Introduction

Virgin was founded in 1970 when Richard Branson established a business selling popular records by mail order. The first Virgin shop was opened in Oxford Street, London, in 1971. By the end of 1973, a record company, a music publishing company, a recording studio operation and an export company had been added. By the end of 1979, the Virgin record company had a growing presence in the UK and, predominantly on a licensing basis, in overseas markets. In 1984 Branson established his fledgling airline when Virgin Atlantic Airways and Virgin Cargo were launched. In 1985 Virgin Holidays a long haul tour operator was formed. In November 1986 the Virgin Group comprising the Music, Retail and Property and Communications divisions, was floated on the London Stock Exchange. The airline, clubs, holidays and aviation services remained part of a privately owned company called Voyager Group Limited. Branson was advised to keep the airline out of the float because of worries in the City that it was too risky a business and could endanger the success of the flotation. The share price performed badly, however, drifting from the 140p issue price to below 90p, and Virgin’s stay on the stock market was short lived. In October 1988 Branson organised a management buyout and the Virgin Group rejoined the Voyager Group as a privately owned company. Branson bought the shares back at the same price at which he originally floated the company. The main reason given by Branson for taking Virgin back into private ownership was that the City was undervaluing the share price. There were also differences between Virgin and some of the institutional shareholders over the company’s plan to invest in long-term projects, with Branson taking the view that the City was too focused on the short-run. Branson’s concern for long term is reflected in his vision for Virgin Atlantic: "We aim to be the best airline in the world by the year 2000, and we will sacrifice short-term profits to make sure we will,’ Richard Branson.

In 1989 Voyager Travel Holdings, the holding company for Virgin Atlantic Airways, sold 10 per cent of its equity to Seibu Saison International, one of Japan’s largest retail and travel groups, in return for an injection of £36m of equity and convertible loan capital. In 1992 the Virgin Music Group, at that time the world’s largest independent music business, was sold to Thorn-EMI for £560m. The money was earmarked for investment in other Virgin businesses such as the airline and Virgin record shops.

By 1993 the Virgin Group consisted of three wholly owned separate holding companies:

Virgin Retail Group - operating chain of megastores in the UK, Continental Europe, Australia and the Pacific, selling music, videos, games and other entertainment products.

Virgin Communications - controlling film, video and commercial radio investments; production services to the television industry; publishing, including books and computer games software.

Virgin Holdings and Virgin Travel Group - consisting of airline and other travel activities; clubs and hotels. Virgin Atlantic Airways is the main operating subsidiary of Voyager Travel Holdings, an intermediary holding company for a number of travel and leisure businesses.

There were over 100 operating companies controlled by the three holding companies doing business in 12 countries world-wide.

Richard Branson

Richard Branson was born in 1950, and educated at Stowe School, where he established a national magazine called Student at the age of sixteen. In 1970 he started selling LPs by mail order, choosing ‘Virgin’ as the name for the company in order to reflect his innocence of the ways of business. Branson eventually established a record company, the first release being Mike Oldfield’s Tubular Bells, which sold millions of copies. Over the years many top rated artists joined the Virgin label, to help make Virgin one of the top six record companies in the world.

Although never a member of the British business establishment, Branson became one of Britain’s best known entrepreneurs. This was in large measure due to his skills at self promotion, for example, being photographed sitting in the bath playing with a model aircraft at the time of the launch of Virgin Atlantic, and arriving at the inaugural press conference for the airline wearing a brown leather aviator’s jacket with matching helmet and goggles in the style of Biggles. He also gained much publicity from various world record breaking attempts. In 1986 his boat crossed the Atlantic in the fastest ever recorded time. A year later he made the fastest ever hot-air balloon crossing of the Atlantic. It was estimated that Virgin obtained £20m worth of exposure from this endeavour at a total cost of £500,000. In 1991 he made the fastest ever crossing of the Pacific Ocean, from Japan to Arctic Canada, in a hot-air balloon.

Branson has been described by critics as the archetypal ‘ hippie capitalist’, summarised by one journalist as ‘sowing the seeds of his fortune in a shrewd understanding of the mores and tastes of a hazy era of libertarian-idealism, and reaping the fruits in an era of pragmatic commercialism.’ (Mica Brown, The Sunday Times, 8 June 1986.) It is probably the case that Branson has always equally enjoyed eschewing convention (for instance he appears only rarely in a suit preferring instead to wear a woolly jumper) and making money. Branson has a personal fortune in excess of £800m with the Sunday Times ranking him as the eleventh richest person in Britain. Despite his apparent casual approach to business, Branson is a great believer in ‘protecting the downside.’ He says ‘An entrepreneur has also got to accept failure. If it works, great; if not, cut your losses quickly and move on to the next thing.’ But one man’s loss-maker can be somebody else’s success. ‘That’s the most important thing as an entrepreneur. Just because somebody has failed at something - like Freddie Laker - it doesn’t mean you should avoid it. If somebody else has been a pioneer, you can learn from their mistakes,’ (The Sunday Telegraph, 19-11-89). Branson has also recognised that ‘there is an element of luck as to whether you succeed at the end. But I’ve never been afraid of failure. If you don’t accept you may fail, you’ll never take any risks,’ (Investors Chronicle, 9-3-90). Branson puts a premium on conservative risk management. In a 1989 interview, he put his cautionary philosophy this way: ‘We go into each venture watching the downside very carefully; a key principle is to arrange the financing of group activities so that borrowings and liabilities are without recourse to group funds.’

While the Virgin name is almost synonymous with Richard Branson, he has maintained that the company could exist without him. ‘Virgin is one of the best delegated companies you could come across ....of the 35 managing directors, only one has ever left. They all have an enormous amount of freedom,’ (Investors Chronicle, 9-3-90). In fact, on a day-to-day basis Branson has little involvement in Virgin’s other businesses, but concentrates on the airline, not having been involved in running the music company since 1978.

The Development of Virgin Atlantic Airways

It was not Richard Branson’s idea that he should own an airline. The idea was brought to him by Randolph Fields, a 31 year old barrister, who owned a ‘paper’ airline, British Atlantic, which had applied for a license to fly Gatwick to Newark airport in New Jersey, which is close to New York City. Fields had applied for the right to fly on a route that had been vacant since the collapse of Laker Airways two years previously. Fields had examined the feasibility of a new transatlantic airline and had made enquiries about purchasing aircraft. Fields, however, had no money to establish the airline.

For Virgin to move into the airline business did not make sense. Branson knew nothing about airlines. all of the expertise at Virgin was based generally on the entertainment business and specifically the record industry. Virgin had grown by a process of related diversification and so a move into airlines would be a radical departure. there was also the risk that the large investments needed to establish a presence in the airline business could ultimately force Virgin to bankruptcy. Nevertheless, Branson was persuaded of the attractiveness of the proposition and within a week of meeting, Branson and Fields agreed to be partners.

Field’s original concept had been of a dedicated business class service between London and New York. But Branson was uneasy with the notion believing that it did not have the right image from Virgin’s point of view. Instead he preferred the idea of a cut-price airline, partly because discounting was what Virgin had been built on. the American cut-price airline People Express had recently become successfully established as a transatlantic carrier and research convinced Branson that the market was big enough to support two cut-price carriers. also Branson came to believe that an airline was not that far removed from the principle of expanding into related businesses. In running a cut-price operation the potential customers would be the same people, young, mobile, relatively affluent - who for years had been buying records by Virgin artists in Virgin record shops. More recently they would have been buying Virgin books and videos and watching Virgin Films.

While Branson was sold on the idea that Virgin should establish a cut-price airline his senior colleagues in the company were extremely hostile to the scheme. As the owner of 85 per cent of the shares in Virgin, however, they were powerless to stop Branson and he set out to establish an airline from scratch in the space of three to four months. Between March and June 1984, Branson worked harder than he had ever worked in his life before in order to get the airline up and flying.

Branson sought to avoid the mistakes made by Freddie Laker whose Laker Airways had gone out of business in late 1981. Laker had overextended himself by buying a relatively large number of aircraft with borrowed money. With very low profit margins Laker had to keep the planes flying to capacity in order to be able to meet the interest payments and repay the principal. This proved difficult to do. Laker was finally put out of business when the major transatlantic airlines, including British Airways, slashed their fares to match Laker’s. In October 1981, BA, PanAM and TWA agreed to cut their transatlantic fares by 66%. It drove Laker out of business. Three months later they put them up again. Subsequently Laker sued the big airlines in the American courts under the anti-trust laws for driving him out of business.

Very quickly Branson came to some firm decisions: the airline would combine an economy section with a first-class section at business-class prices; in order to carry freight as well as passengers the aircraft would be a 747; the aircraft should be leased; the leasing agreement should be protected against currency fluctuations.

In April 1984 the Civil Aviation Authority (CAA) granted Virgin the licence to fly the Gatwick - Newark route, and in June the American regulatory bodies granted permission to fly to the USA. The plane Virgin bought was a 747-200 series, with one previous owner, and only 19,000 recorded flying hours. On 22 June 1984 the inaugural flight of Virgin Atlantic’s Gatwick - Newark flight took off. The plane had only a few paying passengers, but was loaded with journalists, television crews, several celebrities and seventy crates of champagne. The maiden flight was warmly and comprehensively reported in the national press.

The agreement between Branson and Fields, drawn up in April 1984, gave Fields responsibility for the day-to-day running of the airline, while Branson considered the broader picture. Branson soon became disillusioned with Field’s ability to run his side of the operation and in September 1984, Virgin and Fields agreed that his contract should be terminated, with a sum of £125,000 paid in compensation. Fields remained a director and shareholder in Virgin Atlantic until an agreement was reached in 1985 to buy out his share holding for £1m, he was also given unlimited free travel on Virgin Atlantic. Branson now had total control of the airline.

Branson anticipated he would eventually face a price war with the major transatlantic carriers and in October 1984 his expectations were fulfilled when British Airways indicated their intention (which had to be approved by the government because BA was at that time in public ownership) to drop the price of their cheapest return ticket on the London - New York route to only £1 more than Virgin’s price. The same day, the other major transatlantic carriers, PanAm and TWA, announced that they would match the lower prices. Branson argued that while the Virgin price reflected his airline’s lower costs, the new fares proposed by the big airlines were not realistic, but predatory in nature and designed to put Virgin out of business. Branson’s attack on predatory pricing with the implied threat of suing BA under anti-trust laws in the US courts was profoundly worrying for the UK government in the run up to the privatisation of BA. The British government turned down the new fare proposals from the American operators, while the CAA rejected BA’s request. In the event this was not an effective measure. BA was allowed by the CAA to introduce a low-cost fare on the London - Boston route. PanAm which did not serve Boston, introduced a London - New York - Boston ticket, in order to fly to New York on the lower Boston fare. The result was that all New York fares could now be reduced, bringing them to a level only slightly above that of Virgin’s competing New York fare, and fares on the Boston route were adjusted to match the New York level. Branson learned quickly that the international airline business is a fiercely competitive arena. Branson also learned that big business and politics were intimately related.

By the end of 1984, Virgin Atlantic had withstood the predatory pricing moves of its competitors and had overcome an early loss. It had been running at over 90 per cent capacity through the peak season, and weathered the slow winter months to reach a profit of over £250,000. Encouraged by the success of the transatlantic venture, Virgin next introduced a short-haul service to Maastricht, in Holland, using a plane leased from British Island Airways. This also proved a success and Branson began to explore the possibility of flying to Dublin and Miami.

In the year to July 1988, Virgin Atlantic made record profits of £10m, a 104 per cent increase on the previous year. The success story had been achieved in little over four years. Virgin now had six 747s and expected the size of the fleet to double in the following two years, aiming to fly to 12 major cities around the world. In 1989 Virgin Atlantic Airways was named the third most profitable airline in the world by airline world. Asked how this success had been achieved Branson said, ‘It’s easier to follow a pioneer than be a pioneer. We learned from Freddie Laker’s mistakes. He created an airline just based on price, not quality. And he expanded too fast, and didn’t protect himself on currencies. So we decided to create the best airline in the world, not the biggest.’ Branson also indicated that he did not want to expand the airline too much. ‘As far as I am concerned in the airline business small is beautiful. Man’s instinct to expand and grow must be taken out on the other businesses,’

(Investors Chronicle, 9-3-90). Branson stresses: ‘Airlines should be kept small and personal. They should be run like private clubs. We try to manage ours from the bottom up,’ (The Observer, 21-5-89).

Competitive Developments

The Virgin Atlantic route structure, as of 1994, is shown in Figure 1, below.

Figure1: Virgin Atlantic’s Route Structure (1994)

Originally Virgin Atlantic offered two classes of service, Upper Class and Economy Class, in order to attract two kinds of customers: those in search of cheap flights, and

businessmen with large expense accounts. Business travellers are notoriously indifferent to bargain fares. Surveys show that they are swayed much more in their choice of airline and flight by brand awareness, speed, safety and the timings of flights. They also have a surprising amount of freedom in choosing an airline, with most being unfettered by corporate travel policies. Virgin boasted an ‘upper class’ (rather than a first class) which won a large number of awards. During 1993, Virgin introduced its own answer to pressure on business travel budgets - Mid Class, which offers a separate cabin for full-fare economy passengers, with bigger seats and better check-in facilities, and which straddles First and Business.

Virgin’s two short haul routes, from London to Maastricht and from London to Dublin, were abandoned a few years after being established. The withdrawal was not because of failure, but because Virgin decided as a matter of group policy that they had to either concentrate on short haul or long haul. In the end Virgin decided to become the alternative long haul airline to British Airways. Apart from the short haul business being quite marginal, with strong competition from other domestic airlines profits were never going to be great, it was also somewhat muddling from an image point of view. While flying 747 jets on long haul routes, Virgin were at the same time flying a propeller craft to Ireland or Holland. Virgin therefore decided to fly long haul and to have no short haul at all.

In March 1990, Virgin announced a ‘frequent flier’ bonus campaign, whereby free flights were offered on Virgin Atlantic, to buyers of certain products and services who built up points depending on the size and frequency of the purchase. The save and collect scheme, called Virgin Freeway, was launched in response to British Airways’ Air Miles initiative started 16 months previously.

In the summer of 1991, following the success of Virgin in winning the right to fly into Heathrow and add routes to the Tokyo service, Virgin applied for permission to fly from London to Johannesburg. The route was reportedly a very profitable one for BA and South African Airways who shared it. Lord King, the chairman of BA was reported as being vexed, and amused, by Branson’s ability to convince the authorities that his company deserved the right to challenge BA in its heartland. ‘Richard Branson is a pirate - and good luck to him,’ Lord King (evening Standard, 12-91). BA’s supporters were reported as saying that Branson could fail by overexpanding and would be better quality computer systems to handle large numbers of reservations. Branson countered by stating that Virgin would not expand its services beyond long haul flights to 12 cities services by 20 Boeing 747s, that Virgin had perfectly good computers, and chose to put emphasis on quality of service, adding ‘Anyone who counts the number of passengers on BA and calls it "the world’s favourite airline" presumably rates the M25 Britain’s favourite motorway,’ (Evening Standard, 12-7-91).

In an interview in July 1991, Branson said that Virgin wanted to fly long haul to the 12 most exciting cities in the world: Los Angeles, Miami, Orlando, New York, Boston, Tokyo, San Francisco, Johannesburg, Singapore, Sydney, Washington and Chicago. Branson also emphasised that Virgin put service first, rather than computerised operations. ‘Staff loyalty can only be guaranteed for an airline operation up to a certain size,’ (Evening Standard, 15-7-91). Branson also outlined his opposition to mega-leaps and belief in organic growth. Indicating that he was glad he parted company with the City, Branson Said that attitudes of Japanese investors are more to his taste, ‘they invest for the long haul and really care for the attitudes of employees.’ From this position Branson claims to have taken a very Japanese approach to doing business: going for growth, quality and creating valuable assets. And doing it if necessary at the expense of short-term profits. For example, in 1990 Virgin decided to take 50 seats out of every aircraft to give passengers much more leg-room than they get with any of the competitors. This decision was made although it was known it would cost the airline up to £12 million of short-term profits. It was done, however, because it was felt that in the long term, the airline would gain business by giving the best service. Branson has repeatedly emphasised that the luxury of being private is that long-term thinking overrules short-termism.

Although Virgin makes great play of having the second largest long haul airline in the UK, there are only two long haul airlines in the UK, and for all the publicity it attracts, by size, Virgin is tiny beside the giant BA. It has just sixteen aircraft to BA’s 230, and flies 144 fewer routes than ‘the world’s favourite airline.’ That makes it no less of a threat however, to BA’s profitability. Airline profits are made at the margin: the income from most of the seats that fill an aircraft goes towards covering the immense costs of running a network, but it is the last few seats sold that produce all the profit. Also a few popular routes, such as London to New York, subsidise many others. Hence Virgin’s tactic of plying the most profitable routes between big cities costs BA a lot of money. Analysts calculate that if Virgin were to go out of business, and its customer split between remaining airlines on the basis of market share, BA would make £150m extra profit. As Virgin expands, it also faces the challenge of setting up more of its own service operations, adding to its fixed cost base, making it even more important to fill its planes with revenue-earning passengers. Virgin therefore remains highly exposed.

The big question is whether Branson can transform Virgin from a transatlantic niche airline into a global player, albeit with only 16 or so aircraft. In a way Branson has had it easy so far. The airline business has changed beyond recognition since 1984 and is likely to go on changing. Deregulation in America and Britain has hit hard - increased competition means there are now too many carriers chasing too few passengers. Airline analysts believe power could polarise into the hands of seven or eight ‘mega-carriers’. The changes affected Britain with the arrival of American and United, the world’s biggest airlines, at Heathrow, driving down transatlantic fares to an all time low. Return tickets between London and New York could be picked up for less than in Freddie Laker’s day. For a small airline like Virgin, it is likely to be a very tough fight. While the bigger airlines give a niche player like Virgin Atlantic more scope and are perhaps more clumsy, they are also powerful and have deep pockets.

The cost of acquiring aircraft is hefty. It would cost about $1m a month to buy a new plane at the top end of Boeing’s range. With a depressed market Virgin could pick up a second-hand aircraft, but this would still cost about $5000,000 a month even before it got into the air. Virgin’s cost levels are extremely competitive and estimates indicate that they are below BA’s across the Atlantic, with BA’s being below American and United. Virgin’s low costs make the airline a sharp competitor. Virgin’s wages are relatively low but nevertheless the airline is inundated by people wanting to work for it. Branson flies with the airline at least once a month, working with the cabin crew, and believes in making the work fun, in the belief that high staff morale produces good service. This is confirmed in the independent surveys of service quality which give Virgin top ratings.

Apart from a competitive cost structure Virgin’s principal strength - and a major reason why he should not be compared with Laker - is that he has built up a loyal following among business flyers for Virgin’s ‘Upper Class’ service. Virgin prides itself on providing a first-class service for a business-class fare. That makes it a bigger threat than its size would suggest.

In April 1989 Virgin obtained a licence to fly the London-Tokyo route. For 40 years this route had been operated only by Japan Air Lines (JAL) and BA, interrupted briefly by British Caledonian, which served the route for a year before its demise. BA which opposed the Virgin application, was as nervous as JAL about Branson getting the Tokyo route, the 6,218 flight miles between the two capitals are amongst the most profitable in the world. Branson said ‘It’s not right that JAL and BA have been able to fix prices against the interests of the public,’ (Daily Telegraph, 10-4-89). Branson appointed Akira Nakamura formerly with Japan Air Lines to head the Tokyo operation. On the inaugural flight from Gatwick to Tokyo Branson commented on his publicity stunts: ‘I am competing with the likes of TWA, Pan Am and BA. They can afford to spend millions on advertising. I compete by getting my product across to the public via as much publicity as possible.’ According to Branson ‘British Airways forcefully opposed Virgin’s application to fly to Tokyo for a full 10 months. We were forced to delay our original public hearing at the CAA. British Airways only withdrew their objection at the last minute and in the face of almost certain defeat at the public hearing.’ (The Observer, 4-6-89).

In January 1991 the Civil Aviation Authority stripped BA of four of its take-off and landing rights at Tokyo’s Narita airport and handed them to Virgin Atlantic. The CAA said it had decided to award Virgin Atlantic extra services to the airport at the expense of BA to safeguard competition and consumer choice. The decision meant that BA was allowed only 26 flights a week in and out of Tokyo against the 30 it previously held. The four extra flights given to Virgin Atlantic enabled it to increase its Gatwick-Narita round trips from four to six weeks.

In April 1993, Virgin Atlantic launched its first European route with a daily scheduled service from Gatwick to Athens. This undercut the BA-Olympus duopoly our of Heathrow with lower economy and business fares. This was just the first of many new ventures the airline was planning, with Virgin being poised to double its fleet and its routes over the following two to three years. Virgin’s aim was to fly all the main 12 long-haul business routes from London including San Francisco, Singapore, Johannesburg, Sydney, Washington, Chicago and Hong Kong. While it already had licences for those routes, it did not have the slots out of Heathrow. While Virgin did not believe Stanstead and Gatwick airports were options for long-haul routes, it was happy to use Gatwick for its new European network, which it regarded as a separate development from Virgin Atlantic, to be managed in joint partnership with local European partners. Virgin launched the Athens route with the private Greek airline South East European Airlines, applied for more Gatwick slots and held discussions with potential French partners about the chances of invading that two-airline market. Branson believes in different brands, and the colour scheme of Virgin Europe was to be different from Virgin Atlantic’s.

In October 1993, Branson announced that he had completed a private deal to buy out Virgin Atlantic’s only outside shareholder, as part of a plan to expand the company. Branson’s decision to spend about £45m to buy back the 10% shareholding held by the Japanese group Seibu Saison, gave him total control. Branson decided to buy them out after the group sought to exercise its option to increase its stake to 20%. The buy-out was the first significant deal Branson had financed from the £560m he received for the sale of Virgin’s music arm to Thorn EMI in 1992. Branson indicated that the remainder of a £115m expansion package would be used to recruit 500 new staff and equip six aircraft for the airline’s new long distance routes, beginning in early 1994 with Hong Kong and San Francisco.

In January 1994 Virgin began to operate a new jet passenger service to Dublin from London’s City airport. Virgin teamed up with Cityjet, a new company based in Dublin, to offer flights using the Virgin name and livery under a franchise agreement. The London-to-Dublin route, which attracts 2.5m passengers a year, is the busiest European route after London-to-Paris, which has 3.1m passengers. Branson said that if the service was successful he would consider offering flights to other European cities, such as Paris and Brussels.

In 1994, Virgin raised the stakes in the battle for transatlantic passengers by announcing a link-up with the third largest US carrier, Delta Air Lines. The deal, which gave Virgin access to 200 US cities and gave Delta an entry to London’s Heathrow Airport, stepped up the pressure on BA, the largest transatlantic carrier. the Virgin-Delta deal could lead to a long-term shareholding alliance between the two companies. The main terms of the deal involve ‘code sharing’ (through ticketing) arrangements between the two airlines on some Virgin flights from eight US airports and London, and the purchase of ‘blocked space’ be Delta on those flights. (BA already had its own code-sharing arrangement with American carrier USAir.) It was anticipated that Virgin would benefit by around £100m per year from the blocked space arrangements. In return Virgin would be able to sell tickets at cheap rates to passengers wishing to travel on Delta within the US from flights originating in London, and would share Delta terminals and other ground facilities. Branson said the deal would enable Virgin to remain independent and competitive in the face of an increasing number of global alliances in the airline industry. The deal provided Delta with access to Heathrow airport for the first time and teamed Virgin with a major US carrier, which already had partnerships with two other niche players, Swissair and Singapore Airlines. Industry analysts said the deal was good for Virgin. ‘It gets greater access to the US, while Delta pays for access to Heathrow. BA should be worried because Virgin has not made the mistakes that so many small British airlines have made,’ one commented. The share of the UK/US airmarket is shown in Table 1 below.

Table 1: Market Share for the Atlantic Route - 1994

Company % Share

British Airways 42

American 15

Virgin 14

United 10

Delta 6

Northwest 5

Continental 5

Others 3

Source: Industry Estimates (Guardian, 13-4-94)

During the recession at the beginning of the 1990s, Branson took advantage of the depressed state of the market to buy new Airbus A340a (a 282 seat long range four engine jet) and Boeing 747-400s at lower prices than airlines were paying towards the end of the 1980s. Both types will have every seat equipped with Virgin’s interactive 14-channel in-flight entertainment system. The two plane types enhance Virgin’s flexibility. The airline’s basic strategy is to fly on those routes out of London where the traffic would support an extra daily 747 service. However this would confine Virgin’s future growth to 15 or 16 routes. The smaller A340 opens up a much wider world and is useful, for instance in developing a new route such as that to Hong Kong. Branson has identified China and Hong Kong as high growth points over the next 20 years and is keen for Virgin to have a presence there. He has indicated that he wants Virgin to fly to Shanghai as soon as possible and is hoping for airport slots in Malaysia and Thailand by 2996. Branson has admitted that expansion on this scale is a challenge to his determination to stop Virgin becoming too big. So in a bid to maintain the ‘small and friendly’ style, Branson says Virgin’s 2,000 plus cabin staff are to be divided into 15 teams of 150, with each team flying regularly with each other. Furthermore, if the plans for Far Eastern expansion are fulfilled Branson is

prepared to hive off another airline, Virgin Pacific, from Virgin Atlantic and manage it separately. This fear of organisational obesity has largely kept Branson clear of labour-intensive short-haul flying in Europe, but franchising routes, as with the Athens and Dublin services, may be the way to opening more of them and the creation of Virgin Europe. However, cracking the BA-Cathay Pacific duoply that dominates London to Hong Kong is the current prime target. The fact that the opposition is so well entrenched, and perhaps rather complacent encourages Branson ‘You have had identical fares throughout for a number of years. The competition will be good for the consumer,’he says (The Sunday Times, 6-2-94).

Dirty Tricks

In January 1991, Branson accused BA of behaving uncompetitivley by trying to damage his airline’s long-distance services form London Gatwick. Virgin filed a formal complaint against BA with the European Commission, and indicated that it was considering launching an anti-trust claim in the USA against BA. Branson accused BA of operating a ‘predatory pricing policy’ on transatlantic routes from Gatwick, and claimed that BA was breaching article 86 of the Treaty of Rome by loading thousands of tickets for Gatwick flights into bucket shops at loss-making prices. Citing this as an example of BA’s deliberate predatory action Branson argued that Virgin was not scared of competition but that it must be fair. BA rejected Branson’s allegations, arguing that it was operating in a deregulated market. A spokesman for BA said , ‘Our fares policy is designed for the comfort of consumers and not competitors.’ Adding ’We do not adopt predatory pricing. We have special offers at certain times. Branson’s allegations are, as usual, over the top to attract publicity. If he chooses to take legal action we shall defend ourselves vigorously. Mr. Branson would do better to run his own business efficiently rather than attack the competition.’

Also in January 1991, Branson started libel proceedings against BA over allegations about Virgin’s ‘reliability record.’ The remarks were made in an official BA press statement responding to the moves by Branson making a formal complaint of unfair competition to the European Commission. A Virgin spokesman said they would be surprised if the statement had been issued without prior consultation with Lord King, BA’s 73 year old chair man.

The issue that really set Virgin Atlantic and BA against each other was about who should fly form Heathrow, the businessman’s airport, the international hub, and the money spinner for airlines. On January 22 1991, the Civil Aviation Authority did what BA had long dreaded, and Virgin Atlantic saw as the first step towards an era of true competition and the age of monopoly, by advising the Transport Secretary, to change traffic distribution rights at Heathrow. The theory ran that by allowing Virgin Atlantic to run its services to the US from there, dominant BA would be subjected to genuine competition, bringing higher quality, competitive fares and a better deal for consumers. The CAA’s move, which came less than a fortnight after it had stripped BA of four weekly slots for landing and take-off at Tokyo, emphasised that, in the CAA’s view, slots belonged to Britain - not any one British airline. While the news delighted Virgin, BA which controlled 39% of slots at Heathrow and saw the extent of its historic dominance threatened, was outraged. Flying from Heathrow, with the advantages over Gatwick of being nearer central London and of longer runway allowing heavier loads , would mean a 15 % increase in yield for Virgin, which Branson promised to pass on in cheaper fares.

BA argued that to change the regulatory framework and allow Virgin to muscle in on its routes would be to change the rules under which BA was privatised , and, therefore, the understanding under which shareholders invested. Only by protecting BA’s rights could it compete with giant counterparts in the US and across the world. Lord King also stressed that the likes of Virgin were not competitors but poor substitutes.

In the event Heathrow was open to all airlines from July 1991 and Virgin was given 40 slots. On the morning of July 1, 1991, Branson dressed as a pirate was photographed at the entrance to Heathrow airport beside a huge model of Concorde - the symbol that tells everyone arriving at Heathrow that the busiest airport in the world is the home of BA - after having had the tail-fin of the aircraft covered with the Virgin logo, together with hastily erected signboards proclaiming Heathrow as ‘Virgin Territory’ and obscuring BA’s logo. While designed to annoy BA executives the stunt also generated a great deal of publicity for Virgin. Branson said, ‘Today is the second most exciting day in the history of Virgin. The first was when we launched the airline in 1984,’(Financial Times, 2-7-91).

The arrival of Virgin and other international carriers at Heathrow intensified competition for BA as its home base . BA operated about 150 weekly flights for the UK to the US with the North Atlantic accounting for around one third of BA’s revenues. The UK governments’ decision to abolish the regulations limiting the number of carriers at Heathrow enabled several airlines, previously forced to fly out of Gatwick, to switch some of their services to Heathrow. The negotiation of a bilateral aviation agreement between the UK and the US in 1991 also cleared the way for American Airlines and United Airlines, tow of the strongest US carriers, to replace TWA and Pan American, two of the weakest, at Heathrow. The opening of Heathrow clearly angered Lord King. In an interview in The Observer, he accused the Conservative Government of betraying its principles and the thousands if investors whom Margaret Thatcher had encouraged to buy BA shares at the time of privatisation. He claimed that ‘£250m of the revenue lost to our public shareholders will go straight into Richard’s private pocket.’ In his diary Branson noted that BA appeared to have something in common with the Soviet Union: ’Both seem to be having problems adjusting to a free market economy.’

In November 1991, Virgin Atlantic announced it was preparing a list of complaints alleging anti-competitive behaviour by BA, which Branson intended sending to the European Commission the Civil Aviation Authority and the Department of Transport. Branson accused BA of a ‘dirty tricks campaign,’ orchestrated to discredit Virgin’s public standing. The claims were denied by BA, which insisted that it was too busy coping with the giant US airlines and that Branson, who had only a handful of routes , was a little more than a mere irritation.

Documents setting out the complaints and lodged with the European Commission, were the culmination of seven years’ sniping between BA and Virgin during which time Virgin repeatedly claimed that BA was undermining its position. In its dossier to the EC, Virgin claimed that BA was abusing its position as a majority carrier, potentially undermining the EC’s objective of building up airline competition. Virgin claimed that BA had been trying to squeeze it out of the market ‘through predatory pricing together with its other exclusionary and abusive conduct. ’BA was alleged to have taken a series of steps in the provision of air transport and maintenance services aimed at strengthening its dominant position. According to the documents BA established a special committee early in 1990 as it became clear Virgin was becoming a commercial threat. In the autumn of the same year, the committee, it was claimed, was operating in such secrecy that ‘instructions were issued within BA for documentation relating to the committee to be destroyed.’ Virgin also claimed BA flouted aviation industry conventions by ‘acting in an abusive and exclusionary manner,’ denying it full access to maintenance facilities, which was a ‘further breach of a dominant position in breach of article 86 of the Treaty of Rome.’ Prior to BA’s merger with British Caledonian in early 1988, BCal helped maintain Virgin aircraft. According to Virgin immediately following the BA/BCal merger, BA reviewed its combined maintenance services and introduced various new policies including higher levels of charges that Virgin now had to pay. The Virgin document claimed that ‘the terms of BA’s proposals for maintenance to Virgin were tantamount to a refusal to continue to supply such services in view of the unjustified increase in BA’s proposed charges for the provision of more limited maintenance services than those previously supplied by BCal.’ Virgin considered BA’s effective refusal to supply was an abuse of BA’s dominant position on the market. The Virgin document also added that fare levels set by BA ‘appears to be selectively aimed at Virgin, which would constitute an unfair commercial practice by a dominant undertaking intended to eliminate or at least discipline Virgin, which is a much smaller competitor. Such action is prohibited by Article 86 as an abuse of a dominant market position.’ BA denied any unfair campaign against its rivals.

In December 1991, in an appeal over the head of BA chairman Lord King, Branson wrote directly to the group’s non-executive directors demanding an investigation into the allegations that BA had set up an internal task force specifically too ‘discredit Virgin Atlantic and damage its business.’ Branson was reported as saying that he compared the BA campaign with the one which allegedly contributed to the collapse of Sir Freddie Laker’s airline business some ten years previously. Adding that ‘BA would like there to be only one long haul carrier in this country,’ (Evening Standard, 12-12-91). Branson said that he had written to the non-executive directors because previous contacts had convinced him that writing to Lord King would not have achieved anything. Branson’s letter to the non-executive directors stated, ‘it is as if these decisions by regulators, to enable Virgin to expand, have engendered such fear and anger, that normal and acceptable standards of commercial behaviour have been abandoned by BA.’ In an appendix to the letter Branson highlighted the way BA allegedly manipulated the press to damage Virgin’s image. Branson claimed that Brian Basham, a well known City public relations man, ‘has been given a brief to try to discredit both the Virgin group of companies and myself.’ According to the Virgin allegations, Basham had been telephoning journalists and ‘seeking to circulate misleading, false and damaging information.’ It transpired that the strategy of the press campaign against Branson was to paint Virgin as a dangerously overstretched airline, headed by an irrational eccentric who endulged in a range of physically and morally dangerous pursuits. This combination of defects could cause investors to lose confidence in Branson. By discrediting him in this way, they would prevent him from expanding his airline taking more of BA’s profits.

Branson also claimed that he had been told by two separate sources that BA had employed private investigators to tail him and that the cars of Virgin Atlantic’s managing director and chief press officer had been broken into five times. Branson called on BA to confirm that it was not behind such conduct. Sir Michael Angus, Chairman of Unilever and non-executive deputy chairman of BA, replied that it would be ‘wholly inappropriate’ for the non-executive directors to respond to the allegations and that they should be directed to the company itself.

In January 1993, Branson successfully sued BA for libel over an alleged smear campaign. Virgin argued that Lord King had accused Branson of fabricating details of a dirty tricks war waged against Virgin by BA in an attempt to gain publicity. Virgin’s victory in the high court marked an embarrassing climb down for Lord King. Legal documents showed that BA obtained confidential computer information about Virgin passengers and flights and mounted a massive counter-espionage operation because they feared Branson was spying on them. Branson also claimed that BA poached passengers, sometimes as they queued to buy Virgin Atlantic tickets at New York’s JFK airport.

BA was forced to make a humbling, unqualified apology to Virgin as part of a high court settlement that included the payment of £610,000 in damages (£500,00 to Branson and £110,000 to the airline, subsequently Branson used the £500,00 to pay staff a bonus for their support, the 2,800 employees received about £178.50p each), and about £3m in costs. BA admitted and apologised for libel against Richard Branson, and described some of the ‘dirty tricks’ perpetuated by its employees against Virgin as ‘regrettable.’ Both British Airways and Lord King apologised unreservedly for the injury caused to the reputation and feelings of Richard Branson and Virgin Atlantic by the articles and letters which they published, ’the BA statement said in part.

There appeared to be extraordinary corporate paranoia at the top of BA. Press investigations revealed that:

BA obtained confidential computer information about Virgin passengers and flights. In autumn 1990, during the lean months for the air travel industry of the Gulf Crisis and the start of the recession, a team of BA computer operators was told to access information on Virgin’s passengers and flights. The commercially confidential information, obtained via the BA booking system (BABS), allowed BA to monitor the number of passengers on each Virgin flight, their class of seats and details of lucrative corporate accounts. BA staff were able to acquire detailed information on which of Virgin’s transatlantic routes were profitable, how many passengers they were carrying and what class they flew in. Disguised by the name Helpline, the Gatwick operation was shrouded in secrecy. Special combination locks were fitted to the Helpline office. Information on Virgin was logged at the end of each shift and sent in sealed envelopes to a BA manager. Soon after the secret operation was set up, Virgin passengers were cold-called at home. They were offered free supplementary tickets, flights on Concord and even triple air miles to switch to BA flights. BA staff were instructed to impersonate Virgin employees to obtain more detailed data on their rivals’ flights. Some solicited Virgin passengers in Gatwick’s south terminal where BA does not operate persuading them to switch to BA’s flights. A similar team, nicknamed The Hunters, operated from BA’s offices at Heathrow

Lord King and Sir Colin Marshall. BA’s chief executive, sanctioned an aggressive counter-espionage operation because they feared Branson was spying on them

BA paid security advisors more than £200,000 for the counter-espionage campaign, code named Covent Garden.

At the operational level the counter-espionage campaign involved the theft of documents and snooping on journalists and BA’s own senior staff.

Brian Basham, a top City public affairs consultant was hired by BA, to run a negative press campaign against Branson, code named ‘Operation Barbara.’

After the high court apology Branson said that unless action was taken by BA to compensate Virgin for the ‘incalculable damage’ that had been done to Virgin Atlantic, he would instigate anti-trust proceedings and investigations against senior BA executives in the USA. Such action would mean that his £3.6m libel win over BA would be only the beginning. Only BA’s sacrifice of lucrative take-off slots to prime international destinations such as San Francisco, Johannesburg and Tokyo would prevent a renewed legal attack. BA had offered to pay Virgin £9m in compensation on the understanding that neither side referred to the dirty tricks saga in the future, Branson rejected this, claiming that it amounted to a gagging order on him and his airline.

At the beginning on March 1993, Virgin Atlantic Airways launched high court proceedings against BA following the failure of the two airlines to settle their long-running ‘dirty tricks’ dispute. Branson declared that the airlines were now ‘at war.’ Virgin’s writ against BA alleged copyright infringement, breach of confidence and misuse of confidential information. The high court action related to Virgin’s allegations that BA accessed Virgin passenger details and information as well as data concerning aircraft and load factors relating to flights and associated passenger travel services. Virgin said the proceedings were only the first of several other legal and regulatory steps it proposed taking against BA in various jurisdictions including the US and the European Community.

In April 1993, the battle between BA and Virgin Atlantic flared up again with Branson challenging the highest level of BA management to resign after renewed allegations in a television documentary that top BA directors were aware of their airline’s ‘dirty tricks’ campaign against Virgin. ‘They should either test the programme in court or they should consider their position,’ Branson said (Financial Times, 28-4-93).

In October 1993, Virgin announced its decision to file an anti-trust action in the US courts against BA, alleging that the rival airline was distorting competition on transatlantic flights by abusing its position at Heathrow airport. Virgin Atlantic was seeking compensation of up to $975m through the US lawsuit. The case was likely to take at least three and a half years to get to court. The law suit alleges that BA had abused and continued to abuse the monopoly power which it acquired while still in state ownership.

Two other actions were launched during 1993. One relating to breach of copyright and misuse of Virgin’s computer-held passenger lists, was expected to go to the high court in May, 1995. The second complaint, to the European Union, centres on the financial incentives and discounts offered by BA to travel agents and large companies. It is being examined by competition authorities in Brussels.

Lord King, suffered a bitter blow to his reputation in the twilight of an exceptional career. He was set to retire in June 1993, but did so shortly after the libel settlement of February 1993, moving to the honorary post of president of BA. This produced a succession of other changes, with Sir Colin Marshall succeeding King as chairman of BA, and Robert Ayling becoming managing director. King’s resignation marked an inglorious end to one of the most remarkable corporate success stories of the 1980s. Lord King had transformed BA from a loss-making nationalised flag carrier into the world’s most profitable airline, employing 50,000 people across the globe. King later admitted that Branson’s appearance had blinded him to the threat, he confided to a friend: ‘If Richard Branson had worn a pair a steel-rimmed glasses, a double-breasted suit and shaved off his beard, I would have taken him seriously. As it was, I couldn’t.’

Review Questions

Questions for Review:

 

How do you think that a) the non-executive directors of BA, b) the institutional shareholders of BA, reacted to the ‘dirty tricks’ campaign against Virgin Atlantic ? Should they have done anything differently ? Should the top management of BA have resigned and left the company ?

Assume that you are a middle manager with BA at the time of the ‘dirty tricks’ campaign against Virgin Atlantic, and that you have been asked to perform a task that you believed to be ethically wrong. List the possible responses to this ethical dilemma and the pros and cons of the responses. How do you think you would have actually responded?

After you have thought through these questions and formed your own views about the ethical issues that this case highlights, then go to the Virgin/BA slide show presentation.