Summary

• Virgin Atlantic’s creditors voted with an astounding majority in favour of a £1.2 billion rescue deal.
• The deal involves £400 million in new cash, out of this Sir Richard Branson of the Virgin Group invested £200 million of his own money.
• According to the agreement of the rescue deal, each creditor would receive around 80 per cent of the money owed to them.

In a landmark achievement that secured Virgin Atlantic’s future that was hit by the coronavirus-led crisis, the airline’s creditors voted with an astounding majority in favour of a £1.2 billion rescue deal. Virgin Atlantic owes in excess of £50,000 to each of these creditors. The airline required support that would be equal to 75 per cent of the total outstanding value of money that it owed to the creditors. According to the agreement of the rescue deal, each creditor would receive around 80 per cent of the money that the airline owed to them. Virgin Atlantic would make the payment in instalments.

The agreement plan is structured to assist the airline company to survive another one and a half years of travel mayhem caused by the coronavirus pandemic. Virgin Atlantic is expected to return to profit in 2022. Describing the deal as an important step towards securing the airline’s future, Virgin Atlantic said it has got the overpowering assistance from all its four sections of creditors that constitute 99 per cent trade creditors who voted in favour of the plan. The United States (US)-based airline company that has 49 per cent stake in Virgin Atlantic commented that it is hopeful that the plan would facilitate Virgin Atlantic to safeguard its future, besides reaffirming its firm support to the UK airline company.

As part of the rescue deal, Sir Richard Branson of the Virgin Group (parent company for Virgin Atlantic) has invested £200 million of his own money. Branson is known to have raised this amount by selling off a stake in Virgin Galactic, the company’s space division. The £1.2 billion rescue deal involves £400 million in new cash. Informing about the next step where a UK court hearing is scheduled for 2 September 2020, the company stated that it was confident that the court would give final approvals to the plan. Thereafter, next day, the plan would need consent at a procedural hearing that would happen in US.

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Key events preceding the deal

It is to be noted that Virgin Atlantic had cautioned earlier that the airline company could run out of cash in September 2020 in case the rescue deal could not get approval. Similar to other airline companies, as another option, the airline had feared regarding falling into administration. Virgin Atlantic’s finances were hit along with other airlines with the crumpling of air travel during the Covid-19 pandemic. Banks that are Virgin Atlantic’s largest creditors, the company’s shareholders, along with the aircraft leasing firms had already agreed to the deal, when the airline announced its plans regarding privately-funded re-capitalisation in July 2020. Virgin Atlantic planned to pump in its own money after it could not succeed to win UK state support. The UK government rejected the carrier’s plea for state funding earlier in the coronavirus crisis. However, Bank of England provided loans worth hundreds of millions of pounds to the competitor companies like British Airways and easyJet as support to overcome the challenges.

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Virgin Atlantic’s journey during the coronavirus crisis

Being hit hard by the coronavirus-led crisis, Virgin Atlantic took some tough decisions to save cash after its passenger aircrafts were grounded for nearly four months as traffic plunged sharply on its long-haul routes due to border closures between the countries and travel restrictions for people. The company shut down its base at the Gatwick airport and announced to off role more than 3,500 employees. These job cuts consist of approximately a third of its workforce. Virgin Atlantic also reduced the size of its fleet that comprised of retiring some of its Boeing 747s aircrafts, besides pushing back orders for new airplanes.

In July 2020, there was an enforcement action against Virgin Atlantic over the delays made by the airline for processing refund money to the passengers for flights that were cancelled during the coronavirus pandemic. Civil Aviation Authority (CAA), which reviewed the refund waiting times of around 18 major airlines, warned only Virgin Atlantic with actions. It is to be noted that the airline has been making its customers wait for up to 120 days for a refund, which the CAA did not find satisfactory. In April 2020, Virgin Australia, a business that Virgin ran separately went into voluntary administration. This was one of the first and big corporate hit in Australia due to the coronavirus crisis. The administration resulted in wiping out almost 10 per cent of Sir Richard Branson's shareholding in Virgin Australia. In May 2020, Bain Capital bought the Australian company and said that it supported the airline's current management team along with the business turnaround plan that Virgin Australia had presented.

In March 2020, Virgin Atlantic launched cargo-only flights and its airplane’s passenger cabins were filled with goods that included medical equipment, among others. The company expanded its cargo operations and operated in excess of 150 flights per week on an average. These cargo operations helped the airline company to partially sustain through the crisis. Towards end-July 2020, Virgin Atlantic started re-operating its passenger flights from Heathrow airport, London. At present the carrier is flying 14 return flights per week to six places around the world, including Shanghai, Hong Kong, Barbados, Los Angeles, New York, and Miami. In the autumn Virgin aims to restart flights to more places, including Delhi, Mumbai, Lagos, and Tel Aviv. By end-2020, the company is likely to reach only 60 per cent of its 2019 flight capacity.

Conclusion

In June 2020, the International Air Transport Association (IATA) cautioned that the fall in air traffic due to the coronavirus crisis would lead to global airline losses of more than £64 billion in 2020. Regarding the Virgin Atlantic deal, some airline industry insiders pointed out that some of the airline’s unsecured creditors would have to settle with 20 per cent less than they were owed. It is likely that their repayments would also be impacted as it could be rescheduled. Others also highlight that as per the deal, the airline would receive only £400 million in extra cash, which is £100 million less than what Virgin Atlantic had requested the government for. This gap in cash seems it would not be enough for the airline. In the ongoing fight against the coronavirus crisis, recent spike in infections and quarantine norms, it seems that the airline industry is braced for tough times ahead. Many experts suggest that the airline companies need to work with the government to bring in effective Covid-19 testing measures at the airports to trace and isolate the infected patients. Airline companies need to strategise and invest in more technologically upgraded equipments for social distancing and sanitisation measures to increase customer and staff confidence.