Virgin Atlantic filed for bankruptcy protection in the US courts on Tuesday, a move that initially sparked concerns among travelers about the future of the company. Fortunately the filing, made under Chapter 15 of the US Bankruptcy Code, is more of a procedural play than anything to be concerned about.
In mid-July the carrier arranged for a £1.2 billion lifeline from a consortium of private investors. It includes cash from Virgin Group and the waiving of some fees by Delta Air Lines, among other things. With that deal announced it was generally assumed that everything was fine for the company. And it is. But there are still some steps in the process, including today’s filing.
Similar to a US Chapter 11 bankruptcy filing, Virgin Atlantic must secure creditor approval for its restructuring plan and the £1.2 billion infusion. And that approval must be part of a court-approved process, again similar to Chapter 11 filings. Virgin Atlantic was in UK courts on Tuesday as well, pursuing the necessary filings to advance that work. The meeting is slated for 25 August at which it is expected to be approved and the new funds secured. And then the carrier will have a decent amount of time to figure out if the crisis can be sufficiently contained and the airline can sufficiently restructure to stem the losses.
Protecting Virgin Atlantic’s US operations while the UK process plays out
But, in the interim, Virgin Atlantic doesn’t need any claims coming in from elsewhere around the globe, and that’s where the Chapter 15 filing comes into play. Essentially the move prevents a debtor in the US from forcing a claim on the carrier outside of the UK proceedings, thereby creating conflicting court rulings that would muddle the process. With the US filing in place any claims made are considered in conjunction with the UK rules rather than in isolation. It provides a more certain, more consistent, and more fair outcome to the process.
A Virgin Atlantic spokesperson commented, “Following the UK hearing held yesterday (4th August), ancillary proceedings in support of the solvent recapitalisation were also filed in the US under their Chapter 15 process. These ancillary US proceedings have been commenced under provisions that allow US courts to recognise foreign restructuring processes. In the case of Virgin Atlantic, the process we have asked to be recognised is a solvent restructuring of an English company under Part 26A of the English Companies Act 2006.”
Chapter 15 filings are relatively new – the code was added in 2005 – and relatively uncommon. Just 179 companies filed for the protection in 2016, the year it saw the most use. Earlier this year Virgin Australia also filed for Chapter 15 protection as it restructured its operations and debt. And it will likely emerge soon with a new structure and route map expected to be announced as soon as Wednesday.
So, what’s next for Virgin Atlantic?
Assuming the Virgin Atlantic creditor meeting goes well on the 25th there’s not much more to worry about. The airline will keep flying with minimal changes, other than the trimmed route network. The company further notes that all upcoming flight and holiday bookings remain valid. Moreover, Flying Club members can continue to earn and redeem their miles as usual and customers with cancellations can continue to request refunds and these are being processed.
If the meeting does not go as planned – and there is currently NO reason to believe that will happen – then it is likely Virgin Atlantic will run out of cash in late September, breach debt covenants that would cause it to lose its Heathrow slots, and ultimately liquidate. But that is spectacularly unlikely given that the new funding is already agreed to.
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