Virgin Atlantic finally publishes its 2019 accounts
In only three days time, Virgin Atlantic’s 49% owner Delta is due to publish its full year results for the year ending December 2020.
Virgin Atlantic itself has been a little tardier, taking until today to get round to publishing its results for a whole year earlier. But they are now finally available from the company’s website here.
Strangely, Companies House still shows them as overdue. I guess they are in the post.
What do the accounts show?
A long time ago in a galaxy far, far away…
2019 seems like an age ago now and the airline world was very different, so I thought I’d start with a quick reminder of what the airline industry looked like back in the “golden years” before COVID.
For the European industry, 2019 wasn’t the best year in recent times for profitability, but it was decent overall. Airlines from the region as a whole made about a 5% operating margin, slightly down on the 6% they made in 2018, according to IATA.
Virgin Atlantic has a long and consistent track record of making losses. Not Alitalia-style losses, but losses nevertheless.
At a pre-tax level, it reported losses of £80m in 2017 and £60m in 2018. The first thing of note for me from the “new” accounts is that the loss for 2018 went up to £118m, after restating for new lease accounting standards. The figure for pre-tax losses for 2019 was, by those standards, a little better at £64m.
Earnings before bad stuff
To be fair to the broader management team at Virgin, the figures would have been quite a bit better if it had not been for the disastrous decision to buy Flybe as part of the Connect Airways consortium. Virgin’s initial equity investment was only £5.6m, but there were also £2.3m of deal costs. In addition, they extended £40m of shareholder loans and guarantees and sunk another £5.2m on supporting loss-making Flybe routes. Flybe filed for bankruptcy on the 5th March 2020 and so Virgin was forced to write-off all their investment and make full provision against the loans. I think the total damage to Virgin’s P&L in the year totalled almost £50m.
If you also exclude £10m of restructuring costs, I could just about mount a case that the underlying profitability of Virgin Atlantic was around breakeven at the pre-tax level, with operating margins coming in at around 2%.
So very much better than the likes of Alitalia and almost as good as the 4% operating margin that Air France - KLM made in 2019.
A sea of debt
The same could not be said for the balance sheet. Air France-KLM had net debt equal to 23% of revenue at the end of 2019, whilst Virgin Atlantic’s £1.8 billion of net debt was over 60% of revenue. Total liabilities on the balance sheet exceeded assets by £190m.
Unrestricted cash of £353m was only 12% of revenue and crucially was only two thirds of the forward sales account. That meant it simply did not have enough cash on its balance sheet to refund all its customers, if it was ever to find itself in a position where it couldn’t deliver the service.
This left the company in no position to withstand anything like the tsunami that hit it when the pandemic arrived.
Note 3
Much of the interesting material in the accounts is contained in “note 3”, under the heading “Going concern”.
Most airlines and many other companies have had to perform some gymnastics recently to demonstrate why they believe their accounts should be prepared on a “going concern” basis. Both the directors and the auditors have to get themselves comfortable that the company will have enough cash to meet its debts as they fall due for at least 12 months from the date at which the accounts are signed off.
It is a matter of public record that earlier in the year they were in no position to do that. That prompted a financial restructuring, which I summarised in an earlier post and that was completed at the end of August. Following the restructuring, Virgin had to show that there would be enough cash to last until August 2021, which required much crystal ball gazing in the current environment.
Note 3 outlines what planning scenario they used as the basis for that assessment. They made the following assumptions for what they describe as “the December case” (text lifted verbatim from the accounts):
Passenger flying resumes in December with passenger revenue throughout the year in 2021 at 50% of 2019 levels overall (and similar levels of reduction in Virgin Holidays revenue), with 4% of Q4 FY19 capacity being forecast in Q4 FY20, increasing to 62% of FY’19 capacity by the end of FY’21. This is due to factors such as the potential for:
Extended restriction of travel to the US until December 2020 and partial restrictions remaining through 2021;
A second wave of Covid-19 in the UK causing further groundings of aircraft; and
Onboard social distancing requirements beyond Q1 2021.
Airline and holidays forward sales re-booking and refund trends will continue in line with those experienced through the first three months of the pandemic; and
The requirement for further adjustments to the cost base.
The note also makes it clear how little headroom they had for underperformance against this plan, with the low-point for cash stated to be £150m under this scenario. It is also unclear whether this cash figure is unrestricted cash, or includes the circa £100m of restricted cash they had in their accounts in December 2019. Whichever is true, that leave very little room for error.
Are they still on track to deliver their plan?
How solid do these planning assumptions now look, with the benefit of four months of hindsight? The key risks will be around capacity and revenue assumptions.
The 2020 capacity assumptions looks fine, since Virgin recommenced passenger flying at the end of July, and Q4 2020 capacity was around 20% of 2019, both ahead of plan. It is harder to tell how the financial contribution from this flying compared to what they had in the plan. With so little capacity assumed, the real question is whether the flying they’ve done was cash positive or not. CAA data for October shows that Virgin had a load factor of only 20% and passenger volumes were only 5% of 2019 levels. A seat factor of 20% wouldn’t normally be cash positive flying, but strong cargo volumes and inflated yields may have made it so.
What is in more doubt I think are the assumptions for 2021. The wording seems to imply that they were assuming that travel restrictions to the US would be at least partially lifted from the start of 2021. That is clearly going to take longer now, given the new virus variant in the UK. Recent lockdowns and travel bans in the UK must be worse than assumed for the first quarter, surely? Even if they get back on plan later in the year, I would have thought they are going to need more money from somewhere.
Send more cash
We heard this week that the company had raised an additional £170m from the sale and leaseback of two 787s. What surprised me was that the money was apparently ear-marked to pay down the £170m loan from hedge fund Davidson Kempner. I would have thought that they would need the extra liquidity, but I guess the interest rate on the loan is eye-watering.
In recent days we have seen both British Airways and easyJet secure additional liquidity with the backing of UK Export Finance, a government entity. Perhaps we will see a similar deal being announced by Virgin in the coming days?
Abandoned by the government?
I do think it is about time that the UK government stepped up to do more to support the UK aviation industry. That was true even before the most recent restrictions got announced and it is doubly true now. Compared to other governments across the world, the UK has done approximately nothing for aviation, one of its most important industries and a big employer prior to the crisis, even though UK aviation has been hit harder than that of almost any other country.
I also think Virgin is right to feel aggrieved about how they have been treated by the government so far. How can it make sense for Virgin Atlantic to get no support when Hungarian airline Wizz got £300m of UK government guarantees and Irish Ryanair got £600m, in particular when neither of them really needed the money?
Almost 3,500 of Virgin Atlantic’s staff have already lost their jobs. Surely saving the remaining 6,500 mostly UK jobs must count for something?
