That weekend, the plans we’d had ready for such an emergency were used for the first time. The team at Virgin Atlantic did a fantastic job in their assessment of the ‘market failure’ between the UK and the USA, and, as a result, drew up an emergency restructuring plan. There were some painful bits to this: more than 1,200 jobs would go at the airline in the UK, but they did what they could to make the thousands of others secure. Most importantly, they switched larger aircraft, such as the 747–400s, on to booming routes in Africa, and put the smaller Airbuses into service across the North Atlantic.
On the Sunday morning we pressed the button to go ahead with the restructuring and told the staff on the Monday. I will never forget the good grace and professionalism with which they took the news and then got on with the job. The months that followed were sticky but we had called it right in the first week: by Christmas it was clear that Virgin Atlantic was through the worst and would survive. This was no mean feat given that our American competitors went cap in hand to their government, and received massive cash handouts from them. This may be what got them through, but all we saw was that it gave them leeway to behave more anti-competitively than they usually do.
The irony of the situation was this: not only had we built up such a fantastic team of people but, until 11 September, we’d been profitable. My biggest worry at that point was how morale in the business would react to these enforced redundancies. It was a testament to everybody involved that, not only did a lot of the older and part-time staff come forward and volunteer, but those who stayed really buckled down in the spirit that undoubtedly made Virgin Atlantic what it is today. The innovative nature of the airline – using bed-seats and in-flight masseurs, to make passengers more comfortable – now meant, ironically, that we were the first to install bulletproof Kevlar cockpit doors, to further ensure passengers’ safety.
It would have been harder for Virgin Atlantic’s management to be as single-minded as they were if they had to worry about short-haul operations as well, but under Virgin’s investment model they didn’t have to. We have two other airlines, Virgin Express in Brussels and Virgin Blue in Brisbane, Australia, both of which are separately run and publicly quoted. The effects of 11 September on these businesses were entirely different but equally challenging. In the case of one, it faced the collapse of the main state-owned carrier (Sabena), and the other the collapse of its main competitor (Ansett). Both have had to move quickly to reshape and grow their businesses. In each case they were able to focus completely on their own issues.
Similarly, Virgin Mobile faced challenges early in the twenty-first century: growth in the UK market, a recession in Singapore and the decision as to whether or not to press the button to expand in the US. If Virgin Mobile were one conglomerate there could have been paralysis in these decisions but, as each is under a separate joint-venture structure, once again the management teams could concentrate on the job in hand. By October, we took the momentous decision to go ahead with launching Virgin Mobile in the US in partnership with Sprint, and began a fundraising exercise to help finance the $500 million venture.
This was not as daft as it may seem. It was clear that the US economy was going into recession but what was also clear was that mobile-phone sales were finally starting to boom in America after the uncertainties that followed the tragedy of 11 September. Virgin’s low-cost model of prepaid phones seemed an ideal solution to help attract a youth market, one that had not warmed to mobiles and text messaging in the way that the European, African and Asian youth markets had.
Within another two weeks, on 7 October, the war against the terrorists started in earnest as the bombs and cruise missiles started to rain down on their enclaves in Afghanistan. It’s always hard to stay focused at times like these, as I knew from the first Gulf War, but people still had jobs to go to. So it was another shock when Virgin Rail Group’s biggest supplier, Railtrack, went bust. It was a blow to the railway-using public and to Virgin, which was at the time trying to negotiate a deal to save the upgrade of the West Coast mainline. Yet again, the consequences were quickly understood by a dedicated management team, who did not have to worry about the rest of some amorphous plc’s other activities.
However, another shock was to follow when the government pinched Richard Bowker to become head of the Strategic Rail Authority. As co-chairman of Virgin Rail, he had done a fantastic job in co-ordinating our new train orders, as was proved when the first of our tilting trains were delivered from the factory, on time and to budget, in November 2001. By way of contrast, Railtrack’s cost for the upgrade had gone up fourfold, and was going to end up being years late.
It was a proud and tearful moment, standing in the Alstom factory in Birmingham on a cold and sunny November day, watching Joan name one of our new trains Virgin Lady. It was an even better moment sitting by the fire that evening watching the Six O’Clock News and hearing the words I had waited five years for: ‘Virgin has delivered on its promises.’ This was no mean feat, as the orders had been placed in 1998 and, despite all the technological difficulties, Virgin had produced the world’s most advanced train, which tilted round corners at speeds of up to 140mph (225 kph). Of course the sting in the tail was that the track would not be ready for 125-mph operation until 2004!
The winter of 2001 saw yet more midnight oil being burned by Virgin Rail’s finance team as they negotiated with Railtrack, its administrators, the Strategic Rail Authority, the Department of Transport and the train suppliers to ensure that our trains got the track they deserve – and the public the service it deserves. I thought how ironic it was that every critic of our deal to upgrade the railway in 1997 had predicted that we would never get the new trains to work and that we would go bust in the process of trying. As it was, about the only tangible successes of privatisation were Virgin’s electric Pendolinos and diesel Voyagers. The railway experts who had also predicted in 1997 that upgrading the track would be easier than the trains were dumbfounded.
Meanwhile, in Australia, the effects of 11 September continued to be felt in the airline business. Following the collapse of Ansett, Virgin Blue suddenly found itself Australia’s second-largest airline. Its chief executive, Brett Godfrey, had been steadily building the business for a year but almost overnight was running an airline that promised to be more profitable than easyJet and had enormous opportunities, if only he could raise the finance. Our corporate finance director, Patrick McCall, was on a plane to Australia within three days of the Twin Towers attack. One month later Virgin Blue had announced the appointment of Goldman Sachs to prepare for a flotation in 2003 with a potential valuation being talked about of over AUS$1 billion.
It nearly did not turn out this way as Ansett’s parent company, Air New Zealand, had made an offer to buy Virgin Blue for US$250 million shortly before 11 September. Our friends at Singapore Airlines had a 20 per cent stake in ANZ, so it was the CEO, Dr Cheong (CK), who telephoned me to make the offer. ‘Richard, I really think you should accept this offer,’ he said. ‘It is a very generous valuation and if you don’t take it we’ll put the money into Ansett instead, and they will wipe out Virgin Blue within six months.’ Was he bluffing?
It was a difficult decision. My instinct told me that the company was worth more than that, but it wasn’t an ungenerous offer. However, there was something in the desperate insistence in CK’s voice on the long-distance phone line that made me hesitate. I decided to be a little mischievous, and to call a press conference. I wanted the competition authorities to understand how strongly the public felt about the need for healthy competition. I announced, with a sombre and straight face: ‘This is a sad day, but I’ve decided to sell up. This means that cheap air tickets in Australia will be a thing of the past – others won’t want to follow what we tried to do. It will, of course, mean that our staff will be part of Ansett, and that there will be redundancies. But, anyway, I’ve done well out of it, so I’m off back to the UK right away with my $250 million profit.’ There was a deadly hush, and the pack
ed room seemed in deep shock. A journalist from the Press Association rushed off to file her copy. And then I caught sight of some of our staff across the room, who were not meant to be at the press conference. I realised they were in tears. ‘Only joking,’ I added quickly, and publicly tore up the US$250 million cheque.
Five days later, Ansett went bust and Brett could barely contain himself on the phone as he enthusiastically outlined his plans for rapid expansion of what had become, overnight, Australia’s second-largest airline. It was that call that made me realise that Brett’s team had built a truly Virgin business: it had revolutionised the market for Australian air travel; it had built a fantastic reputation for quality; and all this had been done as a small-scale, venture-capital start-up, with only AUS$10 million.
By December 2003 this AUS$10m start-up had captured over 30 per cent of the market and was the first of our new generation of companies to float. This was a remarkable achievement given the chaos in the aviation market and the tragic terrorist attack in Bali the previous year, which had dented Australians’ confidence in their immunity from the problems of the rest of the world. By the time we took the company public on the Australian stock market we had a new partner in Virgin Blue called Chris Corrigan, and, with his investment and the float, we had made over $780m in just over three years of trading. After the float Virgin retained a 25 per cent stake and the company continued to prosper for over eighteen months until Qantas finally woke up to the destruction of their domestic market and, like all good monopolists, they launched a low-quality clone of Virgin Blue in the spring of 2004 called JetStar. By January 2005 Virgin Blue was locked in a price war. Despite this, Virgin Blue is still one of the world’s most profitable airlines. Indeed, one of the remarkable achievements of 2004–5 was that Virgin Blue and Virgin Atlantic both remained profitable at a time when most of the US airlines finally went into Chapter 11 bankruptcy.
Even our newer dotcom businesses – those launched since 1998 – seemed to go from strength to strength after 11 September, largely because they were modelled on a real brand, selling real things. Virgin Cars sold its six thousandth vehicle that winter and, despite a blip after the New York attacks, car sales actually improved in the run-up to Christmas. The same was true of thetrainline.com. Again, sales rocketed as nervous executives decided that a train from Manchester or Newcastle was a better bet than a plane. By the beginning of 2002 these and several other of our e-commerce businesses had turned cash-flow-positive. There was only one exception, Virgin Wines, which, despite winning 100,000 customers, still could not get the margins it needed in a cut-throat market; but we’re confident that it will turn the corner soon enough.
Virgin Wines was a good example of our management philosophy of giving our people the chance to become entrepreneurs in their own right. Rowan Gormley, of Virgin Money, had begun to feel by the end of 1999 that our financial-services business was maturing and needed a different sort of manager. The former venture capitalist had been bitten by the entrepreneurial bug and simply wanted to start something new – an online wine retailer. I sympathised with him and, in spite of our misgivings about entering such a different sector, we decided to back him almost as a matter of principle. Virgin Wines was established as a joint venture by Virgin and Rowan.
I could go on, but hopefully the point is well made. By investing in separate businesses with partners – ‘ring-fenced’, as the bankers keep telling me – we had been able to withstand the management pressures of 11 September, spread risk and take what we hope have been a lot of good decisions. Couple these with a venture-capital private-equity model of creating individual companies with their own business case, shareholders and financial resources, and you have the Virgin that existed in 2001, and continues to exist now.
It’s been interesting, with the collapse of Enron, to see how people still want to build enormous companies; but if something major goes wrong the whole lot falls. What we are trying to do at Virgin is not to have one enormous company in one sector under one banner, but to have two hundred or even three hundred separate companies. Each company can stand on its own feet and, in that way, although we’ve got a brand that links them, if we were to have another tragedy such as that of 11 September – which hurt the airline industry – it would not bring the whole group crashing down. So we’ve managed to avoid the danger that we might wake up one day with one awful thing going wrong that threatens to bring all the companies down.
As it turns out, we’ve never let a company go: we’ve always paid off its debts; we’ve always managed to keep our reputation as an organisation that honours its obligations. But in the event of an absolute catastrophe we could let a company go; we could cut it out and, because of that, the rest of the group would not be affected. Obviously, our reputation would suffer, and we wouldn’t want it to happen, but at least it would avoid a disaster and the loss of 40,000 jobs.
The sheer diversity of Virgin’s businesses has proved the test of time and circumstance. With each management team focused on its own business and entrepreneurial goals, we can achieve just about anything, as long as it is right for the brand. I had learned a lot in the late 1990s and I had come to realise that sticking our name on products was not the best way to create value. Virgin Vodka might sell well on the planes and at the airports, but we did not have the worldwide distribution of firms such as UDV or Scottish Courage to back it up. However, find entrepreneurial managers like Frank Reed and Matthew Bucknall at Virgin Active, and give them the resources, and the sky will be the limit.
The omens were not good when Virgin Active opened its first club in Preston, Lancashire, in August 1999. A fire swept through the club, doing tens of thousands of pounds’ worth of damage, and a distraught Frank phoned me to give me the bad news. However, one can often turn bad news into good news. When he said it would give them a chance to do one or two things differently and have longer to train the staff, I was relieved. I was also beginning to get the measure of why Frank had such a strong reputation in the leisure industry.
At the same time, Frank helped me fulfil a pledge of many years’ standing to invest in South Africa. One of the first casualties of the stock-market decline that preceded the Twin Towers attack was a quoted South African company that happened to own the country’s largest chain of health clubs. I was in the bath when Nelson Mandela called, and explained that it would be a particular blow to have eighty health clubs owned through a black-empowerment scheme closed down with the loss of several thousand jobs. He asked whether we could rescue it, and save those people’s livelihoods. We could, and we did, so that, by the end of 2001, Virgin Active had mushroomed through growth and acquisitions into one of the top five health-club operators in the world.
In the years that followed, Virgin Active became one of the silent success stories of the Virgin empire. Even internally very few people knew how well it was doing. We brought venture-capital partners into the business and, by the beginning of 2005, it was making a profit of £34m a year.
Our method of expansion through branded venture capital may not suit everyone, but it is heartening to see that one entrepreneur is now following a not-too-dissimilar model. EasyJet has been so successful that it now has a stock-market quote and its entrepreneurial founder, Stelios Haji-Ioannou, is developing new businesses using the same brand, such as easyCar, through his separate private venture-capital vehicle easyGroup.
In the aftermath of the attacks of 11 September, Virgin Atlantic has completely restructured its operations, whilst BA’s main response was to wrap itself in the Union Jack and pursue the government to back yet another attempt for it to create a transatlantic monopoly with American Airlines. Instead of trying to prevent more than 60 per cent of UK–US airline traffic and slots at Heathrow from falling into the hands of one monolithic structure, it was clear that the British Department of Transport was going to help!
On a warm and sunny November day in Washington, while I was presenting our case against the deal in front of the Senate, th
e transport department’s hypocrisy was brought home to me. The British Embassy put out a press release supporting the merger, and an attendant ‘Open Skies’ deal – amazing considering the only beneficiaries were likely to be the two airlines creating the monopoly. With considerable pomposity, our diplomats tried to capture the pro-British mood on Capitol Hill with the words, ‘Two allies, united in so much else, should be able to reach agreement on something that would be to their mutual benefit.’ If anyone could have told me what ‘mutual benefit’ the attempt to create a North Atlantic airline monopoly had for two allies locked in conflict with the Taliban and Osama Bin Laden, I would happily have given them a free Upper Class ticket for life.
That was not the end of it, though. In trying to defend the deal, BA made the ludicrous claim in the Sunday Telegraph that there was no shortage of slots at Heathrow; this was, in the immortal words of Sid Vicious, ‘bollocks’! Virgin responded by offering to give £2 million to charity for every slot that Lord Marshall managed to procure for us. Naturally, he was unable to rise to the challenge, and he must have groaned when the United States Department of Justice slammed the deal as anti-competitive and confirmed that its investigations concluded that the shortage of slots was a major reason why the deal should not go ahead as proposed.
It was not until late January 2002 that BA’s game with American Airlines finally played itself out. The US Department of Transport announced that it would let the two monopolists merge their operations if BA gave up slots to the other American carriers. The problem was the price: the US regulators realised that Heathrow was overcrowded and that they would have to give their airlines a lot of access as the price of the deal. For BA, though, the price was too high; in the last week of January they abandoned their merger plans and went back to the drawing board on the whole ‘Open Skies’ issue.
Losing My Virginity: How I Survived, Had Fun, and Made a Fortune Doing Business My Way Page 40
