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Virgin Atlantic announces its £1.2 billion rescue plan – but is it enough?

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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

Virgin Atlantic announces its £1.2 billion rescue plan

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.

Virgin Atlantic announces its £1.2 billion rescue plan

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.

Virgin Atlantic announces its £1.2 billion rescue plan

How to earn Virgin Atlantic miles from UK credit cards

As a reminder, there are various ways of earning Virgin Flying Club miles from UK credit cards.  Many cards also have generous sign-up bonuses!

Click here to read our detailed summary of all UK credit cards which earn Virgin Flying Club miles.  That page is regularly updated with the latest special offers and will still be accurate even if you are reading this article months after publication.

(Want to earn more Virgin Flying Club miles?  Click here to see our recent articles on Virgin Atlantic and Flying Club and click here for our home page with the latest news on earning and spending other airline and hotel points.)

Comments (55)

  • CW says:

    3, 2, 1 to Genghis showing up with some pedantic “well actually…” screed.

    • Rob says:

      Given how long I’ve been out of finance, I welcome his corrections!

    • Genghis says:

      🙂 I like accuracy and hate misinformation but didn’t realise I was that much of a pedant!

  • marcw says:

    Lipstick on a pig. Hedge funds strategy: sell best bits and pieces and run away.

    • marcw says:

      … with the money.

      • Lady London says:

        or the “management fees”.
        In some ways it’s white-collar crime.

    • mr_jetlag says:

      Depends on the fund, but in general I agree. With airlines noping on a buyout deal this may have been the only option on the table and the upfront fees on that 170m will be eye watering.

  • roberto says:

    Cant see Virgin being around in 2 years in its current form. It could not make a profit when time were better, how the heck is it gonna make one in the next 3 to 5 years? They cant afford to pay everybody back now and all this extra liquidity wont be going in refunds. The credit card companies will still be hanging onto a large chunk of future bookings “just in case” squeezing their cash flow further.

    Shame but its a product of its time , and unfortunately that time has passed. It needs to evolve into something else , something viable that makes a profit would be preferential.

    • insider says:

      i agree. The credit card companies may regret releasing that cash in a few months time. There must be a lost of cash tied up in US flights between now and the end of the year – realistically how much of that will actually fly given the state of the US at the moment? They’re just kicking a bigger problem down the road.

    • Ming the Merciless says:

      I only need 6 months to redeem 1.7m FC miles for 5 days safari…

  • Yawn says:

    The problem remains is Virgin actually flying anywhere we can actually go to? I’m cashing in my Virgin points on KLM flights at the moment.

    • memesweeper says:

      … and it’s not just points bookings either. It’s cash business has been heavily skewed to the US, plus a smidgen of africa, carribean and asia. They need to open and develop new (to them) long haul markets now, just to get through the next six months, ones with a decent premium load … this is a tough ask in any climate, never mind right now. Then again Shai Weiss is a smart guy and already started developing new routes before Covid hit — so not impossible … just very, very improbable.

    • Jackj says:

      So how are you doing this? If you even are?
      When I try for miles bookings on other than Virgin metal I’m not getting much, even if underlying cash fares are there

  • Steve says:

    I really like VS. Always just that something a little different about them which I like. I also like healthy competition so have no wish whatsoever to see them fail. I just fear this is not enough and the 2022 profit target seems very ambitious.

    • guesswho2000 says:

      This mirrors pretty much exactly my thoughts re VA, who are obviously in a similar situation. I’m not overly optimistic about either VA or VS, both have a great product and are popular with the general public, but have a limited range and there’s a huge ? over whether they can compete with their respective opponents (QF/BA).

      Time will tell.

      • Lady London says:

        I think VA will do better. They will be No.2 in a closed domestic market with the huge QF prices above their head that will give them room to survive. The new owners also done OK in airline business previously. The Australian consumer wont see an improvement though.

  • Ken says:

    Court approval is required to tie in all of a class of creditors to the arrangement, where holders of 75% of the value of that debt have agreed to the arrangement.

  • Ken says:

    Good on Branson (and Delta who have presumably written off a debt) for putting in some equity.
    Presumably the credit card companies release of funds provides enough liquidity to process refunds.

    Hope it works out.

    • Spaghetti Town says:

      I hope it works out too, not just because of my Flying Club miles, but for the staff, and the staff of the businesses that support and supply VS.

  • Freddy says:

    So…any point collecting virgin points or am I wasting my time