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It is no secret that Virgin Atlantic desperately needs state aid to avoid collapse. Reports over the weekend, however, stated that the government has asked Virgin Atlantic to resubmit its proposal for a £500 million bailout. Specifically, the airline needs to demonstrate that its shareholders – the Virgin Group with 51% and Delta Airlines with 49% – have exhausted all other options for raising cash.
Since letters from the bosses of Airbus, Rolls-Royce, etc. haven’t had the desired impact, Sir Richard Branson is now becoming more personally involved in the public relations effort. Click here to read an open letter to Virgin staff, published online.
I am positive that no reasonable reader WANTS Virgin Atlantic to fail. But that is substantially different from UK taxpayers being willing to PAY TO SAVE Virgin Atlantic.
So… in a slightly different format to our usual, I’d like to invite readers to join the debate… Should Virgin Atlantic be bailed out?
Here’s my take…
The Political Optics are Terrible
As mentioned above, Virgin Atlantic is owned 51% by a notorious tax exile – even though every single one of us would live on our own private island in the Caribbean if we could – and 49% by a large American airline. Although Sir Richard Branson is obviously a paper billionaire, rather than a cash billionaire, and his claims of being a proper expat ring somewhat more true than other famous tax exiles, the UK government obviously needs to make a bailout extremely painful for Sir Richard.
Setting aside the ownership structure, much was made of the fact that Conservative gains in the December elections came from many northern constituencies that would traditionally vote Labour. Are those voters going to be particularly impressed with bailing out an airline that, being exaggeratedly blunt, is nothing more than a way for middle and upper class southerners to enjoy more competitively-priced holidays to North America and the Caribbean? I’m not aware of a single Virgin Atlantic route that would be considered crucial for business “connectivity”, yet isn’t offered by one or more airlines such as British Airways or a US-based airline.
Would it be Throwing Away Money Anyhow?
Virgin Atlantic has rarely been profitable. I believe that the airline made some profit in 2015 and 2016, but was loss-making before and after. If Virgin Atlantic couldn’t make substantial profits during boom times – BA / IAG, Ryanair and Easyjet certainly did – then it’s hard to imagine Virgin Atlantic being profitable until the coronavirus crisis is a distant memory. As a result, it’s hard to imagine Virgin Atlantic actually being able to repay any loans from the exchequer.
Being profitable isn’t necessarily crucial, provided that Virgin Atlantic has good collateral with which it can guarantee a loan. However, my understanding is that Virgin Atlantic only owns a handful of its aircraft – the rest being leased – and that even its valuable Heathrow slots have been mortgaged. And that’s assuming that travel bounces back so strongly that Heathrow slots remain worth something…
How Would a Bailout Even be Structured?
Sir Richard wants a “commercial loan”, similar to the one that Easyjet received. Even if the Chancellor is willing to overlook the lack of a strong credit rating or decent asset collateral, he would still be left with a political problem. If Virgin Atlantic repays the loan and returns to financial health, all of the airline’s profits would flow to a tax exile and a large American corporation. If Virgin Atlantic goes bust, the taxpayer will have lost £500 million or more.
A solution might involve the government taking some or all of Virgin Atlantic’s equity, diluting both the Virgin Group and Delta Airlines. But an unprofitable airline isn’t worth much. The sale of 31% to Air France was reportedly priced at £220 million, giving a total value of £700 million or so for 100% of the airline, back in the boom times! If we charitably say that airlines are worth 30-35% of what they were worth back in January – IAG’s share price has fallen from 670p to 215p – then the entire equity of Virgin Atlantic would be worth perhaps £200-250 million.
Of course, Sir Richard and Delta Airlines wouldn’t receive a single pence. New shares would need to be issued, leaving the UK government owning a substantial stake in an airline. Leaving aside the inevitable lawsuits from IAG and others until the coronavirus aftermath, how would these shares be sold in the future? It’s not nearly so simple as it was with Lloyds and RBS – slowly selling shares on the stock exchange – because Virgin Atlantic isn’t publicly traded.
So either the government’s shares would need to be privatised on the stock market as an IPO or another buyer would need to be found, all the while keeping in mind that the airline would need to be 51+% British owned if it wanted to retain its right to fly its current routes. Quite the headache…
The “Save Jobs” Argument
Governments around the world have recognised that the coronavirus could cause an economic collapse deeper than the Great Depression. To avoid that happening, great pains are being taken to support jobs. Although one might start to wonder who will eventually pay for all of this, it is undeniably cheaper to save a job today than it is to create one tomorrow.
According to their 2018 annual report, Virgin Atlantic has 8,500 employees. £500 million works out to nearly £60,000 per employee, with no guarantee that £500 million will be enough to keep Virgin Atlantic alive for more than a few months without travel. I don’t intend to be flippant, but I suspect that a fair few Virgin Atlantic employees would prefer a direct redundancy payout of £25,000 and to go find another job…
Besides that… the “save jobs” argument didn’t matter much when Flybe and Thomas Cook collapsed. Nor is Virgin Atlantic prohibited from requesting aid under the UK’s Coronavirus Job Retention Scheme.
As much as I would like for Virgin Atlantic to survive – I am one of those who benefit most from competition between airlines and healthy airline miles schemes – I doubt that I would participate in a crowd-funded effort to save the airline. Nor do I really think that the airline can justify a claim on UK taxpayer funds.
But who cares what I think… what about you? Keep it civilised, but what do you think the Chancellor of the Exchequer should do? Let Virgin Atlantic collapse? Or bail it out?