Virgin Atlantic has announced a new package of financial support measures for the airline.
The package comprises both the direct injection of cash as well as cash flow support through the deferral of fees.
Throughout the course of negotiations various numbers have been put on the package from upwards of £500m. Today’s package has been valued at £1.2bn over the next 18 months.
In addition, Virgin will seek to achieve cost savings of £280m a year and savings of £880m over the next five years through the deferral and refinancing of the delivery of new Airbus A350-1000 and Airbus A330 neo aircraft.
The restructuring package is based on a five year business plan where 2019 demand for air travel may not recover until 2024. Virgin Atlantic aims to be profitable by 2022.
Speaking to the Financial Times, Virgin Atlantic CEO Shai Weiss said:
“This is not a plan for another plan . . . our job has been to take a very severe look into 2021 specifically. We funded the plan for the worst case rather than best case as you would expect us to do.”
Under the package, Virgin Group will retain 51% control of Virgin Atlantic. Delta will also remain a 49% shareholder. Delta has today, in announcing its own financial results, written down its investment in Virgin Atlantic and taken a charge of $200m.
Virgin Group will provide the airline with a direct cash injection of £200m. Virgin Group has disposed of some its interest in Virgin Galactic to fund this. It will also defer payments for the use of the Virgin brand name and logo.
US private equity firm Davidson Kempner Capital Management will provide £170m of new debt. This will be secured against assets of the airline.
Delta Air Lines will not provide any direct financial investment as it is prohibited from doing so having received support from the US government under the CARES (Coronavirus Aid, Relief, and Economic Security) Act.
Delta has agreed to defer payments for shared services such as IT and payments due to it under its transatlantic joint-business with Virgin Atlantic. The total value of deferred fees to Delta and Virgin has been put at £400m over the life of the plan.
According to news reports, Virgin’s credit card payment processors, Cardnet and First Data, have also agreed to release funds they have withheld in case of the airline’s collapse.
The financial support package will require court approval and this should be granted within the next 43 days. Virgin’s bondholders who hold security over Virgin Atlantic’s slots at London Heathrow will need to support the package. There will inevitably be a lot of legal detail that has not been disclosed today.
Virgin Atlantic is due to resume scheduled passenger flights from London Heathrow next week, initially to Hong Kong, Los Angeles and New York JFK. Virgin plans to gradually reinstate its London route network over the coming months.
In terms of fleet, Virgin has already retired its Airbus A340 and Boeing 747 fleet. It also plans to return leased Airbus A330-200 aircraft. By 2022, Virgin expects to operate a fleet of 37 twin-engine aircraft.
Whilst today’s announcement does secure the future of the airline in the medium term, Virgin is going to face extremely challenging market conditions over the next couple of years. Long-haul business travel is unlikely to return in any meaningful form until well in 2021. However, credit should be given to Shai Weiss for handling what must have been a very difficult and protracted negotiation with multiple parties.