4 this would be considered a massive breach if the two teams were not independent.

        • Rob says:

          Even if it isn’t discussed, the EY team working for the Government know that it is in their interests – both for the firm and for their own partnership prospects, as partnerships are decided by cross-firm panels – to help VS fail because IAG is a massive client of the firm. You don’t need to send emails across departments making the point.

          • Spaghetti Town says:

            Absolute nonsense. I don’t work for EY but we’re all caught under the same regulator and that would NEVER happen. You’re older than me Rob so more experienced and potentially more in the know but that would not happen at my firm.

          • mr_jetlag says:

            Sorry @Spaghetti Town I am with Rob here. There will of course be strict rules for SM, M and C levels that the MDs / Partners happily ignore if it means landing or retaining a seven figure engagement. Also, seriously, the regulator is as useless as a chocolate N95 mask.

    • Rob says:

      Bless.

      • YN says:

        “Virgin Atlantic has never paid regular dividends to its shareholders so the equity has minimal value.”

        Am I missing something? A ton of corps don’t pay dividends but that doesn’t automatically mean their equity has “minimal value”.

        Equity value is driven by net asset value (which may well has deteriorated for VA with the coming asset write-downs and soaring liabilities, but this hasn’t much to do with its dividends policy).

        • Genghis says:

          “ Equity value is driven by net asset value”. For a company with loads of assets on the balance sheet, eg an oil company, yes. For an airline, the key driver is cash flow. What about the value of the Virgin brand? Where does that appear on the balance sheet?

          • YN says:

            “driven” does not mean the sum total. I’m not an accountant but presume the brand value is captured as an intangible asset (or goodwill in case of an acquisition) on the balance sheet of the HoldCo(s).

            Second, yes cash flow is important but if a businesses prioritizes reinvestment of retained earnings over dividends (even a zero dividend policy), the equity can still have significant value – hence my quibble with Rob’s initial assertion.

            TDLR version: In classic DCF valuation model, the payout ratio doesn’t really factor.

          • Genghis says:

            VS use IFRS. Brand value can’t be reliably measured hence not an intangible under IAS 38. Virgin Group own 51% of VS and hence using proportional consolidation there is no “goodwill”.

          • YN says:

            Thanks for detracting from the original point, Genghis. My initial comment was not intended to quibble about how VS brand equity is valued but rather pointed out the inaccuracy of making a generalized statement spuriously linking the lack of regular dividends to “minimal equity value”.

            Cheers.

          • TGLoyalty says:

            The real question is what’s the brand worth when the name actually belongs to VHG.

          • Lady London says:

            Yup @TGLoyalty I’m pretty sure the name is rented.

            Could easily be stuck on another airline when the time is right.

            Thus letting the current one go down cleanly is making loads of sense

            Australi has exactly the same problem with the current renter of the Virgin name over there – it’s owned by a group including 2 Chinese groups whose other investments have problems predating CV and can’t invest more. There’s even more evidence in Australia that VA really have improved standards and kept prices down in the Australian market. But Australia too should let it go and then find ways later to allow other entrants to the market. Taxpayers everywhere have too much to support now.

    • Anuj says:

      Perhaps his comment was sarcasm ?

  • Genghis says:

    * Rothschild & Co. They rebranded a couple of years ago

    • mr_jetlag says:

      I have both sets of stationery, as well as an amusing one from Five Arrows (their PE arm) 🙂

  • Dominic says:

    Outrageous that Delta got such a huge bailout despite the $3bn share buybacks and dividends… speaking as someone whom has benefited from numerous dividend payments over the past few years.

    • MT says:

      It is I agree but it is a Trump lead administration, its to be expected!

  • MT says:

    I have to say if BA need to ‘fall back’ on their short haul network they are just as screwed as Virgin and would need a bailout also and as we are not part of Europe anymore as far as Boris is concerned it wouldnt involve IAG!

    I could be wrong but I feel both Virgin and BA will survive and the government will ensure they do. Yes FlyBe were allowed to fail, but that was before things really kicked off and in reality Virgin have a much bigger identity than Flybe to the general public and the negative press and impression that would give is just to great!

    Add into that the fact this government is very much northern powerhouse focused (I know currently old news but wont be by the next election) and Virgin are very much big players at Manchester and if they fail its hard to see anyone moving in to fill the slots! The governement are rightly making sure Virgin do all they can before they step in, but they will step in rather than see them fail!

    • Erico1875 says:

      They Would be better off giving any money to RYANAIR. They have invested far, far more in the north of UK than Virgin and IAG.

      • MT says:

        Apart from Ryanair dont need it! I do agree in the theory but reality and perception are very different things!

      • Colin MacKinnon says:

        Or Easyjet, or Jet2…. or even KLM!

        All have many more flights and seats in the North, or even further towards the North Pole in Scotland!

      • Lady London says:

        …and, I believe, Ryanair does a lot more in Italy now than Alitalia these days

  • Lux says:

    Out of interest, I presume this:

    “If the US decides to impose tough restrictions on incoming flights for a couple of years, such as enforcing a two week quarantine period on arrival to anyone who could not prove coronavirus antibodies or vaccination”

    Is speculation rather than something that’s been discussed? Although I’d put nothing past the orange wonder, and his ability to blame others afterwards.

    • philco says:

      I live in the US and I haven’t heard of anything like this proposed. Like you nothing would surprise me given our Federal leadership but by the same token they seem driven to get back to normal ASAP as well damn the numbers so who knows which way they may lean.

    • MT says:

      So far the language is very much back to normal as quickly as possible and no discussions on such measures! Equally if he thought it would get him re elected I am sure he wuodl do it in a heartbeat regardless of if it was the right or wrong thing to do!

  • Mr(s) Entitled says:

    Just because a stock does not pay dividends does not make it worthless. Appreciation has the potential to be multiples of any dividend yield. If you aren’t a buyer of select stocks at these levels you are a fool. Conversely, you may be a fool to buy Virgin. Time will tell.

    • Rob says:

      Yes, that is bad wording but you know the point.

    • ChrisWKR says:

      Given the S&P increased by 25% in the past few weeks, you might think there is an element of irrational exuberance around?

      • Lady London says:

        Yes I don’t think the US market had its full correction.

        And we may have a further one coming soon too.

  • Mikeact says:

    So we loan them, give them, taxpayers money, for what ? To try and help them improve on their losses year on year ? It strikes me they need some decent management on board for once. Obviously him with the cardigan can’t be that bothered each year whether they are profitable or not….just a nice expensive toy to play around with.

    • ChrisWKR says:

      Getting treated like God Almighty on his transatlantic flights probably justifies his investment (in his eyes, plus the other stuff)

    • TGLoyalty says:

      c£2.5bn-£3bn revenue and an operating loss of around £45m and over last 3 published accounts (2019 not published yet) they’ve made a net operating profit of around £50m

      It’s not the worst performing business you’ve ever seen.

      • Lady London says:

        for the assets employed? If on that turnover they only made that level of profit it could easily have been reported as a loss.

        • Lady London says:

          actually stronger than that. Just remembered Rob said the assets are mostly rented anyway.

  • Yawn says:

    So … should we rush to spend our Virgin miles now after all? And should we stop spending on our Virgin credit cards?

    • ChrisWKR says:

      Virgin is junk right now, even if they get bailed out etc miles could be made worthless overnight

      • J says:

        Virgin will survive – and it makes no business sense to alienate loyal customers, that is frequent flyers with Virgin miles. But keep telling yourself that if you want to justify your decision to transfer to Hilton or wherever at an enormous loss!

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