Corporate news: Virgin Atlantic in talks to raise £400m, IAG’s Air Europa purchase hits UK snags

There are two interesting bits of corporate news which are worth knowing about:

Virgin Atlantic in talks to raise a further £400 million

Sky News, which has a good track record in breaking Virgin Atlantic stories, reported on Saturday that the airline is in talks to raise an additional £400 million.

Whilst US flights have now resumed, the bottom line is that tourists have never been rushing to visit the US in November. I have heard cabin crew reports from BA of some US flights having just 40-50 passengers in recent days. The leisure market is unlikely to pick up until next Easter.

Virgin Atlantic undertook a £1.2 billion recapitalisation last year. There was a lot of smoke and mirrors attached to this sum, however, with very little of it being new money. Much of it was in the form of debt write-offs or the waiving of unpaid and future fees and royalties.

No-one would deny that the airline would benefit from having a good financial cushion to see it through the Winter. The report from Sky News seems more worrying though:

“The latest financial injection includes payment deferrals and other creditor assistance as well as cash, according to a City source.”

In plain English, this means that Virgin Atlantic is asking its creditors to write off some of the money that the airline owes them. If they don’t, there is a good chance that there won’t be an airline left to give the creditors future business. If this is true, the situation is not good.

Sky News also reports that, unsurprisingly, plans for a flotation of Virgin Atlantic on the London Stock Market have been put on ice. Anyone who has ever worked in finance will know that this was never a runner, given that the airline has not made a profit for many years even pre-covid.

The only upside is that, with the loss of huge numbers of staff and the retirement of the Boeing 747 fleet, the cost base should be in good shape when the recovery arrives.

UK competition authorities put pressure on IAG’s Air Europa deal

In late 2019, IAG, parent of British Airways, Iberia and Vueling, announced its intention to acquire Air Europa. Air Europa is the third-largest airline in Spain, after Iberia and Vueling, operating around 15% of all Spanish domestic flights.

The hope was that the deal would create a ‘5th European hub’ in Madrid, bulking up the existing Iberia operation, to sit alongside London, Frankfurt, Paris and Amsterdam. You can read our original article on the plans here.

At the time, the price was €1bn. Clearly a lot has changed since then, including the worst crisis aviation has ever seen. IAG has now negotiated a 50% discount on the price. Better yet, IAG doesn’t have to pay a penny until 2026.

The problem for IAG is monopoly concerns in Spain, with the addition of Air Europa giving it dominance of the domestic market with 73%. Ryanair will be the biggest competitor but only has a 15% share.

In July, the European Union announced an in-depth investigation into the deal – see here. This has yet to report. The EU was concerned that the deal would remove or reduce competition on 70 city pairs to/from or within Spain. It was also concerned about other airlines pulling out of long-haul flights from Spain if they lost feeder traffic from Air Europa, especially fellow SkyTeam members.

The UK Competition & Markets Authority has now also decided to take an interest in the deal – see here.

The reasons for concern are not outlined, but you would expect issues to include:

• reduced competition, either now or in the future, between the UK and Madrid

• reduced competition for British Airways on long-haul routes where Air Europa offers low fares for UK customers willing to change aircraft in Madrid

Airlines have until 29th November to make submissions to the CMA which will decide by mid-January on whether to launch a full inquiry.