Virgin Atlantic: a successful non-intervention by the Treasury

Rishi Sunak was right: Sir Richard Branson was perfectly capable of bailing out Virgin Atlantic himself. There never was a need to beg the chancellor for a £500m loan from public coffers.

Treasury officials, like everybody else, presumably spotted that the cure for Atlantic’s viral woes was staring Branson in the face. It was his half-share in Virgin Galactic, the valuable space tourism outfit that has the advantage of being a publicly traded company and thus a semi-liquid asset.

About $500m was raised by selling a 20% stake in Galactic in May. Directing a mere £200m of the proceeds into Atlantic in the form of equity has proved enough to unlock a much bigger refinancing package. Delta, the 49% shareholder in the airline, will defer and waive some joint venture fees; another £170m of secured debt has been raised after Branson’s demonstration of long-term commitment; creditors will defer some payments; and credit card companies will play ball.

Nobody would suggest the refinancing exercise has been straightforward; and the immediate trading future for all transatlantic airlines looks bumpy since the pace of return of customers is anybody’s guess. But Atlantic is now sufficiently confident to talk about a return to profitability in 2022, albeit without the 3,550 employers who will lose their jobs.

Sunak and the Treasury can chalk it up as a successful non-intervention. As for Branson, his remaining Galactic stake is still worth the thick end of $1bn, which is not so bad.

Fines for bad audits should hurt

It’s now two years since the Financial Reporting Council (FRC), anxious to reverse its reputation as a toothless watchdog in thrall to the people it is supposed to be policing, told the Big Four auditing firms to “act swiftly to reverse the decline” in the standard of their work.

Carillion (audited by KPMG) had just collapsed. The shock of that failure plus a bite from the FRC, it was hoped, might finally embarrass the auditors into raising their game. Wind forward to July 2019, however, and the FRC’s annual review of quality showed barely any improvement. One in four audits across the industry were judged to be below standard. Would another 12 months of effort deliver that “swift” improvement?

Of course not. In fact, the picture has deteriorated. One third of audits were below standard in this year’s review. “Unacceptable,” said the FRC. PwC and KPMG were the worst among the Big Four, a traditional slot for the latter. Outside the top group, Grant Thornton was particularly poor.

“The tone from the top at the firms needs to support a culture of challenge and to back auditors making tough decisions,” said David Rule, the FRC’s executive director of supervision. He and his predecessors have been saying as much every year.

The latest hope is that an enforced operational split between the audit and consulting divisions of the Big Four firms will breed greater professional scepticism. The shake-up should help but, in the end, one returns to the same conclusion: fines for bad audits should hurt.

At the moment, a £10m whack from the FRC is considered hefty, even after an increase in penalties. But, when the smallest of the Big Four has annual UK revenues of £2.4bn, it’s really not.

New Huawei policy suits UK network operators

Angry Tory backbenchers don’t like the government’s latest policy on Huawei, but stock market investors did. BT’s shares, up 4%, were the biggest riser in the FTSE 100 index. Vodafone, up almost 2%, wasn’t far behind.

A deadline of 2027 to remove the Chinese firm’s telephony gear looks financially tolerable for the network operators, whereas a two- or three-year rip-out would have caused serious expense and hassle.

It would be an exaggeration to say the extra costs of a 2027 timetable can be lost in the wash of regular capital expenditure budgets, but BT’s analysis wasn’t far off. Back in January, when a 35% cap was placed on Huawei kit by 2023, BT said additional implementation costs would amount to £500m over five years. Now BT says the new policy costs can be “absorbed” within the same budget.

Those Tory rebels could yet force a faster timetable but, as matters stand, the Huawei saga is primarily a geopolitical tale. The UK operators can live happily with Tuesday’s fudge.