July 14, 2020 / 4:53 PM / 24 days ago

Breakingviews - Virgin’s budget rescue buys a bit more flying time

A Virgin Atlantic aeroplane tailfin and nose livery are seen at Heathrow airport. London, Britain, May 5, 2020.

LONDON (Reuters Breakingviews) - Richard Branson has secured an economy class rescue for Virgin Atlantic. The ailing airline, 51% owned by the bearded businessman’s Virgin Group, on Tuesday unveiled what it called a “solvent recapitalisation” worth 1.2 billion pounds. The plans give Virgin Atlantic much-needed breathing space. But the rescue lacks the punch of other industry bailouts.

The headline figure has many moving parts. Virgin and fellow shareholder Delta Air Lines are offering payment holidays and other deferrals: Branson, for example, will temporarily give up the 20 million pounds a year he charges Virgin Atlantic to use of his brand. These items are apparently worth 400 million pounds, though it’s unclear over what time period.

Creditors, including the leasing companies that own most of Virgin Atlantic’s 37 planes, are offering payment breaks worth another 450 million pounds. Actual cold hard cash makes up the smallest slab of the rescue. U.S. hedge fund Davidson Kempner Capital Management is providing a secured loan worth 170 million pounds while Virgin Group is tossing in another 200 million pounds. The deal must also pass through a court-sanctioned restructuring process.

Virgin Atlantic’s asset-light model gave it limited routes to the emergency exit. Its fleet is predominantly leased, and it has even borrowed against its landing slots. That gave it limited collateral for fresh loans, and prompted the UK government’s to rebuff Branson’s request for state support. Other stricken airlines have received better terms, often with the help of national governments. Germany’s Lufthansa, for example, managed to secure debt and equity worth 9 billion euros. The French and Dutch governments collectively lent Air France-KLM over 10 billion euros.

But Virgin Atlantic flew into the pandemic storm in worse shape than many rivals. In 2018, the most recent year for which accounts are available, soaring costs wiped out the airline’s 2.8 billion pounds of revenue. Having cut almost a third of its workforce and closed its hub at London’s Gatwick airport, the carrier now thinks it will return to profitability by 2022 - only a year later than originally planned. But even though it has bought some extra flying time, Virgin will have to quickly get full planes back in the skies for the rescue to succeed.

Breakingviews

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