Virgin Atlantic's future is under review following global airline industry consolidation. David Churchill explores the options
SIR RICHARD BRANSON, arguably Britain's most admired entrepreneur, faces a couple of journeys into the unknown this year that may determine the shape of his Virgin empire's eventual legacy. The first - and admittedly more minor - uncertainty is about the planned Hollywood biopic dealing with the 60-year-old's mercurial career and, more pertinently, who will play him on the silver screen (Branson, somewhat tongue-in-cheek, is said to favour Twilight star Robert Pattinson).
Of substantially more significance, however, is just what will happen to Virgin Atlantic Airways - the international airline which first flew just over a quarter of a century ago but now faces being squeezed by increased consolidation among global carriers. Branson, whose high-profile has undoubtedly helped Virgin punch above its weight over the years, is well aware that the transatlantic deal done between British Airways, American Airlines and Iberia has changed the name of the game at Heathrow. He lobbied hard against the alliance - describing it as a 'monster monopoly' - but to no avail.
Virgin Atlantic looks too small to compete on the world stage - it's fleet of just under 40 aircraft puts it way down the league table in terms of scale (half the size of Qatar Airways, for example, and less than a third that of Qantas). But, more importantly, Virgin's decision so far to stay out of one of the three main global airline alliances has left it struggling to generate the same operational and cost benefits that its rivals enjoy and will increasingly do so. So Branson now has to decide: continue flying solo or, instead, seek to carve out a future for the airline under the umbrella of an airline alliance or as a subsidiary of a larger airline group.
This is not a new dilemma for Branson or his colleagues, particularly Virgin Atlantic CEO Steve Ridgway, as it has been clear for some years that going it alone is not really an option.
But while simple survival during the recession was the main objective, the recovery in business air travel over the past year means that a decision on the airline's future can probably not be delayed too much longer. Branson tacitly acknowledged this late last autumn by appointing Deutsche Bank to advise on options - the usual City euphemism for finding a buyer for powerful rival to BA at Heathrow in terms of slots, giving Virgin/Bmi about 13 per cent of the total compared with BA's 41 per cent. But it would also have added Bmi's long-haul routes, particularly to the Middle East, as well as its short-haul feeder flights into Heathrow. More significantly, it would probably have brought Virgin into Lufthansa's Star Alliance.
Although Branson and Bishop had courted each other for several years, the key stumbling block was Bishop's determination to 'get his money' out of his airline on retirement while at the same time Branson notoriously hates paying hard cash to acquire assets. Bishop, however, had a trump card in a decade-old agreement with Lufthansa for it to buy his controlling shareholding in 2009 at a price agreed just £50m) in 2006. But perhaps his smartest move was in 1999 when he persuaded Singapore Airlines to hand over £600m for a 49 per cent stake in Virgin Atlantic, a deal that provided minimum benefit for SIA.
Not surprisingly, Singapore has been seeking an exit for the past few years but was baulked by the global recession and a failure to find a buyer willing to pay for a minority stake in an airline over which it would have scant influence. Small wonder that Lufthansa has not so far shown much eagerness to get into bed with Virgin.
But time may not be on Branson's side. Although he only turned 60 last July, Branson has for the past the business - although technically the bank is providing Virgin with an 'assessment of the aviation market place...and growth opportunities', according to an official statement from the airline.
Why employ one of Germany's biggest banks to help with this? Some believe one reason is that Deutsche Bank offers an extra advantage: it has close links with Lufthansa, regarded by many as Europe's leading airline and one that has been associated more than once in the past few years with some sort of tie up with Virgin. Although a close banking and business relationship is not unusual in Germany, the bank would be in a good position to facilitate a deal if both sides were willing.
It should be pointed out, however, that the team from Deutsche Bank advising Virgin will be separated by firewalls from other parts of the bank to avoid any conflict of interest.
Even so, Branson has already shown interest in recent years in getting closer to Lufthansa. Previous plans involved Virgin linking up in some way with Bmi (when Lufthansa held a minority stake of 30 per cent and chairman Sir Michael - now Lord - Bishop held 50 per cent plus one share). This would have created a way back in 1999. Although Lufthansa tried to wriggle out of the deal when it realised it was overpaying because of the recession, it settled when faced with court action by Bishop.
Branson, sensing a possible opportunity, has tried over the past 18 months to get Lufthansa to agree a three-way venture between Virgin, Bmi and the German carrier, leaving Virgin in control. But Lufthansa, having appeared to pay more than it wanted to for Bishop's Bmi stake (the price was about £223 million), has been in no mood to be fleeced by Branson as well.
Branson has something of reputation for smart dealing, hardly surprising since he managed to parlay a fledgling career as a cut-price record importer into an empire worth an estimated (by The Sunday Times Rich List) £2.6 billion. His business savvy has been shown by many other smart deals over the years, which have included EMI in the early 1990s paying around £500m in cash for Virgin Records, while NTL forked out almost £1bn for Virgin Mobile (a business established for few years been winding down direct involvement with his business empire. This does not appear to be due to any lack of ambition - his appetite for risky adventures seems undiminished as he prepares for his maiden space flight either this year or next - but rather reflects his acceptance that the Virgin brand must take centre stage if it is to survive him.
Hence, just over a year ago he recruited former Barings banker Peter Norris (whose character was featured in the film Rogue Trader about the bank's collapse) to replace him as non-executive chairman of privately owned Virgin Group Holdings.
Branson had already promoted accountant Stephen Murphy, who had been with Virgin since 1993, to the position of CEO to head an investment committee which effectively manages the sprawling empire of more than 200 companies. Many are joint ventures, such as Virgin Trains, which is co-owned by Stagecoach, while others pay a fee for using the Virgin brand name. The planned new Virgin Hotels venture in the US, for example, will operate as a joint venture with outside investors.
In a further sign of Branson building up Virgin's corporate strength, late last year he created a special committee of leading business people, including ex-BA executive and recent BUPA CEO Val Gooding, to offer advice on the future direction of the group. More significantly this committee also includes Claudio Costamagna, a former Goldman Sachs investment banker with a reputation for deal-making.
What input this committee will have on Virgin Atlantic's future remains to be seen, but there are other issues at the airline that may be relevant. Most crucial, perhaps, is Ridgway's successor as CEO as he also turns 60 later this year.
Although he has given no indication of when he might want to step down after a decade in the job, there is speculation that the recent promotion of Julie Southern, the airline's chief financial officer for the past decade, to a new post of chief commercial officer makes her heir apparent. Her new job embraces the responsibility for expanding route networks, trade alliances and driving revenue - all key areas a future CEO would need to be involved in.
Southern has particularly singled out the investment in 15 Boeing 787 Dreamliner aircraft when they are finally delivered over the next few years as being key to expansion of services and routes. Yet whether she eventually becomes the most powerful woman in British aviation will inevitably depend on what happens to the airline this year. Adding to the uncertainty is the top-level management changes at Lufthansa which will see CEO Wolfgang Meyrhuber replaced this month by Christoph Franz, a 10-year Lufthansa veteran and most recently head of Swiss International Air Lines. Will Franz consider it worth the gamble of bringing together Virgin with Bmi within the Lufthansa and Star Alliance family? Or might he consider that any deal has potentially too much downside from the complexities involved?
If Lufthansa passes on a deal, might Air France be interested? The French carrier had held informal talks with Branson several years ago but these came to naught. Yet Air France's success with integrating KLM following their 2004 merger has shown it has the ability and appetite for bringing in standalone brands. But the 25 per cent Alitalia stake acquired in 2009 has, unsurprisingly, not so far overwhelmed Air France CEO Pierre- Henri Gourgeon and so it may not be keen on a similar minority deal with Virgin. In any case, Air France currently seems more interested in bringing in an Indian airline partner to tap into Asian growth potential.
The other option for Branson is to take Virgin Atlantic back to the stock market after his short-lived dalliance with the City in the late 1980s. Although he found the demands of being a quoted company too intrusive then, he has had other experiences since of being a public company (such as Virgin Mobile) which could make him reconsider an initial public offering. The City's bullish view about the British Airways' share price surge in 2010 will have not gone unnoticed by Branson's advisers, as BA has also registered with regional airline Flybe which was planning a stock market listing last month Whether or not he turns to City, there are clearly a number of permutations for Branson and the airline he founded against the odds a generation ago to chart a new course. But they will all inevitably depend on Branson himself and what he wants.
Yet it is impossible not to have the feeling that, even though Hollywood believes it is now time to film the story of his life, the Bearded One may still surprise us all.
Restoring the glamour
Virgin Atlantic Airways, like most of its rivals, did not have a good recession. Despite posting a £50m profit in the year to February 2009, last year it announced pre-tax losses of £158m. "It was the biggest loss we as a company have ever made," said Virgin Atlantic CEO Steve Ridgway. The losses forced the airline to suspend some routes and staff, even though Virgin gained key business travellers last year from British Airways as a result of the cabin crew strikes.
The Virgin figures are not directly comparably with airlines such as British Airways - which announced a record £531m loss in the year to last March - because Virgin is privately owned and, therefore, follows different accounting standards. But they show that the airline is as vulnerable as its peers to the pressures of a global downturn, let alone acts of God such as volcanic eruptions.
Although Virgin is expected to have returned to profitability in the latter stages of last year along with the worldwide recovery in airline finances as monitored by IATA, the losses will undoubtedly have been a sharp reminder to Sir Richard Branson and his Virgin management that airlines are probably not the best way to make money.
But, as Branson makes clear in his autobiography Losing My Virginity, he started the airline way back in 1984 because "the aviation industry was lifeless and dull ... air travel had lost the glamour that was associated with it in the 1950s...our general philosophy was that the best will always survive, so we innovated."
Premium Economy, Upper Class flat bed-seats, Limobikes ... they have all reinforced the airline's reputation for innovation, especially for business travellers. The question now is: can Virgin Atlantic continue to innovate as an independent carrier and stay ahead of the game?