Flying Low and Flying High: Virgin Atlantic on a financial rollercoaster

September 13, 2020

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3 min read

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What's going on here?

Last month, Virgin Atlantic was desperately trying to get creditors to agree to reductions and instalment repayments to avoid running out of money and entering administration. It has emerged that the High Court has approved the company’s £1.2bn rescue package based on evidence that the airline would be bankrupt by the end of September without support.

What does this mean?

Following the collapse of STA Travel, which owns more than 50 outlets in the UK, this news comes as a glimmer of hope to save the UK’s aviation and tourism industries amid the pandemic’s travel restrictions. The High Court’s timely decision will allow Virgin Atlantic to “rebuild its balance sheet, restore customer confidence and welcome passengers back to the skies”, according to a spokesperson. The rescue plan is built around a loan from private equity firm Davidson Kempner Capital Management. 

A group of 170 suppliers of Richard Branson’s five-decade old aviation company, from aircraft providers to media agencies, have agreed to a 20%reduction on the money the airline owes them, and to receive the rest in staggered payments.

Since July, Virgin Atlantic has cut 3,500 jobs and runs a fleet of 36 airplanes, down from 46 during pre-COVID times. 

As a sign of speedy recovery after the positive news, the airline announced it would start flights to Atlanta, Lagos, Tel Aviv and the Indian cities of Delhi and Mumbai – a decision only made possible by the secure prospects of restructuring.

What's the big picture effect?

Despite this, the six-month long battle to save Virgin Atlantic is still not finished: US courts are yet to recognise the restructuring and will reach a decision by early September. Now that Virgin Atlantic has secured its financial livelihood for the foreseeable future, the challenge now lies in riding out the crisis with minimal cash burn as long-haul routes remain limited by border restrictions. The transatlantic market is critical for the tourism industry, but coronavirus border restrictions have curtailed air traffic on this route. Most corporations are struggling to sustain their business even with the development of alternative routes in Europe and the Middle East. 

This turmoil has forced aviation companies to seek private funding since governments were previously reluctant to bail them out, exemplified by the British government’s refusal to offer a bespoke package of state aid to Virgin Atlantic at the height of the pandemic in April citing the reason that Virgin had failed to seek funding elsewhere. The British government was also reluctant to bail out the aviation industry since it would be “open[ing] the cheque book for polluting industries with no questions asked”, as put by a Greenpeace spokesperson, and the environmental conditions attached to financial aid were contested.

It is projected that regular travel will not reach pre-COVID levels until 2024; aviation companies will need every resource they can possibly grapple onto. As market prospects remain volatile, the High Court ruling provides mid-term relief: Virgin Atlantic’s capital may be secure for a number of years, but remains dependent on the state of international travel activity. Now that it has secured public and private funding, an alternative source of funding, should the future turn sour, would be the selling of shares of Virgin Galactic and other Virgin franchises, as Richard Branson had done in April already. The prospect of administration still cannot be ruled out.  

The evolution of the coronavirus shows little sign of improvement and neither does the aviation sector’s future. Nevertheless, government compassion as shown by the High Court may open a possibility to partially save the industry.

Report written by Anaïs Itani

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