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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)

This article is closed to new comments. Feel free to ask your question in the HfP forums.

  • J says:

    I’m always impressed with Virgin – best of the European airlines and most of their crew really love their job, so they deserve to survive. Without another British rival, BA would only hike prices and cut even more corners on service. Looking forward to a nice Virgin Upper class redemption when all this is over!

    • ChrisWKR says:

      Shame they never made consistent profits over the last few years, then – and UK Govt policy is to not support unprofitable businesses

    • Mikeact says:

      Just a reminder, you don’t have to fly with BA. Out of London, you can get almost all places around the World.

      • J says:

        Virgin provide significant competition on direct routes though. It’s a waste of time (as well as environmentally wasteful) to connect somewhere if a direct flight is possible.

        • ChrisWKR says:

          Not too sure most people care about the environment enough to pay more than a small x% more if there’s a bigger saving around.

          • J says:

            I think inefficient indirect routes will eventually be taxed more aggressively – at least within the EU, which can be positioned as more sustainable and conveniently also helps European airlines. Easy political win.

      • LB says:

        …Out of London, you can go anywhere in the world – as long as you connect 😉

  • BA-flyer says:

    I suspect Virgin have put a hold on all transfers to hotel partners. Two weeks after requesting a transfer by text (all security details provided), they emailed to ask for the same security details again. (I think this was a ploy to delay the transfer). A week after I replied, no sign of the hotel points but the miles are gone.

  • jimA says:

    why would Virgin make their miles worthless They gain quite a bit from charges on redemptions

    • Chrisasaurus says:

      Because

      A) they gain sweet FA on redemptions if their planes are on the ground and
      B) they are a massive liability on the balance sheet and with cash evaporating something needs to help it balance.

      That said I’m sitting on my healthy six-figure balance. Like Rob (though a tiny fraction) I have no need for another million hotel points I cant use so the effective return of converting them would be next to zero anyway.

  • Sean says:

    One thing the Gov’t need to do is stop the massive “Brand payments” to the bearded one and his neckar empire

    • Rob says:

      They are surprisingly small as a % of turnover.

      • Colin MacKinnon says:

        If you sell something for £100 and make 10%, then a £1 payment is 10% of the profits, albeit a small percentage of turnover.

        And BA makes just 2% on turnover!

        • Heathrow Flyer says:

          Colin – I’m interested where your 2% figure comes from?

          By my maths BA’s operating margin was around 15% in FY19.

        • Rob says:

          It is something like £10m on turnover of £2.8bn. Peanuts. Costs less than a chunk of TV advertising and massively more effective.

      • Ken says:

        Large enough to ensure VA loses money every year though.

    • Thomas Howard says:

      And re-brand as “UK International Airline” in courier font?

  • Tariq says:

    VS would just have to realign their route network. Clearly they have value in their LHR slots. If USA is closed to visitors, those people will want to go on vacation elsewhere. We could see a revival of some of the former VS routes like MRU.

    • Anna says:

      Small island nations are even less likely to let us in.

      • guesswho2000 says:

        Small island nations are more likely to require foreign capital

      • Tim says:

        Your favourite small island narion and a few others are linked to the UK in a unique way. Technically, if the UK says, ‘open your doors’, then they need to open their doors. In reality, it will never come to that. One, do we need them to open their doors, two, will we want them to open their doors if they do not want them to open their doors, but linked to both is three – it would be easier for many, apart from a few financiers and lawyers now, if the overseas territories were no longer territories. And the Foreign Office is coming on side with the Treasury now. So who knows?!?! Maybe we’ll go the French, Dutch and Danish way and see MP’s from Cayman, Bermuda et al ?! Less likely Bermuda; more likely the Caribbean lot. 🙂

        • Anna says:

          I for one would welcome that, it might result in a bit more transparency!

  • KP says:

    Rob’s investment banking and finance experience is of real value here. He’s been able to lay down the nuts and bolts behind the story really well. Something which the so-called airline bloggers out there can’t do, because they have no real brains… apart from heavily advertising credit cards to earn commission

  • BJ says:

    Conservative Party donors I guess?

  • letBAgonesbe says:

    This may be a very silly question but….

    Would it not be “cheaper” for the Virgin Group AND the government to let it go bankrupt and then for Virgin to start “all over”?

    • J says:

      The big US Airlines have been in chapter 11 at various points but I don’t think there is really a UK equivalent. Although I’m sure Land of Leather and various furniture stores used to regularly go bust and quickly resume under a new name. Don’t think a major airline could pull it off.

      • Lady London says:

        Chapter 11 = Administration, kind of?

        • J says:

          Chapter 11 somehow seems an easy way to shake off debts though? Even Delta have been in Chapter 11.

          • A says:

            Chapter 11 and administration are similar (both billed as rescue proceedings) but different in a number of important respects (including in C11 existing management remain in charge; in administration, an insolvency practitioner takes over running the business).

            Administration doesn’t work to rescue airlines in the UK in the same way as C11 does in the US. Some of those are Chapter 11 vs Administration differences. But some are specific to airline business. It is really difficult (but not impossible) for an airline to keep its fleet flying during admnistration :
            – risk of operating licence from CAA beign revoked as due to staff attrition, loss of key personnel etc, and management now being non-specialist insolvency practitioner the operator is now no longer competent to secure the safe operation of the aircraft;
            – suppliers of fuel, ground handling equipment etc round the world are likely to stop providing services and may arrest aircraft for unpaid charges;
            – similarly, airports can do the same for their unpaid charges;
            – engine lessors and aircraft lessors may exercise remedies to terminate leases and seek possession of their engines/aircraft (various limitations on enforcing security in administration don’t apply to aircraft leases);
            – insolvency practitioners can become personally liable for certain post-insolvency liabilities – some cannot be easily/commercially insured against given the major risks that running an airline can involve

            Will be interesting to see if we do in fact implement a form of special administration for airlines as has been mooted – that would go some way to helping, but the duty to use funds to repatriate is likely to inhibit a going concern sale.

          • J says:

            Interesting thanks for the explanation.

    • Lady London says:

      Yes
      Let’s hope the brains at EY and Morgan Stanley can come up with this.
      By far the cheapest all round.

      Wonder which solution earns more ongoing fees for investment bankers, Big Four accounting firms and management consultancies?

      To have the courage to recommend letting it go down cleanly now would be a landmark decision that would indicate corporate life really is changing.

    • Will says:

      That’s probably my instinctive choice but you then have contagion.

      It might be good for the long term prospects of a version of the airline to jettison its debt but ultimately if it does default on it that’s not just bad for the person who is owed the money, and whoever they owe money to etc etc but more broadly you risk losing confidence in lending more generally if we face mass defaults across the economy.

      There’s been talk of this not being a liquidity issue like 2007/08 but really back then it was just a bunch of people who’d borrowed money that they couldn’t repay.

      The economic consequence of this may well end up being a bunch of people who have borrowed money they cant afford to repay. This time though we have more debt globally so it’s a bigger problem if contagion of defaults spreads.

      Look forward to printing money, inflation and a return of interest rates. Possibility of an absolutely unimaginable economic future ahead due to current levels of endebtedness, particularly hard for UK due to obsession with house prices and reliance of normal people on near zero interest rates.

      • memesweeper says:

        ‘you risk losing confidence in lending more generally if we face mass defaults across the economy’

        Mass defaults? I think that’s a racing certainty, isn’t it?

    • Nick_C says:

      That should be the strategy for BA.

      If Branson wants to save his loss making vanity project, let him use his own money for that.

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