by Bower, Tom
‘We were naive,’ said Corbett, defensively. ‘We’re going back to PUG1 with conventional signalling. We will rebuild the tracks. It will cost £2 billion.’ No one queried why the estimated cost had nearly tripled within three years. PUG2 – and the 140 mph trains – was abandoned. Corbett assumed that Virgin would be understanding and, without recrimination, revert to trains travelling at 125 mph. ‘If you expect them to be nice guys, you’re in for a shock,’ he was warned.
‘You’ve been sold something which is not deliverable,’ Green reported to Branson in his office in Holland Park.
‘Oh shit,’ said Branson. ‘We must make it work.’
‘They haven’t even put a spade into the ground to rebuild the track. Nothing’s happened,’ said Green, incredulously.
Branson was unforgiving. No mercy could be shown even for unforeseen problems. ‘We want £1 billion of compensation,’ he announced, listing some anticipated losses – the slower service would require extra trains, and the additional passengers he’d hoped for would not now be switching from airlines to faster trains. His attack was based on Tom Winsor’s watertight contract – ‘One of the best contracts in history,’ Green would admit. Virgin demanded that Railtrack immediately pay £250 million in compensation. The relationship between Branson’s team – Patrick McCall, Virgin Trains’ chairman, and Tony Collins, the contracts director – and Corbett became acrimonious. The arbiter of the dispute was none other than Winsor, who had moved from Virgin to become the rail regulator. As a lawyer, he was unsympathetic to Corbett’s plea that the contract should be ignored to save Railtrack from insolvency. Corbett’s fate was then further endangered by a terrible accident.
In 2000, soon after a fatal crash in Paddington and the disruption of services by floods, four passengers were killed at Hatfield in an accident caused by a broken rail. In the uproar over Railtrack’s failure to maintain safe tracks, speeds were slashed to 20 mph on some sections. On the West Coast line, journey times doubled and the number of passengers halved. Every day, Virgin and Branson were blamed for various disasters. ‘The public hate us and it’s all going nowhere,’ Richard Bowker told his colleagues. ‘Everyone is at each other.’ In turn, Virgin’s publicists encouraged derision to be heaped on to Railtrack. ‘Corbett is arrogant and has let us down,’ inquirers were told. In private, Corbett was damned by Virgin’s executives as ‘useless and obsessed by the property business’. There was no sympathy for his plight coping with a poisoned inheritance. The Labour government exploited the political opportunity. Having accurately predicted the disaster of privatisation, senior ministers turned every delayed train into a toxic indictment of Railtrack.
Virgin Trains was trapped. The same contractors blamed for bad maintenance of the tracks were also responsible for the repairs. By exaggerating their problems, they effectively maximised their profits. Corbett discovered that Railtrack could not even fulfil PUG1 – and the cost of replacing the West Coast line had escalated from £2 billion towards £6 billion. Branson’s complaints were justified, but he attracted little sympathy.
Corbett considered retaliation. Railtrack could have used the public’s anger about the late delivery of Virgin’s Pendolino trains as a bargaining chip in the dispute, but he was persuaded to desist. ‘We have to show we are partners,’ advised John O’Brien, responsible for franchising the network, ‘and the government would not like us to use contracts which favour us against the operators.’
Relations between Virgin and Corbett collapsed. With the exception of Chris Green, Corbett disliked the Virgin team. ‘I don’t like their open-necked shirts, especially Bowker’s. He knows nothing,’ claimed Corbett. Will Whitehorn, Virgin’s spokesman, was deemed unhelpful for ‘always talking to the press’. Winsor, the regulator, was criticised as ‘clever and confrontational, regulating by megaphone’. Corbett distrusted Branson and was irritated by his Sunday-morning calls. ‘My team is pleased …’ Branson would enthuse about a triviality, confirming Corbett’s prejudice: ‘He doesn’t understand the numbers and relies on those around him.’ In their rare meetings, Branson riled the beleaguered executive. ‘It’s his shifting eyes,’ complained Corbett. ‘He’s all over the place. Always out for himself and being very difficult.’
‘Bloody Branson,’ Sir David Rowlands, the permanent secretary at the Department for Transport, complained to Corbett. Even John Prescott, the secretary of state for transport, criticised Branson’s conduct. The pugnacious politician had already condemned Branson’s rebranding of the trains, saying, ‘You’ve done wonders for the paint industry, but what are you going to do for the railways?’ Now, he disliked Branson’s aggressive demand for hundreds of millions of pounds in compensation from the taxpayer.
In the midst of that argument, Chris Green met Branson in Holland Park. The first Pendolino train had just been delivered. ‘They work,’ smiled Branson. ‘Virgin has been saved.’ At that turning point, anticipating that the tracks would be rebuilt, Green asked Branson to lease more Pendolino trains in expectation of extra passengers. To prove his acumen, Branson played a familiar game: he reminded Green about something that had been said six months earlier. Naturally, Green was impressed. Like others experiencing Branson’s apparently ‘tremendous’ memory for detail, he was convinced that the owner of hundreds of companies was the mastermind of all. Sceptics believed that Branson rehearsed those displays.
‘It has been bad,’ said Green, ‘but all the projections show it can only get better. The West Coast’s new tracks will be reliable and carry more trains much faster.’ Virgin’s risk, he added, was minuscule. Passenger numbers would rise and Virgin only needed 50 per cent occupancy on the extra seats to make a profit. At the end of thirty minutes, Branson agreed. In the old era, Green reflected, British Rail would have taken a year to mull it over. However, Branson’s decision did not restore sympathy for him in Whitehall. Tony Collins’s remorseless demand for compensation had outwitted Corbett and was pushing Railtrack towards collapse. Technically, Virgin Trains was also facing financial peril.
The first casualty was Corbett, who was replaced by John Armitt, a shrewd engineer. The second was Railtrack itself. In 2002, the company was placed in administration and the public shareholders lost their money. Network Rail emerged as the successor. During that process, Virgin Trains’ franchise was suspended and replaced by a risk-free management contract rewarding the company with 1 per cent of the revenue. Armitt also reintegrated track maintenance into Network Rail and started weekly meetings with the operators. ‘We can stop lobbing hand grenades at each other now,’ said Green, believing that peace had broken out at last. The West Coast track was being improved at a final cost of £8.7 billion – ten times the original estimate – and Network Rail was devising a new timetable to increase traffic, improve punctuality and guarantee more revenue. Once the management contracts were abandoned and the original franchises were restored in 2006, Virgin could anticipate serious profits rolling in. Branson felt the millions of pounds Virgin could expect to earn were justifiable compensation for the damage the botched privatisation had inflicted upon his brand.
The appropriate moment for official acknowledgement of Virgin’s sacrifice, in Branson’s opinion, occurred in 2004, when the Virgin team were summoned to the Victoria headquarters of the new Strategic Rail Authority (SRA), which was responsible for issuing franchises. The topic was the Cross Country franchise. Virgin’s trains were breaking down and achieving only 50 per cent of their punctuality targets, and passenger numbers had collapsed. Virgin’s predicted £15 million annual profit had become a £25 million loss. The SRA decided that the size of the subsidy Virgin was receiving for the shoddy service could no longer be justified. Clearly, the company had overbid for the franchise, failed to buy all the new trains and would fail to pay the promised premium to the government.
Nevertheless, Branson led his team confidently into the SRA’s offices. The authority’s chairman was Richard Bowker, the former director of Virgin Trains, and Branson h
oped that his ex-employee might be persuaded to modify the contract’s terms in Virgin’s favour. Instead, Bowker announced, ‘We will not continue the Cross Country franchise and we will not agree to any renegotiation with Virgin. We are going to offer it up for a new tender in 2006.’ Green looked at the faces around the table: ‘There was surprise, shock and disappointment. Branson was angry.’ Virgin, Branson spluttered, was a ‘victim’ deprived of a just reward.
On reflection, Branson concluded that Virgin needed a tough commercial negotiator. Green had improved the train service but he was unsuited to fight Bowker, so in September 2004 he was replaced by Tony Collins, who had been employed by Virgin Trains since 1999.
As he took over from Green, Collins told an official at Network Rail, ‘Richard called from Necker. He’s concerned that you’re not working fast enough to modify the tracks for the new rolling stock.’ The official was irritated. The image of Branson sunbathing on a tax-free beach while dictating how the British railways should be run was shameful. Worse, he recalled Green’s joke that ‘Richard Branson is not interested in any aspect of the railways except whether the orange juice tastes good.’
Collins’s arrival coincided with the climax of a power struggle between Bowker and Alistair Darling, the new secretary of state for transport. To curtail the mayhem, Darling ordered that the SRA be dissolved in 2006. He directed that future franchises and the control of expenditure would become the responsibility of a new director of railways, a new post inside the Department for Transport. That was a good moment for Branson to seek support from his political allies.
Green’s departure in September 2004 was to be marked by a lunch at Euston station which would also celebrate naming a new Pendolino train Chris Green. Usually, Branson delegated Will Whitehorn or Stephen Murphy to represent him at these functions, but on that occasion he flew from Necker to greet their number-one guest, Tony Blair. Green assumed the prime minister had been invited to boost staff morale, but Branson’s agenda during Blair’s thirty-minute visit was more political in nature. The Hatfield crash in 2000 had accelerated the government’s projected subsidy to rail from £1.3 billion in 1995 to £6.5 billion in 2005. Network Rail was accused of losing control of costs, and many believed Virgin was receiving excessive subsidies. Branson replied that his company deserved even more taxpayers’ money. His public assertion that the government had paid Virgin £1 billion in compensation for the delayed rebuilding of the tracks was disputed, but it fuelled public anger. With skill, Virgin’s executives were exploiting Whitehall’s disarray.
Civil servants were constantly changing rules, appointing and dismissing consultants, scrutinising rolling stock and even dictating the refreshments menu. Untrained officials were approving franchises that would end in disaster. Transport ministers were exerting more control over the railways than their predecessors had over British Rail. This was fertile ground for Virgin’s negotiators. Branson expected Blair’s team to select someone sympathetic to Virgin as the new director of railways. Instead, Mike Mitchell, a troubleshooting railwayman, was appointed. ‘It will take one to get one,’ noted one insider, approving the appointment of a tough railwayman to confront Virgin. Mitchell was neither Virgin’s natural ally nor was he inclined to continue paying large financial subsidies to the company. Since the collapse of the franchises in 2002, Virgin had received about £338 million for managing the West Coast line and as compensation for the lost revenue caused by the disruption. Once the track was modernised, Mitchell wanted to end the hiatus, revive the PUG1 agreement and reduce the payments to Virgin. With the West Coast franchise restored, he expected Virgin to pay the government about £200 million in 2012/13.
Tony Collins agreed to resume PUG1 but disputed the terms. On Virgin’s behalf, he approached Mitchell to negotiate additional subsidies and the submission of a new bid to run the Cross Country franchise. The process was opaque; the cost of so-called ‘additional services’ was impenetrable. Taxpayers would never know whether Virgin gave value for their money. Helped by that obscurity, Collins played hardball, hammering Virgin’s rights as enshrined within the original contract. By 2006, the department’s officials were usually in a state of irritation. ‘They’re getting too much money,’ an official complained. ‘The haggling doesn’t stop.’
On one memorable occasion, the departmental officials wanted to recover £20 million from Virgin Trains. ‘It’s too advantageous for Virgin,’ Collins was told.
‘See you in court,’ Collins replied. ‘If you don’t like it, you shouldn’t have signed it.’
In running a business, he showed no sentiment. Virgin gave out no favours and, relying on the contracts, did not seek allies. The company only took hostages. Although the government’s case was arguable, Collins never concealed his low opinion of the Department for Transport’s staff. In the argument over the £20 million, he outfaced his opponents. The civil servants were not prepared to risk a multimillion-pound legal battle. ‘You guys are always against Virgin,’ Collins complained the following day. Like Branson, he played the underdog.
One victory was not the same as winning the war. For Branson, the prize was restoring the two franchises on favourable terms. He arranged to meet Douglas Alexander, the new secretary of state for transport. His message, the department had been told in advance, was about the advantage of keeping Virgin as a franchisee. Branson arrived wearing an open shirt that revealed the benefits of owning a Caribbean beach. ‘We’re good and we should be allowed to go on for much longer,’ he told Alexander. Virgin’s current franchises, he said, should be extended and even last for ever. The minister was non-committal. As usual, Branson asked a technical point – this time about the rolling stock and franchising – suggesting that Virgin should receive more money. An official replied, dismissing Branson’s claim. ‘That sounds reasonable,’ said Branson, surprising everyone who’d assumed he’d been briefed by Collins.
‘It’s skin-deep understanding,’ Alexander agreed after Branson left. ‘He has no grasp of detail.’
Shortly after that encounter, in July 2007 the Department for Transport announced that the Cross Country franchise would be awarded to Arriva, a subsidiary of Germany’s Deutsche Bahn.
‘Why have Arriva got it?’ Collins asked angrily.
‘They made a better bid,’ he was told. ‘Virgin overbid.’
‘Arriva overbid,’ snapped Collins. ‘They will never be able to make it pay. It’s so unfair.’
Branson took the news badly. Financially, he was told, all the bids were similar. Arriva won by offering a better service compared to Virgin’s ‘poor’ management. Always a bad loser, Branson ensured his anger was translated by his managers into the orchestration of a difficult handover. ‘They’ve turned off the commercial tap,’ reported an Arriva executive after taking over Cross Country’s offices. Without Virgin’s computers, Arriva was deprived of vital information, including essential details about the network’s revenue. Virgin, Arriva’s executives eventually discovered, had overseen a dramatic fall in passenger numbers. Key employees had also departed. ‘And they’ve alienated the staff who have stayed,’ complained one executive. Virgin had demanded the instant return of company cars, uniforms and mobile telephones. The transition was further stymied by a Virgin executive threatening to charge Arriva for exploiting the Virgin brand if the Virgin logo was not removed from all the rolling stock within three months. ‘That’s down to you,’ he was told. ‘If you don’t paint them out within three months, we’ll charge Virgin for advertising.’ The anger spread into pettiness, with Virgin refusing to allow Arriva’s first-class passengers to share any of Virgin’s own station waiting rooms. ‘They’re not making it easy for us,’ complained the Arriva executive. ‘They’ve left everyone demoralised.’ On reflection, he agreed that ‘Virgin was screwing us.’
8
Ghosts
‘Hi, it’s Richard here.’
‘Richard who?’ asked Rowan Gormley, a South African employed in a London private-equity f
irm.
‘Richard Branson. I’m calling because I’d like you to work here at Virgin.’
The two arranged to meet at Branson’s house in Holland Park. Neither appeared to know what to say. The year was 1995.
‘You called me,’ said Gormley, discomfited by the awkward silence.
‘Yeah,’ mumbled Branson. ‘I wanted you to come up with some new ideas. Come and work for us.’
Attracted by Virgin, Gormley soon after delivered his list at a meeting attended by three of Branson’s most trusted lieutenants – Stephen Murphy, Will Whitehorn and Trevor Abbott, one of the original architects of Virgin’s music business. Gormley listed Virgin hotels, Virgin holidays and, finally, ‘What about Virgin financial services?’
‘Virgin is about fun,’ snorted Abbott derisively.
Murphy and Whitehorn shared his disinterest. Gormley turned to Branson. ‘Virgin is trusted, and financial services can make lots of money.’
‘Do it,’ said Branson.
‘Do we have any money?’ asked Gormley.
‘No,’ replied Branson, admitting the reality about his empire. ‘Find the money and do it.’
‘What about Abbott?’ asked Gormley.
‘Ignore him,’ replied Branson.
Shortly after, Abbott left Virgin on bad terms and subsequently committed suicide, blaming Branson in part. ‘Richard broke my back,’ he recorded on a video shortly before he hanged himself. In Branson’s world, failures were forgotten. Gormley could be the future. His invention was Virgin Direct, which would sell personal equity plans – or PEPs – that were priced by tracking an index of shares quoted on the London Stock Exchange. Its launch depended on finding a suitable partner.
The formula for this start-up was familiar. A potential partner would provide the money and expertise in exchange for using the Virgin brand. Dividing the profits was subject to negotiation but, where possible, the losses would be borne by the partner. In this case, as an added ingredient, Virgin’s partner in the banking business needed to be an authorised deposit-taker. In Screw Business as Usual, Branson wrote: ‘I wanted to get into the banking industry because I saw the money markets and finance as a way to build bridges between the social sector, big government and business.’ Banking, he added, would fulfil his ultimate objective of ‘a fairer distribution of wealth’.