Rebuffed by London, Virgin Atlantic gets help from its iconic founder
Like its sister airline Virgin Australia, London’s Virgin Atlantic will survive after all.
Like the Australian Virgin, the British one isn’t getting any special government help, of the sort that rescued other giants of the transatlantic market, like Air France/KLM, Lufthansa, and America’s Big Three. Even British Airways got more help from the state, accessing a Bank of England loan program for which Virgin — with its weak balance sheet — didn’t qualify. So instead, rescue funds will come from the private sector. To save Virgin Atlantic, founder Richard Branson himself will provide $250m, allowing him and his Virgin Group to retain a 51% ownership stake. Another roughly $210m will come from a U.S. private equity firm called Davidson Kempner Capital, which is lending the money.
Delta will keep its 49% stake, refraining from adding new funds but offering Virgin relief on certain fees it typically pays — to use Delta’s in-house reservation system, for example. The Virgin Group will offer similar relief, from obligations like fees to license the Virgin brand. All told, such relief will save Virgin Atlantic some $500m, according to Sky News.
Virgin will receive other crucial cost and liquidity relief from aircraft lessors, bondholders, credit card processors, and aircraft manufacturers. Airbus agreed to push back deliveries to the airline, which began July with outstanding orders for four A330-900 NEOs and four more A350-1000s.
The new capital, the freed-up liquidity, the cost concessions from suppliers, the repayment concessions from bondholders… it all adds up to about $1.5b, pending approval by a newly created U.K. court process that would make the restructuring plan binding on all creditors. With more than three-quarters of creditors already committing, approval shouldn’t be a problem. It won’t, in other words, need to file for bankruptcy to achieve its recapitalization, like Virgin Australia.
So consider it a done deal. Virgin Atlantic now has more than enough funds over the next year and a half to initiate a five-year crisis escape plan. The $1.5b is probably a lot more money than it needs for mere near-term survival. But with demand conditions so uncertain, the carrier is assuming another year of losses in 2021, following heavy losses this year.
To make money in 2022, Virgin recognizes the need for big changes. Already, it’s announced the shedding of 3,550 jobs. It will no longer base planes at London Gatwick, concentrating on Heathrow and Manchester instead. Gone by early 2022 will be all seven of the airline’s remaining B747s and all four of its remaining A330-200s. That will leave it with an all twin-engine widebody fleet; just B787s, A350s, and A330s — 37 in all. The plan aims to achieve $350m in savings annually.
During the past three-plus months, since the Covid crisis began, Virgin has flown more than 1,400 cargo flights, generating some helpful cash and revenue. But its passenger business, as well as its important Virgin Holidays business, has been largely dormant. Only this week (July 20) will it recommence scheduled service, starting with Heathrow flights to Hong Kong. New York JFK and Los Angeles LAX service will restart a day later. Another roughly 20 destinations will reopen over the course of August, September, and October. By next summer, its network will consist of 24 destinations in total.
But this year is all but lost. Q2 flying was down 98% y/y, and capacity is expected to be down 60% for the second half. The number could be higher, depending on the state of border closures and quarantines. The U.K. continues to mandate quarantines for all arrivals, including returning citizens, which all but ensures that new flights starting this week will be largely empty. Indeed, the carrier’s Chief Customer Officer Corneel Koster told Bloomberg that bookings are minimal, emanating mostly from people engaging in essential travel. Koster stressed that uncertainties levels are high, with lots of possible demand scenarios over the next year or so. When will border restrictions and quarantines ease? When will vaccines arrive? How long before people feel comfortable travelling by air again? How much lasting damage will the British economy incur?
Ultimately, Virgin’s future success will depend on two of the world’s most important airline markets. One is London, the world’s largest airline market. The other is the transatlantic market, where Virgin typically generates about 80% of its total revenues. That includes service to the U.S. but just as importantly the Caribbean.
Virgin, remember, was a money-losing airline before the crisis, flying in the shadow of a vastly more profitable British Airways. The situation had an uncanny resemblance to the domination of Qantas over Virgin Australia, one thriving the other stumbling. Virgin Atlantic’s pre-crisis problems were many, including onerous U.K. taxation, low-cost transatlantic competition, a strong U.S. dollar, Brexit uncertainty, too many obsolete widebodies, and insufficient traffic feed. To address the latter concern, it teamed with two other investors to buy the ailing Flybe. But Flybe would become the industry’s first victim of the Covid crisis, bankrupted and grounded in March. A year earlier, a useful partnership with Jet Airways disappeared when Jet ran out of money.
Other developments are more helpful. Virgin enters the post-crisis period as part of a tightly integrated three-way transatlantic joint venture alongside Delta and Air France/KLM. In the meantime, low-cost competition across the North Atlantic won’t look nearly as harrowing as it once did. Thomas Cook, a major Virgin competitor in Manchester most importantly, died last fall. It was buried next to the hapless LCCs Primera and Wow Air. Air New Zealand more recently abandoned the busy Los Angeles-Heathrow route. Norwegian, though it still aims to restart some transatlantic flying from London, will be but a shadow of its former self. And besides, it will be flying from Gatwick, which Virgin is exiting.
Will Virgin eventually return to Gatwick? It retains the slots to do so if and when worthwhile. Before the crisis, it ended a long period of near-stagnant network growth by adding routes like Mumbai and Tel Aviv from Heathrow, and Los Angeles from Manchester. It was supposed to launch Heathrow-São Paulo this spring before Covid determined otherwise. It was also intending to jointly launch Gatwick-New York JFK and Boston service this summer; this too was a Covid casualty.
Why more New York and Boston capacity? It was a warning shot to JetBlue, which still intends to launch London flights of its own from the two northeastern megacities. Will it get Heathrow slots? Whatever airport it uses, JetBlue won’t be Virgin’s main concern. That distinction of course, belongs to British Airways and its close partner American. BA, to be sure, is dramatically downsizing itself, grounding its entire fleet of B747s, for example, and looking to slash its workforce. That’s a potential opening for Virgin, to take advantage.
Virgin’s Caribbean- and Florida-heavy network could prove beneficial as a leisure hedge against business and premium demand, which could take much longer to recover. It’s not unrealistic to imagine a decent spring and summer in 2021, if vaccines are already in distribution by then, and if fuel prices remain near historic lows. Fuel prices will matter less than in the past however, thanks to Virgin’s transition to a much more efficient fleet. What does remain every bit as influential as always: The value of the British pound. When strong, it powers outbound demand. When weak, it swells Virgin’s dollar-based cost structure.
For once in a blue moon, capacity shortages at London Heathrow are not a concern. Before long though, talk will again turn to building a third runway, which would expand the number of available flight slots. How would these new slots be distributed across airlines? Virgin will want an outsized share, arguing that BA currently has too many.
But that’s a discussion for another day. The immediate priority for Virgin Atlantic, having now secured survival capital, is positioning itself well for the next upturn, whenever it comes.