The coronavirus could succeed in doing something that British Airways has been trying its hardest to do for 36 years: kill off Virgin Atlantic, the airline created by the swashbuckling entrepreneur Richard Branson.
The airline had been losing money for two years before the pandemic hit. Now it’s grounded and desperately seeking a bailout from the British government. But they rejected Branson’s first appeal and said he should consider “other options” before asking for state aid.
In a letter to the airline’s staff Branson said its survival was in doubt and he was offering his private Caribbean idyll, Necker Island, as collateral for a commercial loan, believed to be as much as half a billion pounds.
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The British government has taken a far tougher line with airlines than the Trump administration has with U.S. carriers. Instead of targeting specific industries for bailouts it put workers before owners and shareholders by guaranteeing all furloughed workers a minimum of 80 percent of their wages for three months, with an extension if needed.
In contrast, U.S. airlines share a $25 billion bailout despite the fact that over the last decade the five largest of them put 96 percent of the cash they generated to buy back their own shares, pushing up the share price and enriching their investors.
The British government—setting a tone highly unusual for the Conservative Party—is insisting that airlines should first turn to their investors for help before bringing out the begging bowl.
Branson has a net worth of around $4.7 billion. As well as offering his island as security for loans he offered just $100 million of his own money as part of a rescue package for the airline. Under pressure to do more, he said—causing some amazement—that his wealth did not mean he had “cash in a bank ready to withdraw.”
If Virgin Atlantic does go under, the loss will be deeply felt by the devoted cohort of the movie and media crowd who have long preferred its ultra-hip style in business class airplane cabins and lounges to that of its main competitor over the pond, British Airways.
And one person who agrees with the refusal to bail out Branson is Willie Walsh, the CEO of the International Airline Group, which owns British Airways. He is boasting that his airline has enough cash to survive and he was hardly likely to show mercy toward Virgin Atlantic.
Ever since Branson launched his airline in 1984 there has been a running feud between him and successive British Airways bosses. The basic branding of Virgin was explicitly to be the “not your grandfather’s airline”, i.e., BA.
Although Virgin began as a no-frills cheaper alternative flying a few flights out of London’s second airport, Gatwick, it eventually evolved into a full-service competitor pulling in business class passengers with the front of its cabins styled as Upper Class (combining first and business) and a similarly swish Heathrow lounge with its own direct access for those arriving in limos.
This was an audacious and direct attack on BA, who had previously enjoyed a hammerlock on the most lucrative business class route in the world, the North Atlantic, where it kept prices high.
What unfolded as a result of Branson’s challenge went way beyond normal ideas of airline competition. It became the most openly vitriolic feud in the airline business.
This culminated in 1993 when a British court ordered BA to pay $945,000 in damages and court costs of $3 million after the exposure of a sustained dirty tricks operation that included BA securing confidential business data from Virgin and running a covert media campaign to smear Branson and the airline.
That settlement did nothing to cool the mutual loathing. Branson continued to play the role of the underdog crusading on behalf of more competition and higher standards of service for the money, and for a while BA looked like a sore loser unable to up its game in response.
But, ironically, by the start of this year both Branson and BA were pursuing the same high-end passengers who generated the profits with very similar service and charging them stiff prices—for example, as much as $8,000 one-way for a business class seat.
The similarity was highlighted when Nick Ellis, branded by his website as The Points Guy (for his wizardry in maximizing the use frequent flier points) tested both airlines as they introduced a new jet to the route, the Airbus A350. For this airplane BA dropped its first class cabin and matched Virgin with three classes: business class, premium economy and coach.
Ellis still gave Virgin the edge in business class, on the basis of better food and also Virgin’s Heathrow Clubhouse lounge “one of the top options in the world.” But apart from that he said that both airlines were now able to “compete on a more level playing field with airlines around the world.”
The problem for Virgin now, in the midst of the greatest crisis in modern airline history, is that it’s really hard to make a financial case that an international airline can be run like a boutique brand. The scale is too small.
The same problem doomed Virgin America. Passengers loved its sassy style and service and it repeatedly won awards that placed it above other domestic carriers. But in the end the numbers didn’t make sense and it was swallowed by Alaska Airlines, which paid $2.6 billion for it in 2016 and then set about removing all traces of Virgin innovations.
In order to solve Virgin Atlantic’s weakness, in 2013 Branson sold 49 per cent to Delta in an effort to ride on the back of a full-scale operation. This introduced so-called code-sharing between the two airlines, in which their schedules were merged and jointly marketed.
It was a boost to Delta because they became more competitive over the Atlantic with American and United (American code-shares with BA) and they got some of the halo effect of Virgin’s hipness. And Delta passengers got to use Virgin lounges; unfortunately Virgin passengers in exchange got Delta lounges.
Then, in 2017, Branson gave up control of the airline. He sold 31 percent of it to Air France-KLM, leaving him with a 20 percent share, but he remained as chairman.
But even with all that help Virgin has had two years of losses. According to the Financial Times, at the end of 2018 it had just $600 million in cash with a debt of just under $2 billion.
Branson still has friends in powerful places. Airbus, Rolls Royce and Manchester Airport are all lobbying the Brit government on his behalf. They will suffer if the airline is allowed to fail, the engine and airplane makers because the Virgin fleet is a big user, and Manchester Airport because Virgin Atlantic provided them with a direct transatlantic service they needed.
Boris Johnson’s Conservative Party came to power largely on the basis of winning over former Labour Party voters in the North of England with the promise of making huge new infrastructure investments in the region. Manchester Airport’s ambitions to be a major hub were part of that. If Johnson now allows Virgin to disappear it will seem like he’s already reneging on that plan.
