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What’s happening with the Virgin Atlantic rescue talks?

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After a flurry of coverage in March and April, we have heard surprisingly little in recent weeks about the financial situation at Virgin Atlantic.

Sir Richard Branson recently sold part of his stake in Virgin Galactic to raise some cash, and much of that $400 million was destined for the airline.  There has been no news on new investors, however.

Mark Kleinman of Sky News ran an article yesterday on the current situation.  Kleinman has consistently led the way in reporting about Virgin Atlantic and Flybe, so his sources inside the airline are clearly reliable.

Who may invest in Virgin Atlantic?

Kleinman suggests that, in advance of crunch talks over which investor will be chosen, two of the leading contenders have teamed up to make a joint offer.

These are Elliott Investment Management, a US-based hedge fund, and Greybull Capital.  If the Greybull name is familiar, it is from their role as the former owner of Monarch Airlines (which didn’t end well!).  Other investment funds are also still in the process.

Virgin Atlantic rescue talks

Are there any prospective trade partners?

It seems not.

We have never seen any airlines mentioned as potential investors in Virgin Atlantic.

Whilst many are blocked by their own financial problems or the terms of their own bailouts – which restrict money being used for non-core activities – this is still a little surprising.

We are not talking about billions of pounds here.  It “only” requires a few hundred million.  For the cost of one long haul aircraft, you should be able to buy a 49% stake in Virgin Atlantic.

If Qatar Airways wasn’t already a 25% shareholder in BA’s parent, IAG, I would have expected it to be interested.  Etihad has lost more than enough money through investing in other airlines to put it off for life.  Emirates would potentially have been an option.

You could also see a situation where the Star Alliance airlines had a whip round between them to invest in Virgin Atlantic.  It would be on the condition that the airline joined the alliance and started to feed traffic to and from its other member airlines.  I have never seen anyone suggest this however.

A trade investor would be preferable over a financial investor.  As we saw with Flybe (and of course this was my own job for 11 years) any private equity or hedge fund investor will be focussed on extracting as much money from the company as quickly as possible to reduce their exposure.  It is also likely to take security over all of the unencumbered assets, making any future restructuring difficult.

What role will Delta Air Lines have going forward?

Financially, probably nothing.

At present, Delta Air Lines has a 49% stake in Virgin Atlantic.  This is the legal limit that a non-EU investor can hold.

Under the terms of its own bailout, Delta is not allowed to invest more money in Virgin Atlantic.  It is likely that a restructured Virgin Atlantic would end up issuing huge numbers of new shares which would be bought by Virgin Group and the new investor partners.  Delta would see itself diluted to virtually nothing.

This doesn’t mean that the Virgin / Delta partnership will end.  The transatlantic joint venture between Virgin, Delta, KLM and Air France is key to the survival of the airline.

Virgin Atlantic rescue talks

How much money does Virgin Atlantic need?

Sky News suggests that the funding requirement has reduced in recent weeks.  It is not clear if this is due to the expected resumption of flights next month or because Virgin Group has pumped in money.  The total package required is now believed to be around £500 million, with Virgin Group presumably providing 51%.

Virgin Atlantic announced a substantial number of redundancies last week, on top of earlier rounds of voluntary separations.  This will reduce the payroll sharply from the end of August.

A bigger problem is the lack of clarity over when travel to the United States will resume.  A UK press article over the weekend quoted senior US sources as saying that tourism may be banned until a coronavirus vaccine is available, which could be 2-3 years.  Even if this is not the case, it appears unlikely that travel will be allowed before the Autumn.

Travel insurance will be another major issue.  It is very difficult to find new travel insurance policies which will cover coronavirus and the US is not a cheap place to get ill.

Virgin Atlantic rescue talks

There are other stumbling blocks too …..

Virgin Atlantic is a uniquely complex rescue. 

For most other businesses it would be simple.  You could put it into a pre-pack administration and immediately buy it back, wiping out all of its previous liabilities.  It’s messy, and obviously many of your creditors will never work with you again, but it does the job.

Virgin Atlantic has two specific problems though:

If it goes into a pre-pack administration, it appears that it would forfeit its slots at Heathrow Airport

Many of the Heathrow slots were used as collatoral for a loan in 2015.  If the loan is not repaid, which is probably necessary if the airline is to survive, the lenders will take control of the slots.

None of this is insurmountable.  Perhaps Virgin Atlantic defaults on the loan but then does a deal with the lenders to lease back the slots?  (Can a non-airline even own a slot?)  Perhaps it makes a partial repayment in return for a slot leasing deal which would effectively pay back the lenders in full over the life of the lease?  Perhaps this situation makes a pre-pack administration easier, because the slots would default to the banks and not to Heathrow?

It is also unclear if Virgin Atlantic would benefit from using administration to free itself from its existing aircraft orders and leases.  It still has eight (I think) A350 aircraft to come, as well as the $4.1 billion order (at list price) for 14 x Airbus A330-900neo aircraft due for delivery between 2021 and 2024.  These aircraft were replacements rather than additional capacity, however, and will still be required if the airline is back to its 2019 size by 2024.

A pre-pack administration should wipe out Delta ‘cleanly’ and ensure that it had no contractual claims over the new airline.

Virgin Atlantic has apparently set an informal deadline for investment proposals of the end of June.  We may get some clarity in a fortnight about the future size and shape of the airline.  I may even see the £2,000 flight refund that I have been due since March …..

Update

After this article was published, Virgin Atlantic sent us a statement on its funding plans:

“We continue to explore all available options to secure additional external funding as part of a comprehensive, solvent recapitalisation of the airline. As per the Chancellor’s letter of 24 March, HM Government is considered as a lender of last resort, and rightly so. We have already made difficult decisions and taken decisive action to reduce our costs, preserve cash and protect as many jobs as possible.

In parallel, constructive negotiations with our shareholders, creditors and partners as well as private investors and HM Government are progressing at pace, so that Virgin Atlantic can emerge from the crisis sustainably profitable and with a healthy balance sheet. While more work needs to be done, we greatly appreciate the support our stakeholders have shown to date and believe we can deliver a comprehensive financing package that ensures Virgin Atlantic continues to provide essential connectivity and competition to consumers and businesses in Britain and beyond.”

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Comments (62)

  • Leo de Cristofano says:

    The lack of clarity as mentioned in this report from the US about when tourists will be able to enter the country would have a huge effect on Virgin Atlantic as the majority of its flights are transatlantic……2-3 years waiting to resume flights would be unsustainable situation for the viability of Virgin Atlantic without a major route network change and more than likely signal the end of the Virgin Atlantic/Delta tie up .. I don’t believe the US could afford to do that economically anyway. It has recently been said that the London Heathrow-JFK route generates $1Bn in revenue anually for British Airways.

    • insider says:

      They could quite easily just be selling the flights at the chance of getting revenue through the door – if the demand doesn’t materialise, they can cancel the flight 2 weeks out, and take 3 months to hand your money back. Not a bad way to keep afloat for a few more weeks

      • Lady London says:

        Lots of airlines around the world seem to be still selling tickets for flights that definitely aren’t running. The UK has temporarily officially suspended prosecution of Directors for trading whilst insolvent and in the case of airlines the way a majority seem to have been treating customers’ money as a free loan, even before covid, seems quite abusive.

  • Oh! Matron! says:

    So, as there were a few comments about booking flights and when, please, please, please take a look at worldometer again. Yes, many countries are still on the decline, which is great. But two of the original countries with outbreaks, China and Iran, have second outbreaks. Iran significantly so.

    It’s quite obviously that seeing the crowds at the London rallies, along with those at Bicester shopping village (and my own experience yesterday in the Bentall Centre where I appeared to be the only shopper with a mask), that we’ll end up with an outbreak again in the UK.

    Whilst we had the great news yesterday that there’s a steroid treatment for those that end up on ventilators, which reduces mortality, this virus ain’t going away because the blonde buffoon and donny small hands says so. Until we’ve all had it, things can’t get back to normal.

    Apologies for the outburst, but despite the fact I’m desperate to get out into the hills, I’m also acutely aware that we still have a long way to go.

    • Lady London says:

      The cortisone immunosuppressor thing is not all good though as whilst it reduces the immune reaction to the lung infection to try to let the body survive through the virus it brings in its train lowered resistance to bacteria and, particularly underestimated as a cause of disease, fungii.

  • David S says:

    Would anyone even want to go to the US as a tourist anyway. Their outbreak seems far worse than ours, there are riots in many cities and the £/$ rate is rubbish. Would you also want lots of potentially infected US residents coming over here in 2020 ?

    • mvcvz says:

      There’s also far more empty space than here; the riots were confined to a small number of defined areas and now appear to be all but over anyway, and the exchange rate has been relatively unfavourable to Brits for some considerable time. Best of all, you won’t be there.

    • james says:

      It may seem far worse to you, but in fact deaths are about half of England per head of population, so it shows just how badly the Clown’s government have handled, and continue to handle things.

      The exchange rate is a big problem, but again directly related to the idiotic Brexit project that will lead the UK into 3rd world status championed by…yes the Clown Johnson.

      • memesweeper says:

        The US isn’t a good comparison to the UK. Larger numbers living outside densly populated areas for a start, fewer international travellers too. The spread isn’t under control there yet, and the death rate is likely underreported.

        A fair comparison is Singapore, who have many of the same challenges the UK does, and clearly met them.

  • Pb says:

    I am a long distance train traveller so forgive the possibly stupid question .

    Are there not simply too many Airlines ?

    Competition is good but the cake being split into so many pieces , with the high overheads involved this does not make for a profitable business .

    I may simply be out of touch with the volumes involved , it just strikes me with everything I read that they are all desperately trying to attract your custom and that capacity hugely exceeds demand outside of peak periods .

    • Rhys says:

      No. In 2015, average load factor across all airlines globally was 80%. That’s pretty good, considering that in reality 100% is bad for the consumer since it means there is no competition between companies.

      Also worth noting that if you can make enough money during ‘peak’ periods to cover quieter parts it doesn’t matter. The peak effectively pays for fixed costs such as the aircraft, and you can reduce variable costs during the off-peak.

      • marcw says:

        We are in 2020 now.

        • Rhys says:

          and if anything load factors have increased slightly 🙂

          • Hingeless says:

            Load factor is only 1 measure, you can fill every plane in the sky with £1 tickets (as Ryanair used to do), pricing is more important to get right, if you have too many airlines that are all full, the pricing is too low, and then you have no margin.

          • marcw says:

            What I mean with “we are in 2020” is that nowadays there´s no direct correlation between load factor and yields. It´s copmletely wron to assume high load factor are equal to profiability … look at Norwegian.

      • insider says:

        No is maybe a bit of a strong answer to a more subtle question…pre-Covid, there were already airlines struggling to be profitable, let alone cover their cost of capital. If that’s the case, the business is not sustainable and therefore should close down in the long term, unless it’s of strategic priority (as seen with the recent bailouts across Europe) or the vanity project of billionaires.

        Post Covid, when the dust settles I can imagine a fair few smaller airlines going out of business, and maybe the odd large one too. The demand picture will be different, and airlines which are very capital heavy businesses can’t sit around waiting for that demand to recover. They will just run out of money.

        As a consumer of course, the more airlines the better as it drives down prices. But as we’ve seen recently, for example with Norwegian, you can drive down prices, but at some point that will not be sustainable and you’ll exit the market, driving prices back up.

        • Rhys says:

          All of which is true, but if you look at the IATA load factors worldwide you can see they have been steadily increasing since 2000 (about 72%) to just over 80% pre-covid. So it’s not necessarily the capacity that is the issue, but low fares (which admittedly are often linked to capacity)

          Of course using global data also obscures regional overcapacity, but from a global perspective it’s fairly stable.

          • Chris Heyes says:

            [email protected] to a point i agree last two/three years (maybe 4/5) as been quite good for Airlines and consumers both.
            But is over 10 years since i last paid for any flights (Avios only) that’s not just me that’ includes my Children my partners Children, partners brothers children adds up to well over 14 people in twenty’s + if you count their children
            previously aprox 3/4 flights every year paid in cash
            If that’s replicated you can see it cant continue forever

    • Rob says:

      There are possibly too many AIRCRAFT. It doesn’t really matter about the number of airlines, except to the extent that competition forces prices down.

      People think that running an airline is capital intensive. It isn’t. I would imagine that the cost to lease an aircraft is rock bottom now. The airline doesn’t invest in the infrastructure – the airports do that. To start an airline, all I need is enough money to lease a few planes, hire a few crew and set up a website.

      My wife works in shipping. This has similar problems – when the market turns down, the market is overrun with vessels and charter rates collapse. What happens is that the shipping industry gangs up and suddenly gets an environmental conscience. Rules are passed so that ships of a certain age / made of certain materials / constructed in a certain way can no longer be used commercially. Capacity drops out of the market and prices go up.

      Perhaps we will see airlines lobbying Governments to ban four-engine long haul aircraft, for example? This would reduce global capacity and put some stability back in the market.

      • insider says:

        I don’t think you can claim running an airline is not capital intensive. Even if you’re running a small 10 A320 type aircraft operation, you’re looking at $200k a month leasing costs, or $2m a month. That’s before any other costs, a lot of which are fixed.

        • insider says:

          Also bear in mind you can’t just hand aircraft back from one month to the next, you typically sign 8-12 year contracts. So for all intents and purposes, you own the aircraft (and accounting standards now require airlines to account for leased aircraft on their balance sheets)

      • Jessiefan says:

        I like 4 engines better than 2 for transatlantic !

        • Doug M says:

          Has an twin engine aircraft ever been lost to both engine failures? Not the bird strike that landed in the Hudson, but where both engines have mechanically failed?

      • SWWT says:

        Now that’s an interesting concept! Perhaps there will be a sort of ULEZ in the skies. Or even a plane scrappage scheme?! With a bit of imagination this could fly. Pun intended…
        No, but really!
        Ok, maybe not really.

        • Lady London says:

          stop.right.now.

          dont give governments around the world any morr ideas for hassling us and grabbing more money

    • Graeme2 says:

      I think the problem with this logic is that the airline industry is essentially selling a commodity, and there’s high price transparency, so even with a significantly smaller number of larger airlines with correspondingly lower overheads per passenger km, the market would force those savings into reduced prices.

      • ken says:

        It’s also an industry that discovered (once the low cost players got into full swing) that a large part of the demand super elastic.

        Almost anyone will take a punt on cheap Ryanair flights and this demand will return quickest and in volume.

        Highly profitable business transatlantic flights ? I wonder if a portion of that demand has disappeared for good

  • old bob says:

    I like Beardy Airlines, better all round experience and nicer crew generally than boring old, penny pinching BA. Viva Virgin!!

  • Disgruntled says:

    You want Greybull as far away from this deal as is possible. If anyone who had any sense for business, especially the aviation business Greybull will strip and the product and competition to BA will be gone. Sharks in the water. Monarch thought that they had a lifeline a year later gone. Saying that Virgin will most probably go with them as they seem desperate to fuck everyone from staff to loyal passenger’s off.