Branson: Behind the Mask

by Bower, Tom

  The defence had been denied access to documents used by the US Department of Justice during their interviews with Moore on the grounds that they ‘were not material’. Virgin was now accused by the defence of a ‘close-fisted approach to disclosure’ by withholding ‘potentially highly relevant material going to the heart of the case’. Herbert Smith found themselves criticised for choosing which documents to release to suit Virgin. ‘My feelings are of grave disquiet,’ said the judge. His mood was further aggravated after being told that on the eve of the trial, Moore had been professionally coached on how to give evidence. Training witnesses in a criminal trial is controversial and was compounded by the defence’s allegation that a key email ‘may have been modified’ by some unknown person prior to the trial. ‘That is an extraordinary state of affairs,’ said a lawyer.

  Other inconsistencies now assumed greater importance. The prosecution’s case was based on Burns making the first call to Moore in August 2004. Moore emphatically insisted that Burns’s call had ‘come of the blue’. The BA man’s initiative, the prosecution alleged, took Moore by surprise. In that conversation, said the prosecutor, Burns had started by saying to Moore, ‘This is a conversation we’re not having.’ Burns had always denied that suggestion, insisting that Moore had called him first. After they had examined the new emails, the defence confidently asserted that Burns’s version seemed to have been endorsed.

  The defence lawyers found a message sent by Moore to his staff, ‘Anna and Polly’, before his first conversation with Burns in August 2004. In it he described to his two assistants how Virgin intended to raise the surcharge by £5. Importantly, he explained how he had heard from a Financial Times journalist that BA intended to increase its surcharge by £6 to £8 and suggested that Virgin wait for BA’s announcement. Moore added, ‘I might ring Iain Burns at British Airways in the meantime and agree a joint date.’ Pertinently, Moore did not write ‘a joint price’.

  The defence investigators produced Virgin’s telephone records and a log book compiled by Burns’s personal assistant. The records suggested that Moore had called Burns first and, finding that he was out, left a message. Moore then called again and heard that BA had already decided to increase its own surcharge by £6. Virgin then decided to match BA.

  The defence lawyers seized on the new evidence to allege that Moore’s statements were unreliable. If there was a conspiracy, suggested the defence, it might have been initiated by Virgin. The contradictions would be tested during Moore’s cross-examination. But then the trial was shaken by another surprise.

  The prosecutor revealed to the judge that the computer program that had scanned the Virgin documents for the trial had not copied some material dated after 10 February 2005. Accordingly, some emails around the critical date of 21 March were probably missing, as were those referring to Branson’s cricket match and much more. Apparently, no one at the OFT, Herbert Smith or Virgin had noticed that omission. That revelation was followed by another surprise. For over a year, Herbert Smith and Virgin had insisted that some computer files had been corrupted and were beyond retrieval. Now, the prosecutor revealed, those ‘few’ files had been almost miraculously rescued by technicians over the previous days. Suddenly, 70,000 new emails were available, and 12,000 of them were Moore’s.

  ‘Somewhere there’s a smoking gun,’ griped a defence insider, uncertain as to whether the prosecution had been sabotaged or whether the OFT was simply incompetent. The defence demanded that the trial be delayed while all 70,000 emails were scrutinised. The judge refused. Instead, at the end of a weekend’s frenzied work, the prosecutor announced that the OFT had withdrawn the case. The four BA executives walked out of the court as innocent men. The collapse of the trial was a relief for Virgin, as their executives would avoid being exposed as self-confessed criminals offering contested evidence. BA would successfully negotiate a reduction of its fines in London and Washington.

  After his client’s acquittal, Ben Emmerson QC, one of the defence lawyers, criticised the OFT’s lawyers for being ‘ludicrous’, ‘disgraceful’, ‘shabby’, ‘cynical’, ‘not fit for purpose’ and ‘guilty of incompetence on a monumental scale’. ‘Ali Nikpay’, he said, ‘must shoulder the personal responsibility for this fiasco.’ The newly released emails, Emmerson asserted to the judge, showed that the Virgin witnesses ‘seemed to have changed their accounts, from the accounts entirely consistent with innocence that they first gave to their lawyers to what seems to be more manipulated accounts in the final witness statements’. He blamed the OFT for ‘delegating disclosure [of the emails] to lawyers whose job it was to protect and advance the interests of Virgin Atlantic’. That, he claimed, was ‘a disgraceful situation’.

  In reply, Ali Nikpay focused on ‘the role played by Virgin to provide the OFT with continuous and complete co-operation. This may have potential consequences for Virgin’s immunity.’ The OFT’s mismanagement of the case would prompt the new Conservative-led government to close the agency.

  The OFT’s last gasp was an announcement soon after the trial’s collapse. Cathay Pacific, stated the agency, had sought immunity from prosecution for fixing passenger fares between London and Hong Kong with Virgin Atlantic. ‘The parties’, Nikpay said, ‘will now have an opportunity to respond to our proposed findings before we decide whether competition law has in fact been infringed.’ Virgin Atlantic set aside £35.4 million as ‘administrative expenses’ in the event of a conviction for the offence. Two years later, in 2012, the OFT’s officials admitted they were confused by the conflicting evidence. Virgin Atlantic, the OFT announced, would not be prosecuted. Branson’s good relations with the media limited any negative comments. His airline’s fate, however, remained precarious.

  ‘Business is way down,’ said Steve Ridgway in 2010. ‘I think we are probably at the bottom and there is no sign of the green shoots. Business travellers have not come back.’ He dismissed a further 600 employees and cut more routes. Branson predicted that Virgin America would lose another $48 million in 2010. The continued independence of his airline depended on President Obama vetoing BA’s proposed alliance with American Airlines. Branson’s usual reliance on Virgin’s self-professed decency was vulnerable.

  ‘I wouldn’t forgive anybody for what they did there,’ said Willie Walsh, still outraged by Branson’s dash to the American prosecutors. The payback was delivered in a few sentences. Washington’s officials were reminded by BA’s representatives that Branson was not the disinterested champion of consumers. Contrary to his self-portrayal as ‘the cool David taking on the world’s corporate Goliaths’, Virgin had confessed to a serious crime. The masquerade of the underdog, argued BA’s lawyers, should end henceforth.

  Officials at the US Department of Transportation approved BA’s alliance with AA in February 2010, on condition that four pairs of daily slots at Heathrow be sold. ‘The preliminary decision beggars belief,’ exclaimed Branson. ‘Four slots is a complete joke and those responsible should hang their heads in shame.’ Over the following weeks, he fumed that the alliance provided ‘no evidence of consumer benefits’. BA and AA would enjoy ‘a massive frequency advantage’ over Virgin Atlantic, he complained, an obvious consequence of the two airlines operating more planes than Virgin. A few weeks later, BA and Iberia, the Spanish airline, merged. BA–AA–Iberia offered 5,200 daily departures from over 400 cities. Branson’s protests were again ignored, not least because his complaints coincided with his own bid for alliances.

  On 13 September 2010, Branson protested that Australia’s regulator had refused to allow Virgin Blue to code-share with Air New Zealand across the Tasman Sea. ‘We’re losing money,’ Branson retorted, ‘and if we don’t get the code share we’ll pull out of the flights.’ At the same time, he applied to code-share Virgin Atlantic’s flights to Australia with Etihad, the Gulf airline; and also Virgin’s flights from Australia to Los Angeles with Delta.

  Virgin justified that hypocrisy as necessary for survival. But in September 2010, Branson’s poi
se was disrupted. Scrabbling for solutions, he spoke about integrating the three Virgin airlines and Virgin Galactic into a ‘quality alliance’. His scheme bore a hint of desperation. ‘Don’t underestimate the halo effect the new alliance will have on the brand,’ Branson told the single journalist invited to witness him walking through a Dallas convention centre accompanied by two blonde Virgin America stewardesses. He was handing out free tickets for the airline’s new service between Dallas and San Francisco. ‘I’ve long argued with my wife, size isn’t everything.’

  Amusing quips and his description of himself as ‘the rebel mogul’ shaking up markets could not compensate for the erosion of his commercial strength. Branson’s airline, he finally conceded, needed a lifeline. Asked, ‘Is Virgin Atlantic going to be around in fifty years’ time?’ he replied, ‘I think we realise that we need a big brother or we need a partnership.’ The obstacle was his past. He was not everyone’s favourite business partner.

  Cheong Choong Kong, the former chief executive of Singapore Airlines, cursed his purchase of 49 per cent of Virgin Atlantic for £630 million in December 1999. The anticipated profits had not materialised, and Branson had aggravated his partner by expanding Virgin Blue’s network across Asia in direct competition with Singapore Airlines. ‘God help us,’ said Cheong. ‘He’s unreliable,’ declared one of those close to Cheong. ‘He’s never there. He’s not interested in day-to-day results. He’s a lightweight.’ Cheong often lamented an exchange with one British businessman. ‘You should have called me,’ said the industrialist. ‘I would have told you not to touch it.’ Cheong and his successors rejected Branson’s plea for money to expand the airline. ‘He’s got so many inter-company loans’, observed a Singaporean executive on Virgin Atlantic’s board, ‘that one should run for the hills.’ Since 2006, the Singaporeans had sought a buyer for their devalued stake. ‘Anyone can make an offer and we will evaluate it,’ confirmed Goh Choon Phong, the airline’s new chief executive. There was no apparent interest.

  The Singaporeans’ irritation with Branson was shared by the directors of Lufthansa. In late 2009, the Germans decided to cut their losses and sell BMI. Although the airline, which had 11 per cent of Heathrow’s slots (fifty-six pairs), was worth around £200 million, Branson offered just £50 million. The Germans were unsure whether he should be taken seriously. He presented himself as a committed environmentalist, yet he supported a third runway at Heathrow and criticised the decision not to open one as ‘purely political and incredibly damaging’. The Germans were equally bewildered by a capitalist who frequently advocated the benevolent treatment of employees but condemned Virgin pilots for voting overwhelmingly to strike over their working conditions. Finally, they were baffled as to why Branson offered to pay only a quarter of BMI’s true value. Their discussions struggled until the Germans concluded that Virgin Atlantic could not raise the required bank loan. Branson was offering a pittance in the hope that there would be no other offer. At the end of 2010, the negotiations collapsed, but to Branson’s distress Willie Walsh appeared with an offer of £172.5 million. Combined with BMI, BA would own 53 per cent of Heathrow’s slots. Since Lufthansa controlled 66 per cent of the slots at Frankfurt, and Air France owned 59 per cent of those in Paris, the regulators had no reason to oppose a buyout just because Virgin owned only 3 per cent. ‘It is vital’, Branson protested immediately, ‘that the regulatory authorities in the UK as well as Europe give this merger the fullest possible scrutiny and ensure it is stopped.’

  For Walsh, the battle was personal. Recalling the harm inflicted on BA by Branson’s successful libel writ in 1993, he anticipated his own triumph with relish. ‘I don’t get on at all with him,’ he said. ‘I don’t think I’m expected to. I’ve made no secret of the fact I don’t think he likes me either.’ Others in London shared that opinion but had no opportunity to voice their sentiments. They had secretly been pleased by Virgin Atlantic’s embarrassment when an employee was exposed for selling confidential information about celebrity passengers arriving at Heathrow to the Big Pictures photo agency. They recalled that in 1993, Branson won his libel action against BA by denying Virgin had financial problems. His enemies did not fail to notice the irony when it subsequently appeared that the company was facing difficulties. Those critics applauded Walsh for adding, ‘I don’t see any value in the Virgin brand. It’s not a global brand.’

  Branson hated criticism. He also hated losing – especially to people like Walsh. His reaction to any humiliation followed a familiar pattern. First came the bluster. BA’s purchase of BMI, he protested, would harm consumers. ‘The only reason that British Airways have offered to write out this massive cheque for this massive loss-making company is to stop Virgin Atlantic doing it – so it is purely an anti-competitive move.’ Then came the appeal of last resort.

  Throughout his career, when faced with commercial defeat, Branson appealed to regulators. In bidding for radio and TV franchises, the national lottery, his various airlines, trains and the use of renewable fuels, Virgin’s success had depended upon the regulators’ help. Posing as the people’s champion, he expected a government to rescue Virgin, the righteous underdog. ‘We will challenge every aspect of this process,’ Branson now said, ‘which if allowed to stand will undoubtedly damage the British airline industry for years to come.’ He demanded that government regulators ignore market values, block the deal and favour him, ‘in the consumers’ interest’. After his appeals was rejected in London, he complained to the EU in Brussels. Without BMI, he said, flights from London to Glasgow, Aberdeen and Edinburgh would become a BA monopoly. He described how the airline had increased the fares between Glasgow and Heathrow by 34 per cent during the six months since BMI had pulled out. That, said Branson, confirmed the danger of monopolies. ‘Competition regulation should protect the customer from monopoly situations where companies can set whatever prices they like and stop investing in their product.’ The deal, he said, would ‘screw the travelling public’. One hundred BMI employees at Belfast airport cheered Branson. Many were convinced he would save their jobs.

  In March 2012, BA’s purchase of BMI was approved by the regulator. ‘The decision is a travesty, just unbelievable,’ said Branson. ‘You just wonder whoever’s working in the competition authority, whether they realised which department they were walking into the morning they made that decision.’

  ‘Whatever he says’, replied Walsh in celebration, ‘is largely irrelevant as we have the approval and we’re not in any way going to be distracted by anything Branson says.’ He added, ‘I don’t see him as someone who deserves my admiration. Other people have done more in the airline industry. I’m not one of his admirers.’

  The regulator’s approval was subject to BA selling twelve pairs of slots at Heathrow. Seven would be awarded to an airline flying between Heathrow and Scotland. Branson said that Virgin Atlantic would bid for all twelve slots. He wanted to fly the profitable routes to Cairo, Riyadh, Nice and Moscow. The unprofitable flights to Scotland were less attractive. He had often spoken about Virgin Trains ‘wiping the floor’ with the operators of the domestic airline routes. Not only were the trains cheaper and faster but, as his spokesmen had often repeated, flights from Manchester to London emitted five times more carbon. Now the environmental argument was junked, as Virgin Atlantic needed transit passengers. Virgin, Branson announced, would replace BMI’s flights to Manchester. Walsh seized on another chance to embarrass his foe. ‘I would expect Virgin to honour the commitments they have made’, he said, ‘and fly to Scotland. They now have the ideal opportunity.’ To Branson’s misfortune, the regulators were weary of the special pleading from a company that had confessed to its involvement in a cartel.

  Virgin was, however, given permission to fly on the loss-making routes to Scotland, but easyJet was awarded the profitable route to Moscow. Branson’s back was against the wall. Isolated, he was now compelled to search for an alliance – or an outright sale. In May 2011, he admitted that he was in talks with ‘two or
three’ airlines. ‘Within the next two or three months we should be clear whether there’s an alliance we’re happy with or not,’ Branson said in Chicago. ‘If it means selling shares, I’ll consider that. My principal interest is in an alliance.’ His potential partners were Air France and Delta. His contemplation of the sale of his own 51 per cent stake signalled an unexpected twist in his fortunes.

  13

  Virgin Taxes

  The day before Branson implied that he had no cash to buy BMI, he announced Virgin Money’s intention to buy 632 branches of Lloyds Bank. ‘This can happen quickly and smoothly,’ he said in May 2011, on behalf of a company back under his control. ‘We’re a serious bidder and can give the government what it wants through tough competition.’ He would need to borrow about £3 billion ($4.87 billion). This was the sort of bargain that Stephen Murphy and Branson had expected the economic crisis to throw up: namely, a good business teetering towards bankruptcy.

  The sale of the 632 branches arose in the aftermath of the banking meltdown. In 2008, Lloyds had been encouraged by Gordon Brown to rescue HBOS from insolvency. The result was that Lloyds, a previously sound bank, was decimated by huge debt and its shares lost over 90 per cent in value. Two years later, the regulators ordered both banks to sell branches in order to improve competition on the high street.

  Banking’s profits attracted Branson, but his ambitions had been frustrated. In early 2010, the Royal Bank of Scotland (RBS) had offered to sell 316 high-street branches for a minimum of £1.3 billion. To avoid one of the hurdles raised during the failed bid for Northern Rock, Virgin Money had obtained a banking licence by purchasing the Church House Trust for £12.28 million. The obscure private bank, founded in 1792, had no branches and fewer than three thousand customers, and its pre-tax profits in 2008 were £450,000. After Virgin Money invested £37.3 million into the trust, Jayne-Anne Gadhia said that the bank would offer current and fixed-term savings accounts ‘by the end of this year’. Gadhia did not have a background as a banker and was always likely to struggle in establishing the complicated machinery. Her forecast did not materialise.