by Bower, Tom
The complaint was an omen, and in autumn 2008 Branson’s Schadenfreude over BA’s crisis at Heathrow was replaced by a calamity of his own. In common with those of many other carriers, the finances of Virgin’s airlines had been wrecked by that summer’s financial crash. Virgin Atlantic’s profits, earned at BA’s expense, would turn into losses of £158 million in 2009. The company’s flights to Mumbai were among those cut, stopped after just three years. Branson’s expansion into Africa had also imploded, and in Nigeria he was struck by what he called ‘Mafioso-style tactics’.
The potential for lucrative profits had lured Branson into launching a new airline in a notoriously corrupt country. Oil-rich Nigerians were paying fortunes to BA for transporting washing machines and other heavy packages as excess luggage from Heathrow to Lagos. Although Branson would say that Kofi Annan had urged him in 2004 to introduce safe planes into a country cursed by fatal crashes, he was also attracted by the potential profits. He planned to start Virgin Nigeria, an airline flying across Africa that would feed passengers on to Virgin Atlantic’s flights from Lagos’s MMIA airport to London and onwards to New York.
Branson had personally struck the deal to create Virgin Nigeria with President Olusegun Obasanjo in 2005. The president offered Branson concessions in oil and other commodities as an incentive to invest £24 million in return for a 49 per cent stake in the airline. Branson agreed that Nigerian businessmen would own the majority stake. Virgin Atlantic leased six Boeing 737s and transferred them to the new Nigerian airline. However, soon after, Branson and his partners argued: the Nigerians wanted Virgin Nigeria to fly to London and New York, while Branson rejected establishing a competitor to his own airline. After some pressure, he agreed that Virgin Nigeria could fly between Lagos and Gatwick in an old Airbus 340. ‘You want our airline to fail,’ Branson was told by a partner.
Four years later, President Obasanjo left office. His successor, President YarAdua, assumed that Branson and the ex-president had a close working relationship. Seeing that Branson’s bond with his Nigerian partners had crumbled, a member of the president’s entourage ended Virgin’s investment violently. ‘The Nigerian government ignored our contract and sent in heavies to smash up our lounge in Lagos airport with sledgehammers,’ Branson complained. His appeal to President YarAdua for protection against the violent ‘dream killers’ was rejected. Branson accepted the thugs’ message, abandoning the airline and losing his money. ‘I think Branson needed to understand the local environment,’ observed Jimoh Ibrahim, a Nigerian businessman, after buying the debris.
Misfortune also disrupted Virgin Blue. At the end of 2008, the airline’s A$98 million profit had turned into a loss of A$160 million. The shares fell from $2.80 in February 2007 to 29 cents, making the airline worth just A$170 million. Amid fears of an influenza pandemic and ferocious competition, staff were fired and aircraft sold. Paul Little handed control of the airline back to Branson. ‘The economy is fucked,’ said Branson in 2009. He predicted ‘spectacular casualties’.
In a financial crisis, Branson’s characteristics were revealed. Virgin, he had often declared, took care not to fire any staff by arranging job shares, part-time work and voluntary unpaid leave. His employees, he repeated, were embraced as members of the Virgin family. ‘At least if you’ve got a job, you’ve got your dignity and you’ve got some money coming in,’ Branson had told a crowd in Los Angeles while unveiling a new Virgin Boeing 777. ‘But for those people who are out of work it can be very, very devastating.’ The benevolent self-portrait created by Branson was not quite accurate. To protect his own airlines from insolvency in 2009, he forgot his sermons about Virgin’s focus on the consumer’s interest and on caring for his workers, described by him as ‘the Virgin family’: that year, Virgin Atlantic fired 15 per cent of its staff. Those who remained were meant to be reassured by Branson’s family mantra, but that comfort had been rattled by his disdain for employees seeking trade-union protection. ‘Say “no” to the old way of flying,’ he had advised Virgin America’s new staff when considering membership of the Transport Workers Union. ‘And say “no” to the TWU.’ The price of seeking trade-union protection, he said, was the loss of the Virgin family’s ‘uniqueness and independent spirit’. Momentarily, there was a stand-off.
Branson was similarly unamused when 4,800 Virgin Atlantic cabin staff threatened a four-day strike, protesting that their pay compared unfavourably to that of BA staff. ‘For some of you,’ Branson wrote in an open letter, ‘more pay than Virgin Atlantic can afford may be critical to your lifestyle; and if that is the case you should consider working elsewhere’. The paternalistic image was damaged. ‘What Branson did’, a union leader told Steve Ridgway, ‘isn’t sobering but shocking. He’s saying it’s his train set and he’ll do what he likes with it. But what about his employees? Where does that leave them?’
Virgin’s cabin staff eventually backed down. Branson had made no concessions, but a new strike was threatened by the company’s pilots. The income gap between those at Virgin Atlantic and those at BA had increased. Virgin’s pilots were convinced that Branson was concealing the airline’s profits in a myriad of offshore accounts. To offer reassurance, Ridgway had allowed accountants retained by BALPA, the pilots’ trade union, to scrutinise the airline’s financial records. To the accountants’ surprise, the airline appeared to be spending more than it was earning and lacked cash reserves. Baffled but not impotent, the union eventually negotiated a 13 per cent pay rise over three years and a share of future profits. The latter would not be forthcoming. Virgin Atlantic was struggling – not just for profits but also for survival. As his options narrowed, Branson’s invective became more strident, especially against BA, itself weakened by strikes and the financial crisis.
Ever since he had launched Virgin Atlantic, Branson had behaved as if his airline’s survival and profits depended upon humiliating BA. Among his notable successes was the filibustering campaign in 1996 to prevent BA from forging an alliance with American Airlines, or code sharing, in order to allow seamless interconnections for their passengers between the two airlines anywhere in the world. BA’s major rivals in Europe were all grouped into either the Star or SkyTeam global alliances, and Branson lobbied hard in London and Washington to prevent a similar pact based at Heathrow. Consumers, he argued, would be harmed. ‘No way BA/AA,’ was the winning slogan daubed on the fuselages of Virgin Atlantic planes.
While Branson celebrated victory, transatlantic travellers from Britain were paying higher fares than those flying from Amsterdam and elsewhere in Europe. Although Julie Southern, Virgin Atlantic’s commercial manager, insisted, ‘We have always provided competition for British Airways. That is Richard’s raison d’être,’ in reality he opposed genuine competition on flights between America and Britain. His self-interest was to protect Virgin’s privileged access to Heathrow and compel BA to operate at a disadvantage against the other major European airlines.
In 2008, Branson’s bulwark disappeared. The Open Skies Agreement between the EU and the American government allowed any airline to fly between Europe and America. Overnight, the agreements that had previously restricted flights between Heathrow and America to two American and two British airlines (including Virgin) was ended. BA’s fate depended on an alliance with American Airlines. ‘It’ll be the end of Branson within minutes of his rivals announcing their intention to reapply for permission to forge an alliance,’ predicted a BA executive in September 2008.
BA and AA did reapply for permission to merge their booking systems. Their putative code share on nearly 5,000 flights would cover about 20 per cent of all transatlantic flights, compared with the Star Alliance’s control of 41 per cent and SkyTeam’s 29 per cent. The statistics were irrelevant to Branson. ‘I’ll fight this to the end,’ he said. Under the banner of free competition and the consumers’ interest, Branson attacked ‘a monster monopoly. It’s like allowing Coca-Cola and Pepsi to merge.’ He pledged to spend ‘millions’ to prevent a tie-up that woul
d ‘crucify’ the public. He did not, however, possess ‘millions’ in a war chest. In private, he admitted that ‘the landscape is much tougher’.
Denying any self-interest, he appealed as ‘the people’s champion’ to President Obama to stop ‘a monopoly, or near monopoly, on some of the busiest and most profitable routes from the US to Europe causing an unprecedented loss to consumers’. In his letter to a man whom he had recently described as ‘the best president America has ever had’, Branson urged that the proposed alliance be blocked as it was harmful to consumers. The two airlines combined, Branson told the president, would control 63 per cent of all transatlantic flights between Britain and America. Other statistics showed it would be 44 per cent.
Willie Walsh’s first reaction was polite. BA’s chief executive restrained himself. But as Branson’s campaign developed, Walsh accused his critic of sounding like a ‘cracked record’ and let it be known that he would ‘put the boot into Branson for ducking questions’. Branson, said Walsh, ‘should wake up to the economic realities of the business’.
One reality was Virgin’s size. Branson’s airline leased thirty-eight aircraft flying on thirty routes, while BA dispatched 248 aircraft on 150 routes; BA had 41 per cent of the slots at Heathrow compared to Virgin’s 5 per cent; and Virgin Atlantic ranked as the tenth-largest carrier across the Atlantic.
Walsh also questioned Branson’s sincerity. In October 2009, Branson criticised US airlines for levying a new $10 fee for baggage. ‘Airlines’, he said, ‘risked alienating travellers by adding so many charges on top of ticket prices. The extra fees are not a good idea.’ Branson’s condemnation was odd since seven months earlier Virgin America had imposed a $15 fee for checked-in bags. The double standards coincided with the approaching trial of the four BA executives who had allegedly conspired to fix the Passenger Fuel Surcharge with Branson’s team. The bitterness among the BA management over Branson’s denouncement to the Department of Justice had not disappeared and raised questions about his understanding of the airline business.
Branson acknowledged a major error. For years he had single-mindedly focused on expanding Virgin Atlantic, ridiculing the low-cost airlines. ‘EasyJet’s a terrible idea,’ Steve Ridgway, the chief executive of Virgin Atlantic, had scoffed during the 1990s, adding, ‘Ryanair is rubbish.’ Branson echoed that opinion. Since then, Ryanair had become more valuable than BA, and easyJet had expanded to become a profitable challenger to BA and all the other European airlines.
The miscalculation exposed a central flaw within Branson’s empire. He prided himself on delegation but avoided reading complicated documents, was untrained in finance and copied old ideas which had failed elsewhere. Virgin Mobile had been one of the exceptions: renting network capacity was a genuinely novel concept. By contrast, his airline businesses all relied on an outdated and inflexible financial model. Both Ridgway and Branson had underestimated the potential of the internet. Neither had understood Michael Ryan’s genius in creating new routes, new airports and the model for Ryanair’s low fares: he priced the aircraft’s seats on the assumption that they would all be sold. Accordingly, Ryanair’s prices were low. Virgin Atlantic could not break its habit of slavishly shadowing BA.
Belatedly, Branson had tried to replicate the enormous profits reaped by cut-price flights across Europe by expanding Virgin Express, a troubled airline based in Brussels. ‘I am absolutely delighted’, he exclaimed in 2002, ‘that the Virgin Express product will be at the front of the wave of change that will shortly sweep over German aviation.’ Twenty Virgin aircraft were to be based in Cologne. Then he abandoned the plan and, once again cursed by falling ticket sales and unreliable aircraft, he dashed for the exit in 2004 by selling Virgin Express to a Belgian rival. The failed venture had cost Branson about $100 million and weakened Virgin Atlantic. Instead of dismissing Ridgway for failing to devise a profitable budget airline, Branson showered praise on the hapless executive. He had one remaining lifeline to save Virgin Atlantic’s independence.
Michael Bishop, the owner of BMI, a British airline serving Europe, wanted gradually to sell his business after 2002 and retire. BMI owned 11 per cent of the slots at Heathrow and supplied about a quarter of Virgin Atlantic’s transatlantic traffic through code sharing. If Branson bought BMI, Virgin Atlantic would become a credible challenger to BA, easyjet and Ryanair. For several years, Branson had discussed a formal alliance with Bishop, first as a merger and then an outright purchase by Virgin. In Bishop’s opinion, their negotiations collapsed after Branson reneged on their oral agreements and tried to cut the purchase price. Bishop criticised Branson’s style and suspected at the end of 2008 that his finances were stretched. Even Branson admitted that if HBOS had crashed during the banking crisis, Virgin’s credit lifeline would have disappeared and the airline would have been imperilled.
With Branson out of the reckoning, Bishop sold a 30 per cent stake of BMI to Lufthansa, 20 per cent to SAS and kept 50 per cent plus one share. He also negotiated an option with Lufthansa that guaranteed a good price for his remaining shares. In July 2009, after Bishop activated that option, Lufthansa had to buy full control of the loss-making airline for £223 million ($368 million). In the midst of the recession, BMI was a poisoned chalice, and Lufthansa’s directors sought a buyer. BMI’s slots at Heathrow were worth about £200 million. Virgin Atlantic’s independence depended on buying the airline, but Branson did not come up with the money.
As Britain’s star entrepreneur, Branson dived for a smokescreen. ‘We would relish the chance to buy Gatwick,’ he told his media friends. ‘Branson’s comments are fantasy,’ said a BA spokesman.
The fate of his airlines, Branson knew, was at risk.
10
Green Squib
Virgin Atlantic’s losses were matched by Branson’s investments in renewable energy. At the end of 2008, he had lost at least $60 million but, as the New York Times reported, Virgin had benefited through his championship of the environment.
Interviewing a woman in Manhattan protesting about capitalism and the banks, a journalist from the newspaper inquired how she had travelled from San Francisco. ‘Virgin America,’ she replied. But, she was asked, wasn’t Virgin the sort of corporation she should be opposing? ‘Branson’, she replied, ‘is working on creating solar planes.’ Other tycoons would have been damned by a high-carbon lifestyle, but Branson’s ‘green’ activities brought him approval as an environmental crusader. His public relations were masterful.
‘Oil is too precious to burn in cars. I drive cars using ethanol,’ said the billionaire, adding that Necker was powered entirely by wind and solar energy. Although global aviation was allegedly responsible for 4.9 per cent of man-made climate change, Branson deflected blame by explaining that Virgin Atlantic had ordered fuel-efficient aircraft. Even Virgin Galactic was presented as kind to the environment. ‘It produces the same carbon dioxide emissions as a Boeing 747 on a ten-hour flight,’ Will Whitehorn had said. Critics trying to monitor the results of Branson’s $3 billion pledge to produce non-carbon fuels were flummoxed. The evidence was elusive, but Branson was still the hero.
On 19 February 2008, Virgin Atlantic dispatched invitations to another spectacular environmental event. On the same day, Branson flew in his Falcon from India to New York. Over the following three days, he continued to jet between San Francisco, San Diego, Los Angeles, Montreal, New York and finally Toronto, where, to ‘capture the public’s imagination’, he committed Virgin’s support to Earth Hour, an international gesture of dimming lights from Toronto to Sydney. The eco-entrepreneur arrived at Heathrow airport on 24 February to reassert Virgin’s green credentials.
No other businessman could have attracted nearly one hundred journalists to witness what Branson called ‘a historic occasion’. Just after 11.30 a.m., he stood in front of a Virgin Atlantic Boeing 747 holding a small bottle. ‘Today marks a biofuel breakthrough for the whole airline industry,’ said Branson. The bottle contained a mixture of coconut oil and babassu palm
oil. He intended to prove that the jet could complete the forty-minute flight to Amsterdam’s Schiphol airport using three tanks filled with normal aviation kerosene and a fourth containing kerosene mixed with the biofuel.
The biofuel had been manufactured by Imperium Renewables in Seattle, on America’s Pacific coast. The company had imported 150,000 coconuts from plantations in the Philippines and palm oil tapped in the Brazilian wilderness. The product was then flown 4,800 miles to Heathrow.