(Bloomberg Opinion) -- In 2017, the British billionaire Richard Branson agreed to cut his stake in Virgin Atlantic Airways Ltd. to just 20% by selling one-third of the airline to Air France-KLM. In December, he had a change of heart about that 220 million-pound ($274 million) deal, and opted to keep his shareholding in the company he founded at 51%. America’s Delta Air Lines Inc. owns the other half.
Branson has referred to the transatlantic carrier as “one of my children”. But with most of the Virgin Atlantic fleet now grounded because of the coronavirus restrictions, he probably wishes he’d taken Air France’s money. The company is now consuming cash at a rapid clip.
To help alleviate a financial crunch, Virgin Atlantic is calling on Boris Johnson’s British government to provide 500 million pounds of government-backed loans and credit guarantees, so that credit card processors don’t hold onto its cash. Airbus SE and Rolls-Royce Holdings Plc, which respectively sold planes and engines to Virgin Atlantic, have also been lobbying the U.K. on Virgin Atlantic’s behalf, the Financial Times reported.
It’s hard to fathom why Johnson would throw Virgin Atlantic a lifeline before its American and British Virgin Islands domiciled shareholders have reached deeper into their own pockets. Branson himself is worth $5.2 billion, according to the Bloomberg Billionaires Index.
So far, the tycoon has injected $250 million into his various Virgin companies, of which more than $100 million has gone to the airline, according to Sky News. But that clearly isn’t enough. While Virgin Atlantic’s financial performance may have improved before the coronavirus hits, in total it lost more than $100 million during 2017 and 2018 — the two most recent years for which its accounts are available.
That’s one reason its balance sheet is weaker than its European peers. Lease-adjusted net debt was five times higher than a comparable measure of earnings, according to the latest group accounts (which includes the travel operator Virgin Holidays). Air France-KLM — by no means the strongest airline financially — has net debt of 1.5 times the same earnings measure.
While Virgin Atlantic had almost 500 million pounds of cash at the end of December 2018, much of that money came from customers paying for tickets long before they traveled. Its current liabilities far exceeded its current assets, which is a problem if customers start asking for their money back because they can’t fly.
It’s hardly surprising that Airbus and Rolls-Royce are taking Branson’s side, but neither of them were under any obligation to sell aircraft and equipment to a financially stretched airline. Virgin Atlantic had 2.6 billion pounds of future capital commitments for things like planes and engines, according to the 2018 accounts, a pile it added to last summer by placing an order for 14 Airbus A330neos.
The parent company, Virgin Travel Group Ltd, further extended itself by providing about 40 million pounds of funding to a regional U.K., airline Flybe Ltd, which subsequently went bust.
Pandemics are a known risk when you’re running an airline, but nobody could anticipate a shock as widespread and potentially long-lasting as this. So some government assistance is probably justified — in view of the roughly 8,500 jobs at stake. However, the British government’s offer to cover 80% of the wages of furloughed workers is already pretty generous; Virgin Atlantic’s yearly wage bill is more than 300 million pounds.
It’s harder to understand why a government should provide loans or guarantees to Virgin Atlantic, when its shareholders or commercial lenders don’t seem willing to — beyond what Branson has chipped in.
In fairness, the other big shareholder, Delta, is also in a tight spot. It’s burning through about $50 million of cash a day and Standard & Poor’s, a credit rating agency, has downgraded its debt to junk. However, the U.S. airline successfully extended its credit lines and its government has promised $50 billion in assistance for the industry. Delta’s market value remains above $15 billion.
If Branson is short of ready cash, there are other assets he could perhaps monetize, including a majority stake in space company Virgin Galactic Holdings Inc., whose market capitalization is a lofty $2.9 billion. If no more money is forthcoming from the owners, the British government should insist that Branson dilutes his ownership of Virgin Atlantic as originally planned; only this time by signing over the equity to taxpayers.
This column does not necessarily reflect the opinion of 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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