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

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Comments

  1. Will Virgin really be restarting flights to Florida next month?

    https://www.bbc.co.uk/news/world-us-canada-53357742

    • dezbez says:

      Agree. Surely VA will be looking at ways to diversify its destination base away from the US more generally, both in the short-term and the longer term. The rewards don’t justify the risks (particularly with Trump in charge).

  2. Amber Lynn says:

    Hurrah, I like Beardy airlines.

  3. Lady London says:

    ‘profitable by 2022’
    When we know what are they smoking, can they share?

    The only way I can see this even beginning to work is if customer refunds are omitted.

    • Froggee says:

      …well they’ve done a good job of not refunding my £10k stupidly booked via Expedia to make things more difficult!

  4. Colin MacKinnon says:

    Nothing makes me regret moving my points to Hilton.

    • Harry T says:

      Agreed, a safe move at the time, and may turn out to be better value long term.

  5. Chris Heyes says:

    Can Virgin survive Yes but not easily, all they need to do is keep hold of the refund money off customers for as long as possible. Use the same money to keep afloat
    Fly to the US even if most are not allowed in, as long as they fly it wouldn’t be their fault
    The main problems start to add up when Refunds are being withdrawn in scale
    Plus a second wave will finish them off immediately, without any warning for customers

    • Simon says:

      This is my view. No one it seems has refinanced with a second wave in mind. Probably as it is difficult enough to refinance the current debt let alone plan for another shutdown. Any second wave, if it hits nationally, will be the nail in the coffin for a lot of business, not just airlines.

  6. Has anybody tried booking KLM Business Class flights with Virgin FC points? I am trying to book EDIAMS for December on the Virgin website and I repeatedly get error messages at the point of payment.

    • Jessiefan says:

      I couldnt get Delta or KLM via AMS upper class for points, even though cash fares showing – Economy was available but at high points

      • There appears to be a lot of “phantom availability” of AF/KL reward flights on the Virgin website.

        Getting an error at point of payment is a strong sign of this. Try other dates or flights.

        I have been able to redeem a bunch of miles for AF business class long haul, on the VS website, so it is possible, but discovering what is real availability and what is phantom is a real pain in the butt.

  7. Aston100 says:

    Is there anywhere else they can fly to instead of the USA for the next year or so?
    More Asian destinations maybe?
    I think Sri Lanka for example is underrepresented.

    • Dubai – route cancelled
      Sydney – route cancelled
      St Lucia – route cancelled
      Mauritius – route cancelled

      Columbo – BA entered the market briefly a few years ago as a tag on to Maldives but that ended when the Maldives flight became seasonal. Lack of connecting traffic would almost probably make this an unprofitable route for Virgin. Not to mention much Middle Eastern airline competition keeping the prices low. Market confidence in USA flying is really going to hit them hard. I guess with the significant cutbacks in South African Airways flying, there might be other markets they could tap into: Namibia, Botswana, Tanzania, Zambia, Mozambique, Zimbabwe don’t currently benefit from any direct air routes to London, have relatively niche high end tourism markets, local mineral markets and industries requiring cargo demand.

      From a leisure perspective I’d be looking to reinstate Indian Ocean (Mauritius) and perhaps tagging on a shuttle to Mombasa or Zanzibar.

    • Flying to a new destination for just a year until your bread and butter destination demand returns isn’t really going to impress anyone. Would need commitment for a good 3-5yrs to build up the demand and get established. You could probably write off any profitability for any new destination in the first year.

      • True. But I do wonder whether something like a 2 x weekly Bali as a pure holiday route might actually work for them. Biggest challenge I guess is that it’s primarily a millennial/GenZ destination so reliant on the group most likely to be hit by a tanking economy (and who are used to connecting in Dubai so it has to be price competitive). Still, if I were them I would try it in the absence of any realistic US leisure flying for a while.

        BA have also found profitable niche cargo ops between the far/near east and US. The aircraft land at LHR on the way but only for refuelling and recrewing, not loaded/unloaded. This must surely be an option for VS too now (there’s plenty of business to go round, but the cargo customers demand higher surety over liquidity before they charter an aircraft than they’ve been able to get from VS recently).

        • I think the problem with Bali would be the sector length would be pretty much at the crew duty maximum operating limits with little/no room for any flight delay. You’ve got to be approaching 16hrs nonstop which invariably would be longer returning west and require additional downroute time for crew (as per QF LHR-PER crew) due to the ultra long sector so not necessarily good use of resources. Plus given VS would be freeing up A330’s in a leisure config that were based out of MAN/LGW for relatively short by comparison TATL routes, perhaps these aren’t the right aircraft for that sector. Range would most definitely be an issue. Simply swapping out a Dreamliner instead wouldn’t necessarily be feasible either. Also even if the market was there to justify twice weekly service, is essentially going to be from one market without much inbound support from DPS traffic. Then as you mention the market is swamped with competition from Asian and Middle Eastern carriers. You’ve also got the KLM direct (1 stop service) from AMS. I just don’t see Bali being anything near sustainable let alone viable.

          VS have generated £100m additional revenue from recent additional cargo flights of late plus repatriation services on behalf of the British Government.

          • Spaghetti Town says:

            A risky destination would be Perth, Direct. Would certainly bring them into the spotlight. I’m not sure virgin has the correct J Class in the 787-9 for it though. Only problem is it takes up 3 aircraft at a time.

          • Spaghetti Town says:

            I also think Sao Paulo may of worked for them if they’ve got there. You can see in recent years VS have tried to break free from relying on the USA (Tel Aviv, Sao Paulo, Cape Town).

  8. Chris says:

    Weiss’s statement leaving out the customers just goes to show how Virgin have completely lost their way. Virgin have lost the trust of past and future customers and as a customer who they except to wait 4 months to be paid I know others like myself will never use Virgin again. Kempner is only going to get richer sometime in the future as usual!

  9. cinereus says:

    I will still be spending 95%+ of my VS miles on Virgin Wines as the risk is too great otherwise.

  10. Phil Gollings says:

    Saw a Virgin uniformed lady on the train from London on Monday so assumed they had already started flying again.
    Hope they survive to Xmas when our redemption flight is

  11. southlondonphil says:

    Trivia Note –

    Davidson Kempner recently bought Oak Furnitureland out of administration in a pre-pack deal – maybe there will be future opportunities to spend Flying Club points on a sofa? 🙂

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