Branson rescues Virgin Atlantic as 70th birthday gift to himself

Richard Branson has spent decades cultivating an image as a daredevil entrepreneur, glorifying risk with stunts such as sky-diving or hot-air ballooning across the ocean to promote everything from soda to space travel. Now, less than a week shy of his 70th birthday, Branson is taking one of the biggest gambles ever to save his flagship airline from the ravages of the coronavirus outbreak.

With trans-Atlantic travel largely grounded for the foreseeable future, the company most responsible for building his global brand—Virgin Atlantic Airways Ltd.—was being pushed to the brink of collapse. After begging a reluctant British government for a bailout, Branson concluded his best option for raising money was to sell shares in Virgin Galactic Holdings Inc., the orbital tourism venture that has become his obsession in recent years.

On Tuesday, Virgin announced a 1.2 billion-pound ($1.5 billion) rescue package that includes about 170 million pounds from U.S. hedge fund Davidson Kempner Capital Management and 200 million pounds that Branson got from diluting his stake in Virgin Galactic.

“It’s the ticket to our continuing journey, and hopefully it also means a better birthday for Richard,” said Shai Weiss, Virgin Atlantic’s chief executive officer. “He’s put in 200 million, but we’ve helped wrap it up for him.”

Bitter Blow

On March 24, when the news came through that U.K. Chancellor of the Exchequer Rishi Sunak had rejected an industry bailout, Branson was on Necker Island, the Caribbean redoubt from which he pilots his global empire. The decision came as a bitter blow, as Transport Secretary Grant Shapps had hinted he’d consider a rescue just days before.

After leaving open the possibility of a broader package, the government decided that only companies with investment-grade debt would be allowed to access the Bank of England’s 330 billion-pound Covid Corporate Financing Facility. While Virgin Atlantic’s credit score isn’t public, it’s believed to be deemed junk by the three major ratings companies.

The funds were later tapped by British Airways, EasyJet Plc and Jet2, and even Ireland’s Ryanair Holdings Plc and Wizz Air Holdings Plc of Hungary. Government officials told Virgin it might still qualify for assistance, but opposition was mounting in the U.K., with some politicians and newspapers arguing that Branson’s residency in the British Virgin Islands—where there are no income or capital-gains taxes—should preclude government aid.

Branson’s insistence that he had always plowed his profits back into new businesses, and that his companies pay taxes in countries worldwide, did little to sway opinions. The government never definitively said no, but indicated money for Virgin would only be available if it had exhausted all other possible avenues, including lending from private institutions and funds from existing shareholders. Delta Air Lines Inc., which holds 49% of the carrier, was busy grappling with the pandemic in the U.S., and the outbreak had sapped the interest of most mainstream lenders.

That left Branson, who holds 51% of the carrier, to come up with the cash or risk the failure of the airline he’d founded in 1984 as a foil to mighty British Airways. Since the billionaire’s fortune rested largely on the value of his companies, Branson had little choice other than selling less vulnerable assets to save the airline.

Virgin Atlantic had suffered after Europe’s airline industry sorted itself into three megagroups, leaving Branson out in the cold. The Delta invstment, followed by Weiss’s appointment as CEO in January 2019, revitalized the carrier. Virgin soon ordered new aircraft and added destinations such as Tel Aviv and Mumbai, celebrated by glitzy launches featuring Branson schmoozing with passengers and laying on the charm for local grandees. Branson was so bullish on Virgin’s prospects that in December he pulled the plug on a deal to sell 31% of the carrier to Delta ally Air France-KLM.

Courting Investors

After Sunak’s March announcement, Weiss reached out to about 100 financial institutions seeking support. In May, at the height of the pandemic, he held a conference call from his west London home with about a dozen potential investors. The pitch focused on the recovery plan for Virgin Atlantic and a strategy for profitable growth in the medium term.

A handful of firms came back with funding proposals, leading to a contest between Davidson Kempner and Elliott Management Corp. to provide a loan. While the breakthrough promised to raise substantial cash, it remained well short of the 500 million pounds Virgin Atlantic had originally asked the state to underwrite.

So Branson ordered the sale of a chunk of Virgin Galactic, his most valuable listed asset, while indicating he was even prepared to mortgage his Necker Island bolt-hole. The share sale raised more than $450 million, of which Branson is committing a bit less than half to Virgin Atlantic. (He says he’ll use the rest to shore up other businesses.) The airline has asked creditors to defer some 450 million pounds in payments, and Delta has contributed with a delay of several years on bills for services such as IT and marketing.

“We were excited to see the recapitalization come about,” Delta CEO Ed Bastian said on a conference call Tuesday. “It’s been an extremely difficult few months pulling that together. All stakeholders have made contributions to allow Virgin to fly again.”

Employees will pay a heavy price, with more than 3,000 set to lose their jobs as Virgin shrinks to adapt to what could be years of reduced demand for long-haul flights. The carrier’s most profitable links—from London to big American cities—are all but shut down with the accelerating pandemic in the U.S. That leaves it dependent on less lucrative routes such as Israel and the Caribbean.

Despite the cloudy outlook, John Strickland of airline advisory firm JLS Consulting says Branson had to save the carrier to protect his other interests, even if it meant loosening his grip on the space venture.

“It wouldn’t have looked good to let it go,” Strickland said. Virgin Atlantic “shows his colors literally around the world, and airlines are much more of a topic for public discussion than something like Virgin Galactic, however cutting edge it may be.”