Virgin Atlantic set for $1.8 billion rescue

Virgin Atlantic is set for a £1.2 billion (A$1.8 billion) rescue in a major victory for Richard Branson, who snatched his U.K. airline from the brink of failure under the weight of the coronavirus crisis.

U.S. hedge fund Davidson Kempner Capital Management will provide about £170 million in secured financing, according to a statement Tuesday, while Branson will contribute £200 million after raising money from space venture Virgin Galactic.

The plan also relies on creditor deferrals, with Virgin Atlantic planning to use a court-sanctioned process to overcome any dissenting minorities.

Branson and his team, led by Chief Executive Officer Shai Weiss, secured the private bailout after Britain refused to contribute taxpayer funds when the carrier was grounded by the pandemic.

After months of uncertainty, the mogul, who turns 70 this week, is set to retain control of a business he founded in 1984, though future prospects will hinge on the return of U.S. travel.

Right-sizing, restructure and recovery

“It’s the ticket to our continuing journey, and hopefully it also means a better birthday for Richard,” said Weiss. “He’s put in 200 million, but we’ve helped wrap it up for him.”

“This doesn’t mean that we are out of the woods 100%. But it shows that people believe in the future of Virgin Atlantic and our business plan,” Weiss added.

He predicted that the carrier will return to profit in 2022 as traffic gradually recovers to 2019 levels.

By 2022, Virgin expects to be flying the same number of routes as 2019, although with a reduced fleet of 27 aircraft.

Aircraft-leasing firms have largely gone along with the proposals, while about £880 million pounds related to aircraft deliveries – new Airbus A350 and A330-900neo jets – was "re-phased" and financed over the next five years.

Cost cuts, including the elimination of more than 3,000 jobs, the closure of a base at London Gatwick airport, and the retirement of older jets, will save £280 million each year.

Virgin Atlantic will launch a restructuring process in the U.K. to make its plan binding on all creditors if it gets support from 75% of them.

Weiss said backing is “there or thereabouts” for each class of creditors, and that he was confident of clearing the court hurdle.

Delta: no new money, but payments deferred

The loan from Davidson Kempner will be secured against planes and aircraft slots, Weiss said. The New York firm, which has about US$30 billion of assets under management, won the deal after offering more favorable terms than other potential backers, people familiar with the matter said on July 10.

The plan includes £450 million of creditor deferrals and £400 million of payment delays or waivers from Branson’s Virgin Group and co-owner Delta Air Lines.

Delta, which owns 49% of Virgin Atlantic, had said it wouldn’t put in more cash. However, the U.S. airline will make a significant contribution by delaying outstanding marketing fees and other dues.

Delta’s contribution to the rescue involved “deferral of brand fees, as well as certain other joint venture fees we would typically earn,” Chief Executive Officer Ed Bastian said on a conference call Tuesday. He declined to provide additional details.

Weakened niche

Branson started Virgin Atlantic as a 30-something music entrepreneur, after a trip to the Caribbean on a commercial airliner was canceled at the last minute. He chartered a plane on the spot, paying with his credit card, and sold seats to the other passengers whose flight had been bumped.

In time, the company grew to become the only credible U.K. competitor to British Airways, inciting an intense rivalry that continues to this day. Branson’s airline operates mainly on trans-Atlantic routes between London and U.S. destinations like New York and Los Angeles.

The North Atlantic niche is normally the most profitable in the entire airline industry. But Virgin has had to park its fleet due to the coronavirus, and restrictions on flying between the U.S. and the U.K. have caused a continuing collapse in demand, even as other travel markets begin to open with the easing of lockdowns.

On Tuesday, the EU recommended keeping its external borders shut to Americans and most other foreigners for at least two more weeks, Bloomberg News reported.

Weiss said the return may be a slow one but that it will be aided by the expansion of so-called air bridges between specific countries and later by health passports showing passengers are Covid-free.

Tax haven

Branson’s abode in British Virgin Islands – where residents pay no income or capital-gains taxes – made a state bailout politically difficult. The U.K. government earlier rejected his plea for a loan guarantee for Virgin Atlantic on the grounds that its credit rating was too low.

On March 24, when the news came through that U.K. Chancellor of the Exchequer Rishi Sunak had rejected an industry bailout, Branson was on Necker Island, the Caribbean redoubt from which he pilots his global empire.

Government officials told Virgin it might still qualify for assistance, but opposition was mounting in the U.K., with some politicians and newspapers arguing that Branson’s tax-free residency should preclude government aid.

Branson’s insistence that he had always plowed his profits back into new businesses, and that his companies pay taxes in countries worldwide, did little to sway opinions.

That left Branson, who holds 51% of the carrier, to come up with the cash or risk the failure of the airline he’d founded in 1984 as a foil to mighty British Airways. Since the billionaire’s fortune rested largely on the value of his companies, Branson had little choice other than selling less vulnerable assets to save the airline.

Additional reporting by David Flynn