Having requested a GBP 500 million (€ 551 million) bailout from the UK government in April, and been rejected on the grounds that it should first seek alternatives, Virgin Atlantic announced its Restructuring Plan on 14JUL20, along with a GBP 1.2 billion (€ 1.34 billion) refinancing package, aimed at taking it through the next five years.
Shai Weiss, CEO, Virgin Atlantic exclaimed: “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 recapitalization 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.”
Covid-crisis triggered survival measures
Like most airlines around the world, the crisis led to Virgin Atlantic having to take serious steps to remain afloat in an unprecedented emergency situation. This included executives taking voluntary pay cuts in March and, from April, over 80% of Virgin Atlantic staff were placed on the UK government’s Coronavirus Job Retention Scheme. Yet, by May, it announced that 3,550 jobs (roughly a third of its total workforce of 10,000) were to be cut across the company as a survival measure since passenger flights had been suspended since April, and indications were that passenger travel would take at least 3 years to recover to near pre-covid levels. Closing its London Gatwick base, (though some slots have been kept to protect future growth opportunities), Virgin Atlantic is now focusing on London Heathrow and Manchester for its leisure travel business, and streamlining its fleet with A350s and A339s, retiring its 7 x 747s and 4 x A332s by Q1 2022. In its press release, Virgin Atlantic emphasized sustainability, pointing out that this “simplified fleet will be 10% more efficient than it was pre-crisis.”
Sanctioning the Restructuring Plan
Sustainability is also key to the company’s financial future. In a recent Financial Times interview, Mr Weiss stated: “We must and will become a sustainably profitable enterprise,” adding that the Restructuring Plan now set to go through a court-sanctioned process under Part 26A of the Companies Act 2006 (the “Restructuring Plan”), in order to secure approval from all relevant creditors before implementation, has been funded “for the worst case rather than best case as you would expect us to do.”
The majority of stakeholders already back the plan, and the court sanction is expected to come within the next 6 weeks, so that Virgin Atlantic can begin implementation towards the end of this Summer, with the aim of “rebuild[ing] its balance sheet and return[ing] to profitability from 2022”.
“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, ” Mr Weiss stated.
Private-only solvent recapitalization
In addition to the survival measures already taken, the five-year Restructuring Plan will be supported by shareholders Virgin Group and Delta, new private investors and existing creditors. Over the next 18 months, a refinancing package worth around GBP 1.2 billion will be established. Additionally, annual cost savings of around GBP 280 million per year and circa GBP 880 million rephasing and financing of aircraft deliveries over the next five years are planned. Broken down, this entails:
- Shareholders providing c.£600m in support over the life of The Plan including a £200m investment from Virgin Group, and the deferral of c.£400m of shareholder deferrals and waivers
- Virgin Atlantic welcoming new partner Davidson Kempner Capital Management LP, a global institutional investment management firm which is providing £170m of secured financing
- Creditors supporting the airline with over £450m of deferrals
- The airline continuing to have the support of credit card acquirers (Merchant Service Providers) Lloyd’s Cardnet and First Data.
Revival amongst ridicule
Though Virgin Atlantic also saw cargo-only flights boom over April, May, and June, operating over 1,400 cargo flights during that time, this does not go far to compensate for a 98% drop in passenger travel. Yet, things are slowly starting to look up as some passenger services are due to restart from 20JUL20. That said, its main market, the US, which represents over two-thirds of its network, is still a major question-mark, given the dramatic and still increasing development of corona cases there.
At the time of its government load request in April, Virgin Atlantic and Richard Branson unleashed a wave of public outrage regarding whether the company and its founder had a right to bailout if taxes were not being paid within the UK. This was fueled by rival Ryanair’s CEO, Michael O’Leary on Sky News, commenting “This is Branson’s second go at trying to fleece the British taxpayer for state aid,” and pointing out that Branson was “sitting in the Virgin Islands as a tax exile.”
At the time, Branson pointed out that the UK entities of the company did indeed pay taxes, yet figures also show that given the UK’s tax relief for trading losses, Virgin Atlantic had not paid a profit tax to the U.K. government in two years, and had instead received tax credits of £22m in 2018 and £14m in 2017 since it was unprofitable in those years. All other UK airlines have since received UK government aid.
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