How Covid-19 revealed the fragility of Virgin Atlantic’s finances


On June 22, 1984, dressed in the uniform of an airline pilot, 34-year-old music store millionaire Richard Branson charmed the press kit on his first Virgin Atlantic flight.

“Our service is better than the regular airline but at half the price,” he said as the Boeing 747 bound for New York took off from Gatwick Airport 25 minutes late.

Sir Martin Sorrell, who bought a cable company that would later become the world’s largest advertising agency, remembers Branson’s foray into aviation.

“He was a disruptor,” says Sorrell. “He didn’t disturb on the basis of price alone, he disturbed on the basis of a different approach to service and a different approach to the consumer.

“It made air travel more fun and more enjoyable.”

Virgin Atlantic battles pandemic fallout

Credit: Virgin Atlantic

Branson, created Sir Richard by Tony Blair in 2000 for his “entrepreneurship services”, downplayed the comparisons between his business and the escapades of Sir Freddie Laker, whose eponymous airline had tried and failed to hire public carriers such than British Airways.

Laker’s no-frills airline collapsed two years earlier due to more than £ 250 million in creditors. Branson had learned from the mistakes of his mentor, who had taken out huge loans in the United States to buy a fleet of jets. Instead of owning planes, he rented them.

But more than 35 years later, it was one of the many decisions that left Virgin Atlantic fighting for its life. The billionaire’s airline has been paralyzed by a coronavirus, it wants a taxpayer bailout of £ 500 million, according to sources.

The magnitude of the fallout from Covid-19 became apparent a month ago when Branson’s lieutenants rushed to save Flybe, the regional airline it had purchased a year earlier.

With reservations falling off a cliff, now was not the time to recoup their investment in Europe’s largest regional carrier; it was time to put their own house in order, the bosses thought. Very quickly, they realized that they would need state aid. The opening bet came from Peter Norris, the president, who wrote to the government saying that the whole industry needed a £ 7.5 billion bailout.

But the industry was far from united in this regard. Willie Walsh, the head of British Airways’ parent company IAG, and Michael O’Leary, CEO of Ryanair, strongly opposed the state aid. The first round went to Walsh and O’Leary as Rishi Sunak, the chancellor announced a salary financing plan on Friday March 20. The following week, he told airline bosses that the government would only intervene as a last resort.

At this point, Branson has pledged to inject £ 215 million into his enlarged Virgin Group empire and return the ball to Whitehall’s court. “The economic recovery will critically depend on governments around the world successfully mobilizing various recently announced support programs,” he wrote in a blog on March 22.

A multi-million pound loan from Standard Chartered was then agreed to – a loan which, according to Virgin insiders, was an “as usual” deal.

Last week, the accounting firm EY – hired by the government to help its chief adviser Rothschild – applied a calculation rule to Virgin’s bid. He checked all the boxes required by Sunak; he had explored all other options and a state rescue was the only one left.

Virgin’s case was passed on to Rothschild, which has opened talks with the airline’s management team, led by Shai Weiss, the managing director, to reach an agreement. But agreeing on a bailout that did not endanger the British taxpayer has proven problematic.

“Financially, its starting point is relatively weak,” said James Goodall, an analyst with broker Redburn. Goodall estimates its net debt-to-profit ratio to be 5.8x. This contrasts with IAG, for example, whose ratio is 1.4x.

In addition, Branson’s decision to rent rather than own an aircraft came back to haunt him. There was little collateral against a government loan. The policy of having few assets meant that there was little to mortgage, sources said.

Finally, according to an insider, the fact that the taxpayer would not support bankrupt businesses sounded to the ears of a multitude of Rothschild bankers – “like the cast of Ben Hur,” according to an insider.

Virgin’s pretax losses in 2018 and 2017, its latest figures released, were £ 60 and £ 80 million respectively. In 2016, it made a profit of 232 million pounds sterling, in 2015, 88 million pounds sterling. But in 2014, losses exceeded £ 175 million. “The airline has had profitability problems for some time and has not been able to build up the level of cash reserves that some of its major competitors have amassed,” said independent aviation consultant John Strickland.

Eric Kohn, President of Barons Capital Partners, is an investment banker with more than three decades of work in the aviation industry. In the mid-1980s, he worked for a large American investment bank. “When Branson entered the scene in 1984, Virgin Atlantic was new, trendy and sexy. It was something different, attractive and up to date, “he says.

“He was very popular with many people, but he turned others the wrong way. The dancers on the tail fins were not to everyone’s taste. For example, [we] refused to work with them because it did not fit with [the bank’s] conservative mindset. Yes, it was great back then, but the world has changed. “

He concludes, “His counterparts in the United States have been able to get rid of unwanted liabilities and restructure their operations thanks to Chapter 11 of the Insolvency.

“And in Europe, a large part of the power of long-haul is concentrated in three groups: IAG, Air France KLM and Lufthansa, all of which have a solid European network and infrastructure. This leaves them fundamentally flawed by simply not being big enough. “

Goodall adds: “Its business model differs from the other major airlines in the network because it is only a long-haul operation. It does not have short-distance serving routes – and therefore depends on point-to-point traffic rather than transfer. “

Branson tried to remedy this weakness by concluding an agreement with Delta, the American airline which bought a 49pc stake in its airline in 2012.

But Delta’s influence raises the question of whether Virgin is pressuring good government for support.

” [British] Government involvement would be a disaster, “said Barry Norris, founder of investment company Argonaut Capital. “Is it a national treasure?” Is it in the national interest? “

He also warns of a “moral hazard” of bailing out people like Virgin Atlantic. With the state behind operators in trouble, those trying to help themselves will look weaker. “The capital markets will be dead for the strongest players,” he says.

For decades, Virgin Atlantic has surpassed its weight through savvy marketing – campaigns that have made many enemies along the way. An airship on a London Eye not erected with the mention “BA can not raise it!” is one of Branson’s most extravagant efforts. But Sorrell wonders if the billionaire’s heart is still there.

“Richard has done so many other things. Obviously, his concentration [is not solely] on airlines.

“At first it was Virgin Music and Virgin Airlines. This is now the brand that has been stretched so far.

“Like all disruptors,” he says. “You have to be prepared for the incumbents to drive you away. Especially if you are making forays into the market. “


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