Virgin Atlantic will continue to fly – at least for the medium term. The airline has just announced its £1.2 billion recapitalisation which will hopefully provide enough liquidity to see it through the worst of the coronavirus crisis.
Here are the headline details:
The rescue package has a headline value of £1.2 billion over the next 18 months
This excludes cost savings of around £280 million per year from the recent cost-cutting and redundancy programme, and £880 million of deferred payments for new aircraft deliveries over the next five years
Virgin Group is putting in £200 million of new money
Hedge fund Davidson Kempner is putting in £170 million of new money
Delta is not allowed to invest new money under the terms of its US bailout but is writing off some existing payments due to it
Whilst not mentioned in the press release, it is understood that Virgin’s credit card processors have agreed to release ticket revenue which they had been retaining to help fund their Section 75 refund commitments if the airline failed
Virgin Group and Delta will be waiving some future fees, presumably around the use of the Virgin brand and the use of Delta’s technology platform
Creditors have ‘deferred’ £450 million of outstanding money – it is not clear what this represents
It appears that shareholdings are unchanged, with Virgin Group retaining 51% and Delta Air Lines 49%. The Air France KLM joint venture will also remain.
This process is subject to a court-sanctioned process under Part 26A of the Companies Act 2006. I am not sure why this is necessary, to be honest, unless some creditors are having their rights reduced. It is likely to revolve around the rights of Virgin Atlantic bond holders who currently hold security over the Heathrow landing and take-off slots.
Virgin Atlantic is still planning to resume passenger flights next week. Since passenger flights were suspended in April, the airline has operated over 1,400 cargo only flights. 3,550 redundancies have been made and the base at London Gatwick closed.
The new business plan sees a return to profitability by 2022, which is clearly ambitious. Interestingly, the airline says that it will fly the same number of sectors in 2022 as it did in 2019, despite having fewer employees and a smaller fleet of 37 aircraft. It remains to be seen how this is done.
Shai Weiss, CEO, Virgin Atlantic commented:
“Few could have predicted the scale of the Covid-19 crisis we have witnessed and undoubtedly, the last six months have been the toughest we have faced in our 36-year history. We have taken painful measures, but we have accomplished what many thought impossible. The solvent recapitalisation of Virgin Atlantic will ensure that we can continue to provide vital connectivity and competition to consumers and businesses in Britain and beyond. We greatly appreciate the support of our shareholders, creditors and new private investors and together, we will ensure that Virgin Atlantic can emerge a sustainably profitable airline, with a healthy balance sheet.
“Once our plan is approved, we will continue to focus on providing our customers with the service they have come to expect. Despite the incredible efforts of our teams, through cancelled flights and delayed refunds we have not lived up to the high standards we set ourselves, but we will do everything in our power to earn back their trust.
“While we must not underestimate the challenges ahead and the need to continuously respond to this crisis, I know that now, more than ever before, our people are what sets us apart. I have been humbled by their support and unwavering solidarity throughout. The pursuit of our vision continues and that is down to each one of them.”
What do I think?
It is, clearly, great news that Virgin Atlantic will return to the skies next week with a sound(er) balance sheet.
Let’s not pretend that this is the end of the story though:
This deal does not deliver a lot of NEW money – only £370 million, it appears. Much of it is in the form of deferrals or write-offs of existing debt. You need new money to pay the bills.
Most of the new money will immediately be heading out of the door to reimburse customers who are currently waiting 3-4 months for refunds. How much will be left when this is done?
Virgin’s core US market is clearly not coming back to life any time soon. Whilst the fleet sits idle, the airline will continue to lose money week after week.
Davidson Kempner is not the ideal partner, in my view. They bring nothing to the table except money, and their only interest is in extracting as much money from the airline as quickly as possible. If Flybe was a template for this deal, Davidson Kempner will have taken security against everything Virgin Atlantic owns which is not nailed down, which will make any future financing deal harder to achieve.
These are problems for tomorrow though. For today, we can all be happy that Virgin Atlantic will be back in the air.
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