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Can an IPO save Virgin Atlantic?

Having crashed in February 2020 when concerns about COVID-19 first spooked markets, airline stocks have had an up-and-down 2021 so far. Some countries have reopened borders but others have kept restrictions in place, worried about the transmission of the Delta variant. There is a broad hope, though, that international travel will return to some level of normality in the autumn, and Richard Branson (pictured above) wants to capitalise on this by taking Virgin Atlantic public before the year is out.

The Delta Air Lines [DAL] share price – the company owns a 49% stake in Virgin Atlantic – was trading lower on 9 August after the news broke the day before, though these losses have since been recovered. Year-to-date, the Delta Air Lines share price is flat, closing at $39.93 on 16 August. The stock has gained 37.82% in the last 52 weeks.

While not directly affected by the Virgin Atlantic news, competitor British Airways’ Anglo-Spanish holding company IAG [IAG.L] has had a bumpy recovery. The IAG share price is up 2.92% year-to-date to £164.46 at the close on 16 August but down 15.47% in the last 52 weeks.

The Cathay Pacific Airways [0293.HK] share price has also struggled to take off this year. While up on year 14.8% to HK$6.330 at the close on 16 August, the Cathay Pacific Airways share price is down 12.21% year-to-date.

The American Airlines [AAL] share price has bucked the trend and taken off this year. It’s up 25.30% since the start of 2021 to $19.76 at the close on 16 August and 48.24% in the last 52 weeks.

 

Rescue effort?

All four share prices are trading well below the level they were at before the sell-off in February 2020. This suggests that they are trading at a discount and there could be plenty of long-term upside ahead for airline stocks as long as the global post-pandemic recovery remains on track. It could explain why Branson has decided the time is right to give up control of Virgin Atlantic and float it.

Virgin Atlantic’s finances are in dire need of repair. For the year ending 31 December 2020, the company reported revenue of £868m down from £2.927bn in 2019. Its loss was £864m in 2020 versus a loss of £55m in 2019 and its net debt grew from £1.766bn to £2.287bn over the same period.

$864million

Virgin Atlantic's 2020 loss

 

At one point last year the company was at risk of running out of cash until creditors approved a £1.2bn rescue plan last August. The package was expected to secure the company’s future for at least 18 months and prevent thousands of jobs from being cut. In December, the company sold two of its Boeing 787 Dreamliners for around £70m before leasing them back.

The success of the flotation would depend on Virgin Atlantic’s appeal to investors. It’ll likely be a hard sell but the stock would potentially get a boost from those who’ve invested in Branson’s space venture Virgin Galactic [SPCE].

 

Uncertain times ahead

Initial reaction to the flotation news has been tepid.

In a note to clients reported by Reuters, analysts at Goodbody wrote: “The pitch to investors will clearly be the timing of the return to normalised demand and business traffic, with this challenged by concerns over the longevity of government-imposed restrictions.”

The caveat, they added, is that this argument will only be relevant if the listing goes ahead as early as this autumn.

Hargreaves Lansdown’s Laura Hoy has described a potential listing as a “hail Mary” move.

“The pitch to investors will clearly be the timing of the return to normalised demand and business traffic, with this challenged by concerns over the longevity of government-imposed restrictions” - Goodbody analysts

 

“The business is in serious need of cash and selling shares is one way to fill the coffers,” wrote Hoy in a note to clients reported by Proactive Investors.

At the moment travellers from the US can enter the UK but not vice versa. Virgin Atlantic has said it’s hopeful that US reopening will happen in September. Transatlantic travel is crucial to the airline’s sales, so any delay to the reopening could hit the company’s revenue further.

“This is a bit of a strange time to be selling airline shares, though. The sector has been beaten down and pandemic-related uncertainty still lingers. That’s particularly for long-haul airlines that will be last to see traffic recover,” Hoy added.

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