Virgin Atlantic Bailout

Written By Rebecca Maguire

While the world is in the grips of a global pandemic, government-funded bail-outs have become an essential tent-pole to keep businesses, small and large, above water. The reactions to said bail-outs have been broadly positive, with many deeming them both justified and economically viable; however public opinion has been divided in the case of Virgin Group’s subsidiary, Virgin Atlantic. When news broke of founder Sir Richard Branson’s plea for financial aid from the UK government, backlash immediately ensued with many begging the question...why? Branson’s current net worth is estimated at 4.4 billion dollars, and Virgin Atlantic alone has 1.886 billion pounds worth of assets as of 2018. Not only has Branson’s Twitter account been awash with criticism, he has drawn the ire of parties as wide and varied as The Guardian, who published a letter branding him “shameless”, as well as fellow business magnates Simon Cowell and Duncan Bannatyne. Chief among these criticisms is one question, why can’t Branson bail out Virgin Atlantic from his own pocket? Although Branson is a majority stakeholder in Virgin Atlantic, that majority is minuscule. 51% is owned by Branson, while the other 49% was acquired by the US airline Delta in December 2012. It is unclear as to whether Branson consulted with Delta before making an appeal to the UK government, however it would make little financial sense for him to personally bail-out a company of which he owns little more than half. Perhaps a refusal by Delta to match a hypothetical personal contribution could have forced Branson into seeking state aid? Furthermore, it has been reported by the Financial Times that Branson has been seeking prospective investors for the airline via investment bank Houlihan Lokey, which could provide the financial aid it would need without requiring government funds. However, after attempts to secure private investment were deemed unsuccessful by Branson, applications for state aid went ahead, as more governments closed borders and instated travel bans. Though Branson reportedly offered his ultra-luxury private resort, Necker Island, as collateral during talks for state aid; his bid was nonetheless

deemed insufficient by the UK government. They were reportedly left “unimpressed”, and felt that Branson did not explore or consider enough alternatives to find a buyer or enough investors to come up with the £500 million the airline was asking for in its state aid bid. When posing the question, “Should Virgin Atlantic be given state aid?”, it is worth noting that the aid provided would mostly benefit those that have chosen to book flights with Virgin Atlantic. According to the Financial Times: “Virgin Atlantic is asking for about £500m, which would come from a split of commercial loans to cover fixed costs over the coming months, such as ticket refunds and airport parking charges. The remainder would come in the form of a credit guarantee that would stop credit card companies from holding back passenger revenues for future bookings from the airline.”. Although it is perfectly legal to use any form of aid to refund customers for cancelled flights and unused airport parking spaces, this can be seen as a temporary measure to reduce backlash from customers. From the information that is publicly available, Virgin Atlantic seem not to be considering that if they do not invest money back into the functionality of the business, like paying staff wages for example, planes will not be able to fly, and therefore, there will be no flights for the foreseeable future. Branson claims that: “there won’t be any competition left and hundreds of thousands more jobs will be lost.” without any form of financial aid. Branson has also lashed out at critics posing the theory that he could bail out the company himself, saying: “I’ve seen lots of comments about my net worth - but that is calculated on the value of Virgin businesses around the world before the crisis, not sitting as cash in a bank account ready to withdraw.” This is true, Branson’s wealth, like that of many high net-worth individuals, is largely concentrated in his shares in successful companies. It is not a liquid asset he may spend at any given time. Critics feel that Branson is in no position to organise and negotiate financial affairs, with many considering his business practices “shady”, and others noting a lack of transparency in terms of his own wealth. Branson has paid no income tax since moving to the British Virgin Islands in 2006, which is a tax-free zone. Due to said practices, public support largely lies with the government, opening the door for other airlines, such as EasyJet, to rip government funding out from under Branson. It is known that most airlines are large businesses, and with not much in terms of figures separating them on the surface, there was little clear reason to favour one above the other. When comparing the figures of the two companies, EasyJet’s total revenue stands at £6.4 billion as of 2019, while Virgin Atlantic’s revenues as of 2018, stood at just £2.78 billion, according to Virgin’s official financial report for that year. EasyJet is considered a listed company, and runs completely independently from the owner and majority stakeholder, Stelio Haji-Ioannou. EasyJet’s figures over the past few years are also much more appealing to investors, while after years of losses, Virgin Atlantic seems to have lost that appeal. The losses reported by Virgin Atlantic are staggering, in 2018, the company recorded losses of £60.8 million, with the biggest losses being reported in regards to “physical fuel”, “airline traffic direct operating costs” and “aircraft costs”, essential factors to keeping a successful airline running in good working order. So there is a possibility that the UK government are taking a company’s future prospects into consideration when dishing out financial aid. With that in mind, and with EasyJet’s revenue and passenger numbers having steadily risen for the past decade, the government decision suddenly seems less like bowing to popular opinion, and more like one solely based on economic viability. With all things considered, it seems that Virgin Atlantic would be struggling financially, even without a pandemic. Government-funded financial aid is being given to keep businesses afloat during these unsure times, but it seems that Virgin Atlantic are struggling to stay afloat regardless, with essential parts of the business dragging down profit for the company. While budget airlines are soaring to new and profitable heights, it seems that Virgin Atlantic could do with vast amounts of investment, however the company’s financial reports show clear financial reasons as to why state aid may have been denied. Only time will tell if Virgin Atlantic will be able to find some way rejuvenate its finances, especially while planes are stuck on the ground and no end to the non-essential travel ban is in sight. And as for the unanswered question of Branson paying out of his own pocket, it seems we will just have to take his word on the fact that it cannot be done.