At the height of the financial crisis in 2009, billionaire Richard Branson balked at the idea of government intervention to stop companies going bust, proclaiming that weak airlines should be allowed to go to the wall. Just over 10 years later and the Virgin Group founder has had a change of heart as he fights to protect his business empire from the fallout of the coronavirus crisis. On Tuesday, he hit out at the lack of government support after Australia’s second biggest carrier, Virgin Australia, collapsed into administration after failing to secure a bailout — making it the airline industry’s first big casualty from the worst crisis in the sector’s history.
Hours before Virgin Australia entered voluntary administration, the British billionaire stepped up pleas for state aid for his airlines — Virgin Australia and UK-based Virgin Atlantic — pledging to mortgage his home and luxury holiday resort in the British Virgin Islands as government intervention on both sides of the world looked increasingly unlikely. It comes as governments are taking contrasting action on how much financial support to provide carriers with their fleets grounded and revenues evaporating in the face of the air travel shutdown.
“The whole issue of competition and support is now beginning to gather momentum and issues such as overseas ownership and existing shareholder investment are obvious areas for discussion,” said John Grant of OAG, the data consultancy. “Governments are faced with some real hard decisions about priorities and needs at the moment and perhaps some airlines are not seen as strategic to some governments whereas others are.”
Support packages have varied across the globe. In the US, airlines have been given a $50bn aid package made up of a mixture of loans and grants. In Europe, the French and Dutch governments are considering providing about €10bn of loans to Air France-KLM, while Lufthansa has appealed for aid from several governments, including Germany. “In most countries federal governments have stepped in, in this unprecedented crisis for aviation, to help their airlines. Sadly that has not happened in Australia,” wrote Sir Richard in a letter to Virgin Australia employees. During a month of tortuous negotiations over Virgin’s request for a A$1.4bn loan, Canberra rejected eight separate variations of its bailout proposals.
Virgin’s existing investors — Singapore Airlines, Nanshan Group, HNA, Virgin Group, and Etihad — resisted ploughing in extra funds to an airline that had not turned a profit for eight years and remains saddled with A$5bn in debt. “Even though our shareholders wanted to contribute, those that were getting government support from their own governments were told that money wasn’t to be spent anywhere but their own country,” said Paul Scurrah, Virgin Australia’s chief executive. “Virgin acted like kids in a lolly shop,” said Neil Hansford, chairman of Strategic Aviation Solutions. “Virgin’s collapse is fundamentally a culmination of a poor business model and management, although most of the damage was done before the current CEO came on board.”
In the UK, Sir Richard said Virgin Atlantic could only “keep going” with government support. The airline asked for a package of £500m in commercial loans and guarantees, but the request has drawn sharp criticism over bailing out an airline owned by a billionaire and US carrier Delta Air Lines, which owns 49 per cent. Delta has said it cannot assist Virgin and needs to concentrate on its own finances. Last week, the UK government told Virgin to resubmit its bid for government help. Ministers were unimpressed with the company’s first plan and the lack of effort to explore other options to bolster cash. Virgin has appointed investment bank Houlihan Lokey to look at private funding options, and will apply for about £50m through the government’s coronavirus business interruption loan scheme, CBILS.
Michael O'Leary, chief executive of Ryanair, on Wednesday criticised Sir Richard's appeal for state aid. “He was looking for a state bail out for Flybe. Now he's looking for one for Virgin Atlantic. Why doesn't he put his hand in his own pocket?” Like Virgin Australia, its British sister company has struggled with profitability, reporting losses for the past two years. However, the airline was expecting to return to profit by the end of 2020, one year earlier than it had originally planned. A banker for Virgin Atlantic told the FT that it had a “fantastic turnround plan. The management is very strong and they have completely revamped the airline . . . The timing is very difficult for Virgin.”
Iata, the airline trade body, has warned more carriers are likely to follow Virgin Australia into administration if governments do not offer quick financial support. Brendan Sobie, an aviation analyst, said financial support from governments was critical. “It is not only about what airlines are the fittest but which airlines are able to secure financial support from their governments.” For Scott Poole, a ground crew member at Virgin Australia, news that the airline was entering administration brought back dark memories over the collapse of his former employer Ansett Airways almost 20 years ago.
“I worked at Ansett for nine years and there is a feeling of déjà vu about this,” “Some staff never recovered from the loss of their jobs and air ticket prices rose dramatically, leaving Qantas in a near monopoly.” Indeed, the failure of Ansett in 2001 is now shaping the public debate over Virgin’s future after leaving deep scars on a nation dependent on air travel. Canberra is hoping the administration process will tackle the company’s unsustainable debt burden, enabling it to attract new investors.
Deloitte said more than 10 parties had expressed an interest in the carrier, including Virgin Group and BGH Capital, according to media reports. “This is not liquidation, this is not Ansett, this is not the end of the airline,” Josh Frydenberg, Australia’s treasurer, told reporters on Tuesday. “But the government was not going to bail out five large foreign shareholders with deep pockets who, together, own 90 per cent of this airline.”