22 Flying into turbulence
January–February 1991
FRIDAY 25 JANUARY WAS the end of a bad week for Sidney Shaw, our account director from Lloyds Bank. He sat on the edge of my sofa fidgeting with his pen and papers, refused to have a cup of coffee and then changed his mind. Trevor and I began to worry. Sidney expressed no interest in last week’s Pacific crossing and was reluctant to meet my eye. He was behaving ominously like my old Coutts bank manager.
‘I saw Air Europe on Monday and Dan Air on Wednesday,’ Sidney began, ‘and I suspect that you’re in much the same trouble. I’m afraid that we’re pulling our loans out of both those airlines, and I don’t see why we should support you any more. We can’t see how you can possibly keep Virgin Atlantic going.’
It was clear where he was heading. He had come to see us in perhaps the worst week in what would become the worst year of aviation history. Virgin’s group overdraft facility with Lloyds Bank was formally set at £20 million but we had now hit £50 million. After a visit by Lloyds Bank on Monday and the subsequent withdrawal of their loans, Air Europe – the largest independent short-haul airline in Europe – run by Harry Goodman, had been declared bust on Wednesday, with 4,000 redundancies. As with Laker, B-Cal, Dan Air and of course Virgin Atlantic, British Airways had managed to keep Air Europe confined to Gatwick.
As the Gulf War continued, the price of aviation fuel was still over $1.20 a gallon, and passengers were still not flying – and certainly not flying the flag-carriers. To an outsider, the airline industry looked like a disaster. Yet, for the rest of the Virgin Group, the picture was pretty good. Virgin Communications would reach sales of over £150 million that year on Sega equipment alone. Simon and Ken were having no problems in selling records. Indeed Virgin singers Paula Abdul and Steve Winwood were top of the charts in America, and Bryan Ferry was there in Britain. The Gulf War and the gathering recession were not affecting record sales. The Virgin Megastores weren’t making much money, but weren’t losing anything either.
Virgin Atlantic was our biggest liability in that we had high overheads that we couldn’t cut down. But even here the underlying picture was encouraging. Virgin holidaymakers were still all taking their holidays, and Ron Simms, then managing director of Virgin Holidays (since retired), forecast that we would increase this number from 83,000 the previous year to around 100,000 in 1991, a jump of 20 per cent. Ron had built up Virgin Holidays into one of the most profitable parts of Virgin Travel, and since I’ve never known him make a forecast that he can’t comfortably beat by several thousand I took this as a concrete figure. Given that the average value of a Virgin holiday was £730, this meant that we would receive sales of over £73 million from these customers alone, and they would be taking seats that would otherwise be empty. There was equally good news on the cargo side: the rates for cargo to Japan had actually increased. Alan Chambers, who had successfully built up our cargo division, pointed out that so many airlines had suspended services to the Far East that he was now able to charge a premium to transport cargo to Japan.
‘What are we shipping out there?’ I asked him.
‘You’d never guess,’ he said. ‘Scottish smoked salmon and whisky are the bulk of it. Then we’re bringing back computer games. It’s a roaring business.’
It sometimes seems to me that I have spent all my life trying to persuade bankers to extend their loans. Given that Virgin’s policy has always been to reinvest our surplus cash back into the business, our profit and loss accounts understate the underlying value of the businesses. This policy has worked over the long term, but whenever there is a crisis it disguises the real picture and means that the banks worry about our short-term profits and ability to pay our immediate interest. Trevor explained to Sidney Shaw that our balance sheet had included no value either for the Virgin brand name itself or for the contracts with the Virgin artists.
‘Look,’ I told Sidney Shaw. ‘In a nutshell, we have very sound businesses. The record company alone will make £30 million profit this year, and that’s in spite of the cost of making a massive investment in America. It’s forecast to make £75 million next year. Virgin Communications and Virgin Retail are profitable. The airline, the holiday company and the freight company will also make profits by the end of the year. They’re just having a bad patch. With the Gulf War and the winter, we’ve got a cash-flow shortage of £10–20 million. This is a tiny percentage of the total value of the Virgin Group and it’ll be ironed out by the end of the year.
‘Anyway,’ I pointed out, ‘we could easily sell some or all of Virgin Music. The latest Citibank valuation shows it to be worth $900 million. Now, are you going to withdraw your loan because of a temporary blip due to a war?’
‘No, no, no,’ Sidney backed down. ‘But you must see it from our point of view.’
I could see it all too clearly from his point of view: Virgin Atlantic had a small cash-flow deficit, which, despite the great value in the rest of the Group, put us at the mercy of Lloyds Bank. Under the British banking system, banks make their money from charging high interest rates rather than taking any kind of equity stake, as they often do in Japan and Germany. British banks therefore have a greater incentive to cut and run from a company than see it through the bad times. It is in desperate times like the middle of a war that perfectly good profitable businesses go bust. The frightening thing about an airline is that it can go bust faster than almost any other business: all it takes is for the telephones to go quiet and for passengers to stop booking flights. Even a large airline can unravel in a matter of days.
By the time Sidney Shaw walked away from Holland Park, he seemed to have had most of his worries put to rest. He wrote me a letter admitting that his worst fears had been unfounded; he even apologised for ‘overreacting’. For the time being, Lloyds Bank was back on our side. The only trouble was that the idea of our selling part or all of Virgin Music was now firmly on their agenda.
Trevor had made a number of forecasts for 1991, even the worst of which showed that over the year Virgin Atlantic would make a profit of £7 million. So we ourselves felt quite confident. However, as soon as I arrived back in London I realised that, beyond the immediate concerns of Lloyds Bank, there were some wider rumours going around the City that Virgin was going the way of Air Europe and Dan Air and that I was destined to become another Freddie Laker.
Rather than spending time searching for the right partner to invest in Virgin Music, I had to switch my attention to stamping out a bizarre variety of rumours about Virgin Atlantic. I was closely in touch with journalists, and so, when I started receiving a series of calls from them asking me in one breath whether there was a drugs problem at Heaven nightclub and in another breath about the finances of Virgin Atlantic, I was rather baffled. Up until then journalists had typically asked me about our new services on board the planes, the latest record signing, or what Janet Jackon was really like. And so, when ‘serious’ newspapers began firing questions about the drug scene at Heaven, and in the same conversation asking about the impact of currency movements on our profit and loss account, I felt that something rather strange was happening. I was bewildered. By the time almost every newspaper had inquired about Heaven, I felt that there must be some kind of campaign against us. It was most odd.
The news coming from the airline was also disturbing: the number of passengers who booked seats and then didn’t turn up, the ‘no-shows’, had increased way beyond the levels any of us remembered since we had set up.
One day Will came into my office looking worried.
‘I’ve just had a call from a friend at Rothschilds,’ he said. ‘Apparently Lord King was there for lunch yesterday, and he was bad-mouthing Virgin Atlantic.’
An accusation of financial weakness can rapidly become a self-fulfilling prophecy, particularly when it comes from as lofty and authoritative a source as Lord King of Wartnaby, whom nobody would think could ever feel threatened by a tiny airline like Virgin Atlantic. Lord King’s accusation of Vir
gin Atlantic’s financial weakness had a number of key audiences. For a start there was the press, which would not be slow to run a story about another successful entrepreneur who, like Alan Bond, Ralph Halpern, George Davis, Gerald Ronson, the Reichmanns and many others, was now overstretched and running into trouble. But, more significantly for us, Lord King would also be listened to by the bankers in the City whom we were considering approaching to place some shares in Virgin Atlantic. We had had some preliminary talks with the American bankers, Salomon Brothers, who were preparing a selling document to raise around £20 million. Rumours of our impending insolvency would pull the carpet from under our feet when trying to negotiate. The third audience whose antennae would pick up this rumour was the aircraft manufacturers and leasing companies: despite the recession we were looking to expand our fleet, but nobody would do business with a crippled airline. The last key audience was in many ways the most important to us in those first months of 1991: the Civil Aviation Authority, which has a duty to ensure that all airline companies are trading viably.
I am no stranger to healthy competition – working hard and playing hard – but there was no love lost between Virgin and BA. Over the last two years we had become embroiled in an increasingly acrimonious dispute over some maintenance BA had carried out on one of our planes. Thanks to their bad servicing, our 747 was grounded for sixteen days in August, the busiest time of the year.
In desperation I had called Sir Colin Marshall, chief executive of BA.
‘Your engineering was so bad that it could have brought an aircraft down,’ I told him.
‘That’s one of the perils of being in the aviation business,’ he told me coldly. ‘If you’d stuck to popular music you wouldn’t have had this problem. No, we won’t lend you a plane.’
All of which meant that, instead of making good money in the summer and living off it through the winter’s lean months, Virgin Atlantic had a terrible summer and alienated passengers. Since we had paid out to lease the replacement aircraft, our cash flow was severely hit. When we tried to agree compensation, BA dragged its heels. They owed us several million pounds of compensation and by delaying payment precipitated a cash crisis at the airline which Virgin Music had to bail out. Just before I set off to Japan for the balloon flight, we had sued BA.
Alongside the maintenance dispute, our major battle with British Airways was our application for two extra flights a week to Japan, which was being negotiated with the Japanese Government. Flight timetables and slots may have no appeal outside the world of aviation, but they form our lifeblood. Without permission to fly somewhere, we literally can’t take off. The battle over the slots and routes to Tokyo was a vital one for Virgin to win if we were to expand.
After the B-Cal takeover, their four flights to Tokyo had been transferred to Virgin, but it still wasn’t enough. For the route to be viable we needed to be able to fly daily, and from Heathrow. Surely that had to be a priority before BA was allowed to fly twice a day during the week. Two frequencies – four slots – were then offered by the Japanese Government. BA naturally presumed they would be theirs. After consultations with our lawyers, and even though we knew that BA had already lined up for the slots, we made an application. Our future depended on it. If we were successful, Virgin would win not just the routes but – crucially – the slots that BA had arranged for them at Narita Airport, Tokyo.
When news of our application leaked out, British Airways went berserk. This kind of thing had never happened before: small airlines were meant to just let BA walk all over them and be grateful for any slots at all. But to ask for slots that were ‘rightfully’ theirs! They went into action. Lord King and his team lobbied good and hard that these slots were British Airways’ rightful inheritance and that it was illegal to transfer them to Virgin Atlantic. This argument backfired:
‘They’re not “your” slots,’ Malcolm Rifkind, the then secretary for transport, said curtly to British Airways. ‘They actually belong to the government and we issue them to you. BA does not own them.’
When British Airways realised that they had lost that argument, they turned to more damaging allegations, pointing out that Virgin Atlantic was not a financially strong enough airline to take on these slots. In fact, they muttered, word was in the trade that Virgin Atlantic was about to go bust. Hence Lord King’s comments at the Rothschilds lunch. They also wrote ‘confidential’ letters to the Department of Transport casting doubts on our finances. This hit the CAA on their Achilles heel. They could not award the frequencies to Virgin Atlantic only to see us suddenly go bust.
We had to battle to persuade the CAA that Virgin Atlantic was a viable airline. Throughout January, as the CAA deliberated whether to award these two Tokyo frequencies to us, I heard an increasing number of rumours about both Virgin and me, all of which implied that we were in trouble.
Finally, in the last week of January, the CAA made two historic decisions in our favour: it awarded the two extra frequencies to Virgin Atlantic, ordering British Airways to hand over to us the slots it had organised at Narita Airport; and it announced that it would recommend to the Department of Transport that Virgin Atlantic should be allowed to operate from Heathrow. Lord King was furious. As a major donor to the Tory Party’s finances, he announced that he had been betrayed and appealed against the Narita decision.
On 29 January, the first television documentary about the rivalry between Virgin Atlantic and British Airways was broadcast by Thames Television. This programme described the battle we were having over the Tokyo frequencies and open access to Heathrow, and also highlighted some of the other complaints Virgin Atlantic had about BA, including our long-standing maintenance dispute. The day after the Thames Television programme, British Airways issued a press release which claimed that Virgin Atlantic was abusing them. It referred to our attack on them as an ‘onslaught’.
After hearing of another tirade of abuse from Lord King about me, and recognising that it could indirectly drive Virgin Atlantic bust, I wanted to have the rumours stopped. I didn’t mind competition from British Airways or anyone else as long as it was fair competition, but I continued to hear a growing collection of damaging rumours.
On 31 January, I wrote my first letter to Lord King. I hoped that by bringing matters out into the open I would be able to stop the rumours. I have always believed that personal relationships are vital in business and that people should be directly accountable for their actions. If I alerted Lord King to what he had set in motion, I hoped that he would then call me and we would have a quick chat about it and bury the hatchet. I wrote:
I am writing to put on record to you that I resent the level of personal abuse your people at British Airways have recently resorted to. As chairman of a small independent airline I have behaved no differently than you would have done in my place. I have argued our case with the CAA over Tokyo slots. They have decided in our favour. That decision is now under review. We have argued our case for access to Heathrow. The CAA have decided in our favour and we are waiting on the secretary of state’s final decision.
In none of these issues have we behaved improperly. We have sought remedies through the CAA, the Department of Transport, the EEC and the High Court when appropriate. We have not at any stage made offensive personal remarks about you or Sir Colin Marshall. I would expect the same courtesy from your company.
My letter was wishful thinking.
The next week Will was called by a man who introduced himself as Frank Dobson, private detective. He said that he wanted to have an urgent meeting with Will. He suggested a pub underneath Waterloo Station. Will went along with Gerrard Tyrrell, our lawyer from Harbottle and Lewis. Frank Dobson told them that a detective agency called Kroll Associates was investigating me and the whole Virgin Group. Frank Dobson asked Will whether he could work for Virgin to counteract whatever Kroll were up to. Will thanked him for his information but turned down the offer of his help since we never use private detectives.
I received Lord King’s re
ply on 5 February. He merely quoted what he had said to the Sunday Telegraph: ‘I run my airline; Richard Branson runs his. Best of luck to him.’ He added that he intended to say nothing more on the subject.
The letter’s brevity was matched only by its arrogance. It was clear that Lord King treated me with a contempt that would rub off on how everyone at British Airways felt they could treat Virgin Atlantic.
Lord King’s letter contained two short sentences. Lord King did not mean me to have the ‘best of luck’. Indeed, if he could have anything to do with it, luck would not enter into it. And Lord King would go on to say a great deal about ‘the subject’ to a number of people.
The other peculiar thing about Lord King’s letter was that it did not address me personally but only quoted a response he had made to a newspaper. It was as if he could not bring himself to address me as a person or even acknowledge me. I knew that he had coined the contemptuous expression ‘the grinning pullover’ to describe me. In the same way that British Airways was trying to steamroller Virgin Atlantic out of sight, it struck me that Lord King was pretending I didn’t even exist.
23 Dirty tricks
February–April 1991
IN THE AFTERMATH OF the Thames Television programme, more alarming proof emerged of some kind of campaign against me and Virgin.
‘I’ve had a call from an ex-British Airways man,’ Chris Moss, our marketing manager at Virgin Atlantic, told me. ‘Peter Fleming saw the Thames Television programme and says that he can confirm all sorts of things BA have been up to.’
‘Will he write it down?’ I asked. ‘Is it hard evidence?’
‘He says that Virgin is BA’s number-one enemy and that after the Baghdad flight they set up a special team to undermine you.’
Losing My Virginity: How I Survived, Had Fun, and Made a Fortune Doing Business My Way Page 29
