Company / Analytics

Analytics, 26 April 2020

Coronavirus and Virgin Atlantic. What to expect?

Global airlines from the United States to South Africa, Britain to Australia are looking for a bailout and could collapse without one. Some airlines, including Air Mauritius and Virgin Australia, have filed for bankruptcy and entered into voluntary administration while others such as Norwegian and South African Airways are nearing liquidation. Meanwhile, American Airlines was forced to send its brand-new Boeing 787-8 straight into storage as delivery could not be delayed.

In our March article, we analyzed the shock the fast-spreading coronavirus has caused to the airline industry and the long-term impacts of measures to contain the virus in the industry. The impacts are already settling in with major airlines across the world about to go under.

In this follow-up series, we explore the challenges facing UK-basedVirgin Atlantic Airways Ltd and Virgin Australia Airlines Pty Ltd. Both Airlines have requested and got denied a government loan. Virgin Australia has already filled for voluntary administration, and it appears Virgin Atlantic might follow soon.

Virgin Atlantic Airways Ltd was all over the news this week with its billionaire founder Richard Branson pleading for government aid. The airline is seeking a total of £500m in commercial loans and guarantees, which was rejected by the British government.

Virgin Atlantic’s complicated ownership structure

In addition to the negative publicity surrounding Branson’s life following the application including accusations of tax evasion, Virgin Atlantic’s ownership could also be responsible for the British government refusing to bail out the airline.

Virgin Atlantic is 51% owned by the Virgin Group and 49% owned by US-based Delta Air Line. The British government may have been concerned with bailing out an airline nearly half-owned by a US-Airline (corporation).

Branson is seeking a loan in the same manner as EasyJet which has managed to secure a £600m loan from the Treasury and Bank of England and a further £400m+ from creditors. But it appears the British government wants Branson to seek cash elsewhere first. In the end, it is highly likely that Virgin will secure a government loan, especially given the hundreds of thousands of jobs at stake. After all, it’s a British company and provides jobs and taxes to the Crown.

Delta Air Lines, the co-owner of Virgin Atlantic, has hinted that Virgin could enter into administration in the U.K as they (Delta) are occupied with their crisis in the United States and are unable to invest more into the U.K. airline, Bloomberg reported. Delta is however hopeful that Virgin could re-emerge well out if they were to go into insolvency proceedings.

Times must be really tough when a billionaire openly asks for a government bailout. Or is it courage? While Branson has promised to do all it takes to save the airline, including using his Necker island as collateral, it’s no doubt he has become the highest-profile victim of an airline-industry crisis that’s only just getting started.

Virgin Australia

Virgin Australia, which is 10% owned by Richard Branson is also fighting to survive and seeking support. Virgin Australia is the second-largest airline after Qantas if it goes under it could either leave a monopoly for Qantas, in addition to being replaced by Alliance Airlines, a regional Queensland airline.

Virgin Australia is seeking a AUD$1.4 billion government loan which has been rejected by the Australian government which also refused to buy a stake in the airline. The airline has entered into a voluntary administration and its administrators, Deloitte, are desperately looking for a buyer.

Even before the outbreak of COVID-19, Virgin Australia was already struggling and reportedly owes some 10,247 debtors a reported $7 billion, according to its Administrator Deloitte. According to the administrator, the figure owed to creditors includes about A$2.3 billion of secured debt, A$2 billion of unsecured bonds, A$1.9 billion of aircraft leases, A$450 million owed to employees, A$167 million to trade creditors and A$71 million to landlords.

According to aviation experts, if Virgin Australia goes under, the void could be filled by Alliance Airlines, a charter group based out of Brisbane which owns 50 planes. The small carrier was founded in 2002 and already supplies several domestic flights to Virgin Australia.

Virgin Australia’s complicated ownership structure

Similar to Virgin Atlantic which is part-owned by Delta Air Lines, Virgin Australia also has a complicated ownership structure that has complicated its bailout by the Australian government. The airline is largely owned by foreign entities as follows:

We are not bailing foreign-owned airlines, says British and Australian government

The predicament surrounding Virgin Atlantic in the UK and Virgin Australia as regards to refused government loans is a clear indication that governments may not be ready to use taxpayer money to bail out majority-owned foreign airlines (and companies). In some countries, such as the United States, there are mixed reactions on whether governments should bail out the airline industry at all.

In March, the International Air Transport Association (IATA), the organization representing some 290 airlines comprising 82% of global air traffic, estimated the impact of COVID-19 on the industry to at least US$63 billion—$113 billion resulting from a fall in global passenger revenues. As at March, over US$ 157 billion has been wiped off valuations across 116 publicly listed airlines, according to the visual capitalist, a data simulation website. On the other hand, IATA estimated that airline share prices had fallen by nearly 25% since the outbreak of the Coronavirus, 21% greater than the decline recorded at a similar time during the SARS crisis of 2003.

The CAPA - Centre for Aviation, a global source of market intelligence for the aviation and travel industry estimates that most world airlines will be bankrupt by the end of May and the industry requires approximately US $200 billion in some form of financial relief to recover from the impacts of COVID19.

Read more on our piece on the impacts of COVID-19 on the airline industry and the post-COVID-19 recovery scenarios for the industry.

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