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Virgin Atlantic: Another Sinking Ship?

 

  • Worldwide airline revenue is expected to plunge by half from 2019 levels, worst in the history of aviation industry
  • Virgin Atlantic is the latest in string to file for bankruptcy protection

 

COVID-19 pandemic has left many companies from an array of different industries on the verge of extinction. Amongst all, the aviation industry has been one of the hardest hit, with companies suffering from their worst downturn ever. Revenue for various airlines around the globe has dropped significantly as passenger demand has plummeted to lowest level ever. As per IATA (International Air Transport Association), revenue of all commercial airlines worldwide is expected to shrink as low as 50% in 2020 as compared to pre-COVID level.

 

As the pandemic continues to importune industries worldwide, airlines, amidst travel bans and safety concern, have been downsizing operations resulting in bailouts, thousands of job losses and even bankruptcies. Since the start of 2020, the airline industry has seen multiple bankruptcies, including Avianca, Latam, Aeromexico, RavnAir, and Flybe. The latest victim of novel coronavirus is Virgin Atlantic, a British airline founded by Richard Branson, that has filed for bankruptcy protection in the United States on August 4, 2020.

This U.K. based airline is primarily a long-haul full-service carrier which focuses on international routes between the United Kingdom and other parts of the world. The airline is seeking protection under “Chapter 15 of the US Bankruptcy Code”, which allows companies to continue their operations and have both U.S. and foreign investors and lenders. It provides a mechanism for foreign companies undergoing bankruptcy proceedings in their origin country to access the U.S. court system. In that way, it enables a foreign debtor to shield assets in the country.

Technically, Virgin Atlantic’s financial stress started even before the outbreak of the virus. For last two years, 2017 and 2018, it reported net loss despite growth in number of aircrafts and revenue. The airline lost nearly USD 78 million (£60 million) on revenue of USD 3.6 billion (£2.8 billion) in 2018 and lost nearly USD 100 million (£80 million) on revenue of USD 3.4 billion (£2.6 billion) in 2017. The company's Atlantic airline had also previously asked the British government for a bailout of nearly USD 655 million (£500 million) but ministers rejected the request. Things got worse when the global lockdown forced it to suspend all passenger flights in April and it had only resumed flights in July. Now the carrier has already laid off nearly 3,500 (roughly 30%) of its workforce and closed its base at London's Gatwick airport. The airline is now undergoing a liquidity crisis.

The company, which is 51% owned by Virgin group and remaining 49% by Delta Air Lines, is seeking protection from creditors under Chapter 15 of US Bankruptcy Code and also unveiled a recapitalization plan that would be deployed over 18 months. The company had nearly USD 725 million debt (£556 million) on the books in 2018 and is seeking to negotiate a USD 1.6 billion (£1.2 billion) refinancing deal with its investors and creditors to secure its future. The deal includes injection of nearly USD 260 million (£200 million) by Virgin group apart from nearly USD 221 million (£170 million) funding from Davidson Kempner Capital Management, a US hedge fund; nearly USD 590 million (£450 million) deferment of payments to creditors and nearly USD 522 million (£400 million) payment delays or waivers from holding company Virgin group and co-owner Delta Air Line. Owner Branson is also looking to shed his stake, fully or partially, as a part of the deal.

This restructuring and fresh funding is very critical to the company. As per the airline, without this, its cash flow will drop significantly, and it would run out of cash altogether by the last week of September 2020.  As per company’s officials, without a "solvent recapitalisation", the company would be left with no choice but to wind down business and go for administration in mid-September 2020.

This airline carrier is not the first company which is seeking court protection, Virgin’s sister airline, Virgin Australia has already filed for Chapter 15 protection in the US and a voluntary administration in its home country Australia. It has also planned to lay off nearly 30% of its staff.

As the COVID cases continue to surge, in the US and many other countries, people are still reluctant to go out freely as against the pre-covid scenario. Without mass availability of proper medication and vaccination, we may see another wave of lockdown. With the lack of consumer confidence, closure of borders and shutdowns within and between countries, many industries continue to face tough time with major hits continuing to be hospitality, travel and aviation. As per IATA, global air travel is not likely to fully recover from the downturn until 2024 wherein airlines around the globe, are hit hard due to severe drop in all types of air travel, whether domestic or international, business or leisure travel. With Virgin Atlantic being the latest victim, the world may see more companies in the sector going out of the business and filing for bankruptcies in coming months.

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