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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.

Virgin Atlantic rescue talks

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.

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)

  • BSI1978 says:

    Lot to ruminate over there, but re your question over non airlines owning the Heathrow slots, presumably that question was asked/answered prior to their taking charges over said slots for the loan?

    Any scenario which involves Greybull going forward should be avoided…..

    • pauldb says:

      VA Airways has a subsidiary VA International which either owns or could take over the slots and be spun out intact – that the theory at least, which the creditors must have bought into. VAI has its own CAA license and operates a token number of routes.

    • ken says:

      I’ve long stuck the boot into Branson, however, I’d rather the Government just gave him the money than have Greybull involved in any way.

      There was an excellent description by the City Editor Jonathan Ford in the FT about Greybull describing them as a “corporate undertaker” rather than a conventional investor.

      I can’t remotely see a happy ending with Greybull involved.

    • Lady London says:

      what are the rumours about Greybull (answer with a hint and a company name or two?)

      • Lady London says:

        er… had a look now.
        Seems Greybull should be renamed “private equity RoundUp”. They kill everything they touch apparently.

        In a sleazy industry (sorry Rob!) to be that sleazy really takes the biscuit.

        Virgin (and the UK taxpayer) would be better to go bust than fall into the hands of those sharks.

  • SWWT says:

    An excellent expose of the difficulties facing the airline. Perhaps not quite representative of all airlines but one does get a flavour of why Buffet dumped his exposure to this sector.

    • Marcw says:

      You would be stupid investing in airlines right now. The future is just very uncertain; current border restrictions and limitations are the main problem.

      • Ben says:

        Risk vs reward

        • Ken says:

          You could do worse than simply avoiding certain sectors as an investor.

          The aviation sector has always been littered with loss making flag carriers and large bankruptcies.
          It’s susceptible to oil prices and highly sensitive to global recession. It has Middle East airlines that can run at a loss for as long as they want. It also attracts vanity investors. Too often the strategy relies simply on getting more planes and routes.
          Yes you miss the success stories (Ryanair mainly in Europe) but avoid the dross.

          I also avoid retail. So I miss JD Sports (extraordinarily successful) but dodge plenty of bullets (too many to mention)
          Even other recent successes (unfathomably WH Smith) haven’t been outstanding over 25 years

          • Lady London says:

            Do you think Amazon is overvalued?

          • ken says:

            Yes – but I’ve thought that for at least 3 years so shows how much I know.

            Maybe ultimately their biggest threat will be government anti trust legislation

          • Lady London says:

            @Ken +1
            there’s the fair valuation of something…. And then it seems there’s working out when(if)(why)the market might catch up. This seems to be completely different things. All above my ability to understand.

      • Richard says:

        IAG shares are still below half of their February 2020 value – if you think that BA can get back to something close to “business as usual” in 5 years time *without* having to hose the shareholders to stay liquid through this – ie government bailouts and the cost cutting they are doing will suffice – it’s not that crazy a buy. It can very reasonably be outside of your risk tolerance but to make it a small part of the riskier bets in a portfolio; not that mad.

        • Ben says:

          100% Agree. Its going to be a tough couple of year for them but as you say over 5 years I would be confident in making a good return (as you point out for a small part of the portfolio)

          • SWWT says:

            I wouldn’t bank on a five year period for a decent return. There has to be plenty of other areas where you can invest with a better ie shorter ROI period. With less risk. If this virus comes roaring back come winter all bets on the global economy being sufficiently resilient are off.
            Unless of course its a vanity investment. Bored with the football team so time to move on to something bigger, maybe..?

        • Craig W says:

          whilst i agree and think the analysis is worth doing, people seem to be forgetting another significant aspect which is the assets. theoretically if they are back where they were in capacity terms within 5 years then *all else equal* buying at a 50% discount is a reasonable buy. but all else isn’t equal and another important factor when considering the value as at Feb 2020 is the asset position – particularly cash. The future earnings potential will have an impact on value but so will the cash on the balance sheet. if they blow 75%+ of the £9bn in cash (or whatever they had) on refunds and operating expenses – it is no longer worth what it was in Feb 2020 even if they get back up to Feb 2020 capacity. Similar story for other assets if they are squeezed

          Also, valuations in Feb 2020 were stretched, so in reality was it already overpriced? Quite a large number of factors to think about and i am not concluding either way, just think people need to be careful!

          • Ralph says:

            All correct considerations! Another factor to consider is that IAG is highly likely to do some form of equity issue to consolidate its position while the market still appears happy to fund the many companies coming with cash calls in the last few weeks.

  • Yvo says:

    Also reluctantly in the “waiting since March” club and a quick glance at Twitter shows there doesn’t seem to be anyone getting refunds despite the protestations they are working through them in order/as fast as they can etc.

    • Rachel says:

      I’m part of a FB group of people waiting for refunds with over 1100 members. Maybe half a dozen have posted about getting a refund. My 115k miles have been returned to my Flying Club account, but the fees are no where to be seen, nor do I guess I will for a while. I put it on my AmEx Platinum so am considering disputing the charge and see if that gets me anywhere.

  • Linda Dunbar says:

    My family group of 9 had booked a direct flight with Virgin from Glasgow to Orlando on 8th October. I believe the 747 booked is now scrapped and the flight times on the surrounding days have at least 2 stops making the journey up to 22hrs. We booked direct flights as we are travelling with children and was 9 and a half hours. The carriers look like KLM and Air France. We haven’t been advised of any changes by Virgin and by text they assure me our original booked flight is going. Travel agent says that flight not showing any availability. We booked non refundable flights with Netflights. Can anyone advise at all?

    • Qwertyknowsbest says:

      I think until Virgin actually cancel the flight or notify new flights/times, nothing that you can do.

      My flight with VS now cancelled which they notified around 60 days out. Giving them another 30 days for the refund to appear, which is unlikey given reports, then will approach credit card for claim.

      • Linda Dunbar says:

        Thanks for that. Looks like might not see £6000 for a while then…😱

    • Jessiefan says:

      Hard to believe that flights won’t have resumed by October, so if they don’t cancel you may have to suck up the new routing. I’ve been looking myself for EDI to USA and mostly via KLM/AF/DELTA

  • Linda Dunbar says:

    Omitted to say 2 new flight times shown but neither is ours which was 13.25 flight VS71

  • Alan says:

    I’m bit surprised other airlines aren’t investing given their own financial situations. Sure it might ‘only’ be millions but probably not good optics/possible if they’re taking bailouts and/or laying off staff.

    Not sure where the ‘2-3 years’ figure for a vaccine came from though, not heard any estimates as far away as that previously. I would expect to be nearly as long as that. An update from around the world published just today is still talking about early 2021, which is consistent with many previous reports too.

    https://www.telegraph.co.uk/global-health/science-and-disease/covid-19-vaccine-trials-coronavirus-uk-human-news-latest/

    • TGLoyalty says:

      I’ll be amazed if it’s available this time next year.

  • Dev says:

    Elliott and Greybull … what a choice!

    The former is notorious for its activism and extracting maximum value for shareholders and the latter did a sterling job of Monarch!

  • Mikeact says:

    I guess as long as gullible people keep buying tickets for unlikely travel from mid July, Virgin must be happy with cash coming in. And then there’ll be masses of complaints again … long wait for refunds.

    • Johnny Tabasco says:

      Quite. It’s staggering the amount of people who STILL think they will be having a normal foreign holiday in 2020.

    • Ianmac says:

      Given my very recent experience with Laura Ashley (and backed up by their filings with Companies House). it is unlikely that VS will be seeing some or any of the cash coming from new ticket sales if bought using a credit card.
      The ‘merchant service providers’ (i.e. credit card companies) withhold pass through of sales income to offset the Section 75 claims that they receive from users against the vendor (e.g. LA, VS, BA etc).
      Note, in the case of LA, not all credit card companies are doing this but certainly AmEx are listed as withholding transfer and using offset process.

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