Virgin Atlantic has announced a £1.2bn rescue deal to allow Sir Richard Branson’s grounded passenger airline to survive another 18 months of turmoil and aim to return to profit in 2022, after four months without scheduled flights.
The privately funded recapitalisation package, a combination of cash injections, loans, and deferrals, was finally confirmed on Tuesday after weeks of talks with potential investors, after Virgin’s attempts to garner state support were rebuffed.
Davidson Kempner hedge fund will provide about £170m in loans. The new investors will have collateral but no shares in the airline, which remain 51% in the hands of Branson and 49% owned by the US carrier Delta.
Branson will inject £200m of his own money, raised through selling off a stake in the space division Virgin Galactic, while Virgin Group and Delta will defer payments owed totalling about £400m from the airlines’ transatlantic joint venture.
Creditors and suppliers will also defer about £450m, and credit card companies have agreed to ensure funds from bookings are not withheld from the airline.
The UK government rebuffed Virgin’s appeal for state funding, although rival firms with more assets such as British Airways and easyJet obtained loans worth hundreds of millions of pounds from the Bank of England to help tide them over.
Virgin’s plan is understood to have been based on a worst-case forecast, and it is not expecting to have to raise fresh capital should international travel approach normal, pre-crisis levels by 2023.
Virgin said it had saved about £880m by pushing back orders for new planes, while its restructuring programme would amount to savings of about £280m a year.
After furloughing most employees, Virgin announced in May it would make 3,150 staff redundant and trim back its fleet, including retiring some of its Boeing 747 jumbo jets.
It has since added a further 400 voluntary redundancies, leaving it roughly a third smaller than pre-crisis, with around 6,500 staff remaining. The airline will also cease operations at London Gatwick to focus on Heathrow and Manchester.
Virgin has sustained some revenues by carrying out about 1,400 cargo flights from April to June, including using the cabins of passenger planes to transport goods. The airline plans to resume scheduled passenger flights this month, starting with Heathrow to Hong Kong next week.
Shai Weiss, Virgin Atlantic’s chief executive, said: “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 recapitalisation 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.”
Weiss said the airline should not underestimate the challenges ahead, and acknowledged that Virgin customers had experienced cancelled flights and delayed refunds. He added: “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.”
The process will require the formal approval of the courts, with the airline hoping it can be sealed by the end of August.
Virgin’s position has proved the most precarious of the big airlines operating out of the UK, having rarely turned a profit in recent years. Before the impact of coronavirus became apparent, it had ambitions to scale up in competition with BA, having acquired the regional carrier Flybe, which it planned to rebrand as Virgin Connect. Instead, Flybe went bust as the impact of coronavirus on bookings started to bite.
BA, easyJet and Ryanair are making large-scale redundancies, with the pandemic throwing the industry’s future in doubt. The global airline association Iata has warned that many companies could collapse, with total industry losses forecast of $84.3bn (£67.4bn) in 2020.