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Virgin Atlantic has just published, somewhat belatedly, its annual report and financial statements for the year to 31 December 2019.
Although the report was clearly drafted months ago in advance of it recapitalisation last year, it has only just been published on the Virgin Atlantic website and has not yet been filed at Companies House.
The airline group, which includes Virgin Holidays, reported a loss before tax and exceptional items for the year of £29.5m.
Like all airlines, Virgin Atlantic has been severely impacted by COVID-19. The court sanctioned solvent recapitalisation in July enabled Virgin Atlantic to secure new sources of debt and partial relief of debts owed to creditors.
When a company prepares a set of financial statements, its Directors are required to assess the ability of the company to continue to trade as a going concern. The company’s auditors are also required to comment on this.
To do this, Virgin Atlantic has modelled different scenarios for the resumption of passenger flights through 2020 and 2021. These are detailed extensively from page 57 of the report.
The airline has modelled its ability to trade as a going concern on an expected case of travel restrictions being lifted throughout 2021. In this instance, Virgin considers that, following its solvent recapitalisation, it would have sufficient funds to continue to trade for the next 12 months.
Virgin has also modelled an alternative scenario with more severe travel restrictions remaining in place until the summer, dubbed the August 2021 scenario. In this instance, Virgin Atlantic and its auditors have stated that further measures will be required to ensure the airline can continue to trade.
Virgin has since undertaken further measures such as the sale and leaseback of aircraft. Before its solvent recapitalisation, Virgin did seek state support but was rebuffed by the Treasury. Given that Virgin’s ability to operate passenger flights is in part impacted by restrictions imposed by the UK government and BA has secured a state guaranteed loan of £2 billion, it may have a stronger case for state support.
On the scenario of travel restrictions remaining in place until August 2021, Virgin Atlantic has commented as follows:
In this scenario our free cash levels would breach current liquidity and slot covenant levels in January 2021 all other things being equal. The Group would also be exposed to further working capital outflows through refunds as a result of the return of customer advance payments on cancelled departures.
At 30 June 2020 the value of forward sales across both the Airline and Holidays businesses was £727m of which around £669m related to departures from July to the end of the year and a further £58m related to departures in 2021. In this scenario, and based on experience to date, the Directors expect a significant portion of sales in advance will be retained, in return for discount vouchers and offers on future departures.
In the unlikely event that this scenario transpires the Directors considered additional potential mitigating actions. These included:
• Review and rationalisation of our network;
• Asset disposals;
• Further significant restructuring and cost reduction activities;
• Deferral of expenditure; and
• Securing additional funding.
The directors consider there are scenarios which could represent a material uncertainty and could cast significant doubt upon the Group’s ability to continue as a going concern. These scenarios include the failure of the current court sanctioned recapitalisation process, the failure of potential additional mitigations in the more severe August 2021 scenario (for example the lack of alternative sources of finance, such as sale and leasebacks on aircraft), or the inability to obtain additional funding.
Notwithstanding this material uncertainty caused by the current Covid-19 pandemic, the Directors do not consider this additional severe August 2021 downside scenario to be likely.
Based on the above indications the directors believe that it remains appropriate to prepare the financial statements on a going concern basis. However, this material uncertainty may cast significant doubt on the Group’s ability to continue as a going concern and, therefore, to continue realising its assets and discharging its liabilities in the normal course of business.
Comments By Virgin Atlantic Auditors
Virgin Atlantic’s auditors have commented as follows on page 47 of the report:
We draw attention to note 3 to the financial statements which indicates that, under certain severe but plausible downside scenarios as a result of COVID-19, and its associated impact on air travel and leisure industries, there is a risk of whether the group and parent company are able to meet liquidity requirements, such that they can continue to operate as a going concern. The scenarios modelled by the group assume a gradual return to passenger flying below historic levels, along with a recapitalisation plan, which requires a court-sanctioned approval process prior to implementation. Note 3 sets out the uncertainties regarding the successful completion of the group’s recapitalisation plan and the directors’ assumptions for the resumption of passenger flying. Even if the group’s recapitalisation plan is successfully completed, if travel restrictions continue during 2021 in the group’s key markets, the group may need to obtain additional funding in the future to maintain liquidity. These events and conditions, along with the other matters explained in note 3, constitute material uncertainties that may cast significant doubt on the group’s and parent company’s ability to continue as a going concern.
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