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Virgin Atlantic to apply for state aid

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Virgin Atlantic will apply in the coming days to the United Kingdom for a set of commercial loans and guarantees worth hundreds of millions of pounds, while the carrier is fighting worst crisis in decades, according to people familiar with the subject.

The airline would be among the first in the UK to do so since the government said this week that it would act only as a “last resort” for the country’s struggling industry in the fight against fallout. the coronavirus pandemic.

Other carriers, including easyJet, regional airlines such as Loganair and Eastern Airways and the struggling airline Norwegian Air Shuttle, which employs around 350 people in the UK, are also considering following Virgin’s lead.

Earlier this week, Chancellor Rishi Sunak said the government not offer an industry-wide bailout airlines and airports plunged into crisis as countries close their borders to international travel. Instead, the government expects the industry to explore options for strengthening liquidity before requesting state aid, which would be considered on a case-by-case basis.

A government official said there could be political obstacles to aid to Virgin and easyJet, but did not rule out state aid to these companies. However, regional airlines were to be the first to seek assistance, if requested, since the government is focused on promoting economic activity in regions beyond London.

Richard Branson, the billionaire founder of the carrier, has already offered to inject $ 250 million into the Virgin group – much of which will go to the airline.

Virgin Atlantic declined to comment. The Department of Transport declined to comment.

The United Kingdom, with the third largest air network in the world, has adopted a stricter approach than other countries such as France and Germany, whose governments have acted quickly to offer support to national carriers.

Analysts say the problem for the British government is the varied nature of the British aviation sector compared to other countries.

“If you look at British airlines and airports, they are not all controlled by the UK,” said Andrew Lobbenberg, aeronautical analyst at HSBC. “British Airways is owned by International Airlines Group, a Spanish company, and the main shareholder is Qatar Airways. Virgin is 49% owned by Delta Air Lines in the United States. Wizz UK, Norwegian UK and Ryanair UK are subsidiaries of the parent airlines of Hungary, Norway and Ireland, respectively.

Deploying taxpayer dollars in aviation becomes complex “when you recognize the non-UK shareholders behind the companies,” said Lobbenberg.

UK-based airlines are currently examining fleet networks and strategies to save money. Like their peers abroad, they have reduced salary costs by reducing working hours or by offering unpaid leave.

All airlines search for vacation from aircraft rental payments. These can reach $ 1 million per month for larger planes like Boeing’s 787 Dreamliner, or a third for popular single-aisle aircraft like the Airbus A320neo. Finally, they will try to raise funds by reselling and renting their devices. “Every airline comes to us,” said one of the major donors.

“We have seen a significant increase in the number of airlines discussing the refinancing of their fleets,” said one of London’s leading aviation finance bankers.

This will give donors a say who survives and who doesn’t, say industry leaders. “I expect donors to start choosing the winners,” said Willie Walsh, chief executive of British Airways’ parent company International Airlines earlier this month.

Leasing companies will choose to enter into agreements with the strongest.

For example, two-thirds of Ryanair’s 455 aircraft are wholly owned. Stephen Furlong, aeronautical analyst at Davy, estimates that with a net cash of 4 billion euros at the end of February, the carrier has about 18 months of cash even if none of its planes flies for a year. This does not include the nearly 7 billion euros that could be raised by the sale and leaseback of aircraft.

EasyJet, which owns 70% of its 331 aircraft and had cash and credit facilities of just over £ 2 billion at the end of February, could last 10 months, said Furlong. Mortgage machines could significantly extend this time.

IAG has over £ 9 billion in cash and credit lines. Walsh has publicly stated that he has no plans to ask the state for aid beyond the measures proposed to the broader business sector last week, such as wage assistance.

Virgin, which has suffered losses for two years, specializes in the long-haul sector which should be the hardest hit. Virgin had only £ 83 million in net cash according to its latest report and accounts available, and already leases three-quarters of its 46 devices. The room for maneuver for refinancing will be limited.

The carrier must show the government that it is doing what is necessary to receive state aid, said people familiar with the matter.

“They asked people to take leave without pay for eight weeks, blocked certain routes and reduced cost prices,” said one.

But if Virgin gets help, industry experts say Walsh could be forced to demand a share of the state’s largesse for British Airways if the crisis continues beyond the summer. EasyJet will also be worried about the help given to its European rivals and could ask to level the playing field. “Each airline will try to get help in the long term and you could assert that it has a justification”, a said John Strickland, aviation consultant.

However, free money does not exist. Under proposals developed by the government, taxpayers could end up with stakes in airlines in exchange for their support.

Mark Manduca, an analyst at Citigroup, said that the state bailouts adopted during the financial crisis should give rise to warnings this time around. “Government assistance will be mired in punitive agreements. . . it could potentially last for years, “he said. “The chains include high-interest debt, current subordinated senior bond holders and future restrictions on executive compensation and dividends. It is not really a help at all. “

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