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(Adds comments from Branson in 14th and 23rd paragraphs.)
June 17 (Bloomberg) -- Richard Branson doesn’t like to cut corners or budgets where his airlines are concerned.
Visiting Chicago on May 25 for Virgin America Inc.’s first flight there, the billionaire handed travel vouchers to people riding a train from the airport. At a party later he offered to write a check to fund a flight attendant’s request for red stilettos for female members of the carrier’s 500 cabin staff.
Branson’s sense of theater, combined with a love of flying that suffuses his latest book, ‘Reach for the Skies,’ set Virgin Atlantic Airways Ltd. apart when it was founded in 1984. That same yen for doing things differently may thwart a bid to win allies and investment for a company that’s becoming isolated among fast-consolidating rivals matching Virgin’s service standards without endorsing his approach to business.
“Richard has never been a believer in being the biggest in the sector but in always trying to be among the best,” said Will Whitehorn, Branson’s right-hand man at a variety of Virgin Group companies for more than 20 years. “Virgin Atlantic has always been close to his heart. Other CEOs are interested in the aviation business, but Richard is interested in aviation.”
Branson’s commitment to flying was put to its sternest test when he took on British Airways at London Heathrow airport, and it was BA that prompted Virgin’s current search for partners by coordinating trans-Atlantic services with American Airlines and bulking up through a merger with Spain’s Iberia.
Branson hired Deutsche Bank AG to review alliance options last year and is still considering what best to do, he said yesterday in an interview in Miami while celebrating the 25th anniversary of Virgin Atlantic’s second route.
Branson said he’s had approaches from alliances and would probably “sell a few shares” from his 51 percent stake in the carrier to facilitate joining one, though he would prefer a reduction in the 49 percent held by Singapore Airlines Ltd.
“Virgin Atlantic was very much my baby and now she’s a very beautiful young lady,” Branson said, adding that he watched the carrier grow alongside his own daughter. “I will always remain a major shareholder in this airline.”
Branson’s attachment to Virgin Atlantic means he will struggle to relinquish enough control to attract partners and investment, with potential allies seeing at least as much value in the airline’s operating slots at Heathrow as the brand and its founder’s “avant-garde” approach, said Laurie Price, director of aviation strategy at Mott MacDonald Group Ltd. in Croydon, England.
Branson made his name through Virgin Records, signing the Sex Pistols and reaping chart success through acts including Culture Club and The Human League. But it was into aviation that he plowed his first fortune, founding Virgin Atlantic with a single leased Boeing Co. 747 operating between London’s Gatwick airport and Newark in New Jersey.
As the music business blossomed, Branson’s personal trials in travelling the world to visit his record labels quickly convinced him that there was scope for many more such services.
“I didn’t really like the experience of flying,” he said in Miami. “You were lucky if you got a lump of chicken dumped in your lap, there were no entertainment systems, the crews didn’t smile and it just wasn’t much fun.”
Branson went out of his way to put fun at the heart of his pitch. Virgin Atlantic lured passengers with in-flight massage, motorcycle pickups at their homes and speedboat trips down the River Thames to avoid London’s traffic, while premium lounges, dubbed Clubhouses and styled somewhere between a golf resort and U.S. country club, featured putting greens, hairdressers and shoe-shine booths, as well as the more usual business amenities.
“If you go back to what it was like before Virgin Atlantic started, the experience for people flying was dreadful,” the entrepreneur said. “People were treated like cattle and Virgin came in and brought some excitement and glamour back to flying.”
The carrier’s inaugural flights became the stuff of industry legend as Branson breezed through city after city with high-impact publicity campaigns that saw him take over a casino in Las Vegas, star in the Jerry Springer Show in Chicago and dangle from a helicopter above the Sydney Harbor Bridge.
Even yesterday, aged 60, the Englishman arrived at a press party via a speedboat chase themed after TV show Miami Vice and featuring Victoria’s Secret supermodel Karolina Kurkova.
The headache for Branson is that such frills don’t come cheap, and with Heathrow slots tough to come by he’s struggling to add business-oriented routes that turn the biggest profit.
Virgin Atlantic operates 31 services from London, and while 10 are in the premium U.S. market and account for 50 percent of revenue, many of the newest have been to vacation destinations such as Jamaica and -- announced yesterday -- Cancun in Mexico, often served from the less crowded, and less popular, Gatwick.
What’s more, many of Branson’s long-haul rivals have closed the gap with Virgin in terms of standards, offering a cabin product that may not feature the same quirky style but which meets the needs of most business travelers just as well.
Assessed in terms of service quality, Virgin Atlantic ranks in the second tier in the most recent survey by airline-review firm SkyTrax, alongside 30 rivals including British Airways, Air France, Deutsche Lufthansa AG and Dubai-based Emirates.
While that places the Branson flagship ahead of operators such as American Airlines, Delta Air Lines Inc. and United Airlines, it ranks behind seven “five-star” carriers, six of which -- including Singapore Airlines and Cathay Pacific -- are based in Asia, with one, Qatar Airways Ltd., from the Mid-East.
Cosying up to the airline establishment might also rankle because Branson has always viewed himself as an outsider, identifying more with long-haul discount pioneer Freddie Laker, whose airline went bust in 1982 after a trans-Atlantic price war, than other industry leaders, Mott MacDonald’s Price said.
Branson said yesterday that his airline’s standing as a “challenger brand,” has been emphasized by the tie-up between British Airways and AMR Corp.’s American, a move that the entrepreneur says is effectively a merger of the two airlines.
Virgin Atlantic’s underdog status was enhanced by a successful lawsuit against BA in 1993 which led the larger carrier to apologize for “regrettable conduct in relation to Virgin” spanning a “number of unconnected incidents.”
Whitehorn, most recently chairman of the Virgin Galactic space-launch venture before stepping down in January, said the experience was important in hardening Branson’s resolve.
“The fact that a company so powerful in the industry, a former state-owned carrier, undertook the kind of activities that it did to try and put Richard out of business made him very determined,” he said “They’d have been better off ignoring him.”
No More Motorbikes
Still, just as other carriers have reinvented themselves to match or surpass Virgin’s cabin offering, the U.K. airline has itself been “normalizing over time” and is no longer so very different from its peers, said Price, who as a route-planning manager at British Caledonian, now part of BA, recalls tussling with Branson in the early 1980s over access to North America.
Frills such as the motorcycle pick-ups were discontinued, and there is now “not a cigarette paper” between fares at British Airways and Virgin,” the analyst said.
Virgin Atlantic had a net loss of 125.2 million pounds ($202 million) in the 12 months ended Feb. 28, 2010, the most recent period for which figures are available, versus a 36 million-pound year-earlier profit. Sales fell 11 percent to 1.98 billion pounds.
With most top airlines signed up to three global groupings, carriers in the U.S. and Europe consolidating and an Open Skies accord opening Heathrow to new entrants, the pact between BA and American was the tipping point that forced Branson to review his long-cherished independence, Yves Dufresne, vice president of alliances at Air Canada, said in an interview.
Carriers such as Emirates and Qatar Air still stand aloof from alliances but have the resources of whole countries behind them. At Heathrow, Delta operates 10 flights a day to the U.S., having been excluded from the airport before 2008, while BA and American are commencing a trans-Atlantic shuttle with flights from London to New York every hour in the afternoon and evening.
“Virgin’s situation is very different from five or six years ago,” said Dufresne, who spoke in Barcelona on June 2 after a meeting of the Star Alliance’s 27 members. “They have to face a new dynamic in the U.S., their bread-and-butter market.”
Joining an alliance would provide more customers to help Virgin fill seats in London while providing better connectivity at destination cities, Jaan Albrecht, CEO of the Star grouping, which also includes Lufthansa and United, said in Barcelona.
“We know that Virgin is shopping,” Albrecht said. “We have been in a dialogue. Not currently, but over a longer period of time, we have tried to explain our strategy.”
SkyTeam, led by Delta and Air France-KLM Group, also regards Virgin Atlantic as “an interesting option,” given its position in the U.S.-U.K. market,” Managing Director Michael Wisbrun said in an e-mailed response to questions yesterday.
“Virgin has a major position at Heathrow built up over 20 years, plus a good brand and a good reputation, so it’s a not unattractive proposition,” Price said. “There is an opportunity here, but at the end of the day it’s down to Richard Branson.”
--With reporting from Mary Jane Credeur in Atlanta. Editors: Chris Jasper, Chad Thomas.
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