Congrats, Frequent Flyers. You Helped Save Branson
(Bloomberg Opinion) -- More than a decade ago Time magazine anointed “You” its person of the year, in recognition of our collective effort to create free content for social media.
Today Virgin Atlantic Airways Ltd. owes a similar debt of gratitude to its long-suffering customers. The cash they’ve advanced the transatlantic airline for future bookings was every bit as important as that provided by billionaire founder Richard Branson and hedge fund Davidson Kempner Capital Management in saving it from collapse. Issuing customer refunds at a snail’s pace helped the airline preserve cash during the pandemic but unhappy customers will make Virgin Atlantic’s recovery that much tougher.
Virgin Atlantic has confirmed that Davidson Kempner will inject 170 million pounds ($213 million) in secured debt as part of a 1.2 billion pounds rescue deal. That provides an external vote of confidence. The airline’s co-owners, Branson’s Virgin Group and Delta Air Lines Inc., will forgo 400 million pounds of fees owed. On top of that, Virgin Group injects 200 million pounds; in precisely what form isn’t specified. The deal must still be approved by a court.
The rescue suggests the U.K. government was right to push Virgin Atlantic to exhaust other options before demanding a government bailout.
Finding private money was a tall order because the carrier entered the pandemic with a lot of debt, a paucity of assets it could sell and a track record of losses. A strategic focus on the once lucrative North American market — the destination accounted for about 70% of group revenues — has become a vulnerability. The coronavirus is still ripping through the southern United States; those flying transatlantic face a fortnight in quarantine. It’s difficult to know when and to what extent demand will return.
Branson, whose billionaire status and tax residency in the British Virgin Islands made a rescue politically unpalatable, has done the honorable thing by stumping up more of his own cash rather than relying on taxpayers. He also stays in control. Fortunately for him, monetizing part of his stake in space-tourism business Virgin Galactic Holdings Inc., hasn’t crimped its stratospheric valuation too much.
Davidson Kempner is taking a risk because the value of the takeoff slots and aircraft against which its loan is secured is uncertain, but at least it has some fallback. It’s Virgin Atlantic’s customers who have gone the extra mile. Blaming the difficulty of processing such a high volume of refund requests, the airline has taken up to 120 days to give customers their money back when their flights were cancelled, thereby turning its passengers into unsecured creditors.
At December 2018, the most recent date for which there are published accounts, Virgin Atlantic and the associated holidays operation held 520 million pounds of cash from forward sales. Since the crisis began, social media has been awash with complaints about poor customer service; the airline came near bottom of a recent consumer survey of the way travel companies have handled refund requests. Chief Executive Shai Weiss acknowledged that “we have not lived up to the high standards we set ourselves.”
One sticking point in the rescue talks was apparently that credit card acquirers, which authorize and process card payments, threatened to withhold the cash that Virgin Atlantic generated from future bookings, instead of passing it on to the airline.
You can understand why Lloyds Banking Group Plc’s Cardnet and Fiserv Inc.’s First Data may have been hesitant: They’d be on the hook if Virgin Atlantic went bust and customers claimed a refund via their bank. The company said Tuesday it has credit-card providers’ support.
This rescue shows those already exposed to Virgin Atlantic, and some who aren’t, will give it another chance. But the carrier’s path back to profitability — targeted for 2022 — remains precarious. The $7 billion pre-tax quarterly loss that co-owner Delta just announced included a $200 million write-down on Virgin Atlantic and underscores the scale of the challenge now facing the aviation sector.
Not only is Virgin Atlantic focused on a difficult route but its small size could be an impediment to operating efficiently: After retiring less efficient aircraft it expects to operate fewer than 40 planes. A plan to cut the workforce by one-third will deliver savings, but at what cost to service quality?
Branson’s “child” lives to fly another day but the airline’s mission statement — to become “the most-loved travel company” — now requires urgent attention.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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