Virgin Atlantic Owes Delta $200 Million, Won’t Receive Cash From U.S. Shareholder

Virgin Atlantic’s request for a loan from the U.K. government has put in the spotlight billionaire Richard Branson, whose Virgin Group owns 51% of Virgin Atlantic. Overlooked is 49% shareholder Delta
DAL
Air Lines.

But Delta will not be providing Virgin Atlantic any financial assistance. It is Delta expecting cash: Virgin has to pay Delta $200 million related to their joint-venture, the airlines agreed earlier this year.

Delta CEO Ed Bastian said he would strategically work with Virgin and the other airlines Delta has invested in, but Delta won’t provide cash. Delta reported a first quarter loss of $534 million.

“We’re not in a position to be making any financial commitments to any of them,” Bastian told investors. “They are aware of that.” Delta’s other major investments include Aeromexico and LATAM.

Delta is unchanged in its view Virgin and other equity partners have long-term value. Bastian dismissed any notion he would sell stakes: “I have no interest in trying to sell them or monetizing them at this point or any time in the future.”

The U.K. government rejected Virgin’s request for a loan. Branson still lobbies for it. Forbes estimates his net worth to be $4.2 billion.

Bastian said Virgin Atlantic could enter administration and restructure.

“If they are required to go through an administrative process in the U.K., I’m confident they could re-emerge,” Bastian told MSNBC. “It could take a legal process to get through that.”

Administration would see Virgin still fly while reorganizing. Sister carrier Virgin Australia entered administration on April 21 but remains flying.

Financial assistance to airlines globally has mostly been in the form of loans. But Delta has its own obligations precluding it from helping Virgin. “With the cash that we need to protect our own business, that’s where our focus is,” Bastian told MSNBC.

Airlines can also raise cash by issuing new shares, as Singapore Airlines has done and as United Airlines
UAL
is proposing. Even if Delta wanted to invest new equity into Virgin, it would be constrained by ownership laws.

“We are not in a position to invest any more money into Virgin. We’re already at the ownership cap of 49%,” Bastian said. Delta could directly invest in Virgin Atlantic only if Branson’s Virgin Group invested a comparable amount in order to ensure Virgin Atlantic maintains majority U.K. ownership.

Air Italy failed in February despite 49% shareholder Qatar Airways being willing to invest more. Air Italy’s Italian shareholders did not want to invest more, so any further Qatar investment would have pushed Air Italy over the foreign ownership cap.

There are ways to inject equity without breaching ownership laws – but only if an owner wants to, and Delta understandably does not.

Etihad Airways gave cash to its investment partners in exchange for assets with subjective value. Etihad bought into airberlin’s loyalty program and purchased Jet Airways’ London Heathrow slots.

While airlines are almost always required to have local majority ownership and control, there is no stipulation on an airline’s assets including fleet and slots, and subsidiaries like loyalty and maintenance.

The $200m Virgin Atlantic owes Delta stems from them combining their joint-venture into the larger Delta-Air France-KLM JV, which resulted in a change of performance.

“Certain measurement thresholds were reset from the previous joint venture with Virgin Atlantic, reducing the value Delta would have received over the original term,” Delta said. “To compensate Delta for this reduced value, we entered into a transition agreement with Virgin Atlantic.”

Delta did not specify when the $200m would be due, but it was listed as an outstanding invoice as of March 31.