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Update 27 April 2020 06:35 – There are rumors emerging that the UK Government has agreed to a £300m (~$372m) loan to Wizz Air (an airline headquartered in Budapest, Hungary) – this may make it politically awkward if the government now fails to assist Virgin Atlantic (an airline viewed as a UK airline).
Over the weekend, reports emerged that discussions between the UK government and Virgin Atlantic had collapsed following the airline’s request for a £500m ($620m) government loan to help keep it afloat. The Telegraph reported that a buyer would now have to be found if the airline was to survive and that Richard Branson had set a deadline of 31 May before the airline would be put into administration.
In the current climate, the number of potentially interested parties isn’t going to be very high and the fact that at least 51% of the airline will have to remain owned by a UK/EU entity isn’t going to help matters very much…but I’m not sure this really matters. What I believe we’re watching here is pure theatre.
From the very beginning of this crisis, the UK government made it clear that airlines wouldn’t get state aid until they had exhausted all their other options (the markets, institutional investors, existing shareholders etc…) and what I think we’re now seeing is Virgin Atlantic doing its very best to overtly demonstrate that all its options have been exhausted.
There are two key things at play here:
- The UK government doesn’t want to be seen to be bailing out Richard Branson (someone a significant percentage of the British public consider to be a “tax dodger”) unless it absolutely has to.
- The UK government doesn’t want to be seen to be going back on its position that airlines need to exhaust all their other options before it will step in.
In recent days we have heard how Richard Branson is willing to put up Necker Island (his private island in the BVI) as collateral for any government loan, and we have heard Richard Branson say (over and over again) how any loan made to Virgin Atlantic would be on commercial terms and would be repaid over a predefined period (just as happens with all loans).
That’s point #1 taken care of – the UK government can say that it’s not bailing out Richard Branson and that it’s just giving Virgin Atlantic a straightforward commercial loan which the taxpayer will see repaid and which will help preserve 8,000+ UK jobs.
What we’re seeing now is point #2 being addressed.
All parties involved have been very vocal (in the press) about how there’s no free money on the table (i.e no bailout for a billionaire who is an alleged tax dodger) so now we’re moving on to the need to demonstrate that Virgin Atlantic has nowhere left to turn to for additional funds.
Delta (a 49% shareholder in Virgin Atlantic) is almost certainly not going to put more money into Virgin (using the free money it got from the US taxpayer to prop up a foreign airline would not look good), and anyone with even half a brain knows that Richard Branson doesn’t have the kind of liquidy required to produce £500m at such short notice…so that leaves outside investors.
It’s very clear that the large investment banks have no interest in lending Virgin Atlantic money, the airline’s stock isn’t publicly traded so it can’t follow United’s lead and issue more shares to the market to raise the much-needed funds (even if it could, I suspect the offering would fail) and there aren’t going to be any trade buyers because no other airline in the world is looking to invest right now. That just leaves sovereign wealth funds, hedge funds, and private equity houses…and here’s where the theatre continues.
If you take a look at the funds and houses that, according to the Telegraph, are interested in acquiring a stake in Virgin Atlantic, there’s one glaring issue – all but one are based outside the EU/UK.
For most of these guys to be able to take a stake in Virgin Atlantic would require Richard Branson to maintain his 51% stake and for Delta’s 49% stake to be wiped out. I can’t see Delta being overly happy with that idea and I doubt the investors would like that very much either -they would want a controlling interest.
There’s a possibility that some kind of special purpose vehicle could be created which could help circumvent the issue of UK/EU ownership and allow a foreign-based fund to inject cash into Virgin Atlantic…but that doesn’t seem overly likely. More importantly, I don’t think that’s what anyone is considering right now because I don’t think the point of this investor list is really to show us who would consider investing in the airline. This is more theatre.
This is a list to allow Virgin Atlantic to demonstrate that the only investors it could find are not qualified to invest thanks to UK/EU law.
Quite simply, Virgin Atlantic is putting on a big show (for the benefit of the UK government and the UK taxpayer) to demonstrate that it’s out of options. It is giving the UK government a way of offering a life-saving loan while, at the same time, being able to say that it has kept to its original stance.
Bottom Line
If Virgin can demonstrate that there isn’t a bank in the world that will lend it the money it needs, that there isn’t a billionaire in the wings with the liquidity needed to save the airline and that there aren’t any qualified investors around who are willing to put up the cash to keep the airline afloat, it will be able to say to the UK government that it has fulfilled the key criteria required for state aid – the airline has nowhere else to go.
In the grand scheme of things (and considering the pile of debt it has just taken on), £500m isn’t a lot of money for the UK government to cough up and with 8,000+ jobs on the line, I suspect that’s exactly what it will do…it just needs Virgin Atlantic to put on a good show before it can hand over the money.
The UK is more capitalist than the fake capitalists in the US who are just racists masquerading as capitalists.
Delta’s model for global growth is showing signs of coming off its wheels not that anyone could have predicted this mess we are in. Having said that Branson’s lifestyle and the way he conducts himself is coming home to roost. When Virgin America was sold the operation was coming apart, upkeep of the interior of the planes was a disaster, planes were dirty they were short on cash and rapidly running out which is why he sold then Branson whined when AS took Virgin off the planes. Virgin Australia is a mirror of VA. He needs to sell his interest in Virgin Atlantic and enjoy life.
Very nice article
I personally think that virgin will survive
I’m curious to know your thoughts on that?
Interesting article, although the main point with Delta is that they’re NOT ALLOWED to divert any funds into JV Partners such as Virgin, under the terms of the Federal Grant package… Interestingly enough, there were plans to relax the rules on EU majority airline ownership post Brexit. The point you make on the size of the loan is a good one – £500m is actually a fairly small sum compared to the size of the PAYE income alone of the 9000 plus employees at Virgin, many of whom fall in the 45% tax bracket. The mathematics make sense and despite the protestations of the baying social media mob, the airline was on track to make a good profit in this financial year, and like all airlines, it now faces a (necessary) government enforced wipeout of 90% of its revenue stream. I have confidence that common sense will prevail.
Agreed, Delta is not allowed to use Federal Grant money for JVs but it could still use other funds that it is raising right now (https://travelingformiles.com/delta-is-raising-3-billion-to-ease-its-liquidity-issues). It won’t do that because, to the world, it will *look* like it’s using Federal money even if it’s not.
It’s also interesting that, as I mentioned in an update yesterday, Wizz Air has just told the markets that it will be drawing down a £300m loan from the UK government despite being headquartered in Budapest. The government will find it hard to persuade the public that bailing out Virgin wasn’t an option when a carrier that is (essentially) foreign gets taxpayer money that it doesn’t actually need (Wizz is the best funded airline in Europe).
VA will never be able to pay a commercial rate of interest on a loan. As such the only honest way forward is to seek risk capital i.e. an equity injection. There is an obvious source of UK equity for VA: the Government. It worked for the banks. The ones in which the Government injected equity in 2008 are still going and helping us survive this crisis.
Based on the loan offered to Wizz Air, the UK government’s idea of a commercial rate is 0.6% – Virgin Atlantic should be able to pay that back.
I’m on the record as wanting to see shareholders wiped out and governments taking equity in airlines before any loans or, worse still, grants are offered, but it doesn’t look as if HMG wants to take an equity stake.
The loss of tax revenue from VA’s 9000 employees is an interesting point. It would seem pointless for the government to lose this and then have to pay out unemployment benefit. It seems a ‘no-brainer’ to me, they must give VA the £500m loan. In real terms this is small beer and not a gift.
[…] have to admit that I didn’t think it would come to this. I thought that Virgin Atlantic was doing a good enough job of persuading the UK government that it h… and that a government loan would be what would keep the airline in business…but it appears […]