How passengers helped save Virgin Atlantic from crashing, and how they will make recovery difficult
- With no bailout from the British government, Richard Branson’s airline has managed to stay solvent through the pandemic
- Slow handling of refunds for cancelled flights gave Virgin some cash, but has also left it unpopular with passengers
More than a decade ago Time magazine anointed “You” its person of the year, in recognition of our collective effort to create free content for social media.
Today Virgin Atlantic Airways owes a similar debt of gratitude to its long-suffering customers. The cash they’ve advanced the transatlantic airline for future bookings was every bit as important as that provided by billionaire founder Richard Branson and hedge fund Davidson Kempner Capital Management in saving it from collapse. Issuing customer refunds at a snail’s pace helped the airline preserve cash during the pandemic but unhappy customers will make Virgin Atlantic’s recovery that much tougher.
The rescue suggests the British government was right to push Virgin Atlantic to exhaust other options before demanding a government bailout.
Finding private money was a tall order because the carrier entered the pandemic with a lot of debt, a paucity of assets it could sell and a track record of losses. A strategic focus on the once lucrative North American market – the destination accounted for about 70 per cent of group revenues – has become a vulnerability. The coronavirus is still ripping through the southern United States; those flying transatlantic face a fortnight in quarantine. It’s difficult to know when and to what extent demand will return.
Davidson Kempner is taking a risk because the value of the take-off slots and aircraft against which its loan is secured is uncertain, but at least it has some fallback. It’s Virgin Atlantic’s customers who have gone the extra mile. Blaming the difficulty of processing such a high volume of refund requests, the airline has taken up to 120 days to give customers their money back when their flights were cancelled, thereby turning its passengers into unsecured creditors.
At December 2018, the most recent date for which there are published accounts, Virgin Atlantic and the associated holidays operation held £520 million of cash from forward sales. Since the crisis began, social media has been awash with complaints about poor customer service; the airline came near bottom of a recent consumer survey of the way travel companies have handled refund requests. Chief executive Shai Weiss acknowledged that “we have not lived up to the high standards we set ourselves.”
One sticking point in the rescue talks was apparently that credit card acquirers, which authorise and process card payments, threatened to withhold the cash that Virgin Atlantic generated from future bookings, instead of passing it on to the airline. You can understand why Cardnet and First Data may have been hesitant: they’d be on the hook if Virgin Atlantic went bust and customers claimed a refund via their bank. The company said on Tuesday it had credit card providers’ support.
This rescue shows those already exposed to Virgin Atlantic, and some who aren’t, will give it another chance. But the carrier’s path back to profitability – targeted for 2022 – remains precarious. The US$7 billion pre-tax quarterly loss that co-owner Delta just announced included a US$200 million write-down on Virgin Atlantic and underscores the scale of the challenge now facing the aviation sector.
Virgin Atlantic’s size could be an impediment to operating efficiently: after retiring less efficient aircraft it expects to operate fewer than 40 planes. A plan to cut the workforce by one-third will deliver savings, but at what cost to service quality?
Branson’s “child” lives to fly another day; on the Virgin Atlantic website is a note stating: “We’re back; Mark it in your calendars – we start flying to New York JFK, Los Angeles and Hong Kong from July 20 2020” and among “popular destinations for 2021” are Shanghai, Orlando and Barbados.
But the airline’s mission statement – to become “the most-loved travel company” – now requires urgent attention.
