Branson: Behind the Mask (16 page)

Ever since he had launched Virgin Atlantic, Branson had behaved as if his airline’s survival and profits depended upon
humiliating BA. Among his notable successes was the filibustering campaign in 1996 to prevent BA from forging an alliance with American Airlines, or code sharing, in order to allow seamless interconnections for their passengers between the two airlines anywhere in the world. BA’s major rivals in Europe were all grouped into either the Star or SkyTeam global alliances, and Branson lobbied hard in London and Washington to prevent a similar pact based at Heathrow. Consumers, he argued, would be harmed. ‘No way BA/AA,’ was the winning slogan daubed on the fuselages of Virgin Atlantic planes.

While Branson celebrated victory, transatlantic travellers from Britain were paying higher fares than those flying from Amsterdam and elsewhere in Europe. Although Julie Southern, Virgin Atlantic’s commercial manager, insisted, ‘We have always provided competition for British Airways. That is Richard’s
rai
son
d’être
,’
in reality he opposed genuine competition on flights between America and Britain. His self-interest was to protect Virgin’s privileged access to Heathrow and compel BA to operate at a disadvantage against the other major European airlines.

In 2008, Branson’s bulwark disappeared. The Open Skies Agreement between the EU and the American government allowed any airline to fly between Europe and America. Overnight, the agreements that had previously restricted flights between Heathrow and America to two American and two British airlines (including Virgin) was ended. BA’s fate depended on an alliance with American Airlines. ‘It’ll be the end of Branson within minutes of his rivals announcing their intention to reapply for permission to forge an alliance,’ predicted a BA executive in September 2008.

BA and AA did reapply for permission to merge their booking systems. Their putative code share on nearly 5,000 flights would cover about 20 per cent of all transatlantic flights, compared with the Star Alliance’s control of 41 per cent and SkyTeam’s 29
per cent. The statistics were irrelevant to Branson. ‘I’ll fight this to the end,’ he said. Under the banner of free competition and the consumers’ interest, Branson attacked ‘a monster monopoly. It’s like allowing Coca-Cola and Pepsi to merge.’ He pledged to spend ‘millions’ to prevent a tie-up that would ‘crucify’ the public. He did not, however, possess ‘millions’ in a war chest. In private, he admitted that ‘the landscape is much tougher’.

Denying any self-interest, he appealed as ‘the people’s champion’ to President Obama to stop ‘a monopoly, or near monopoly, on some of the busiest and most profitable routes from the US to Europe causing an unprecedented loss to consumers’. In his letter to a man whom he had recently described as ‘the best president America has ever had’, Branson urged that the proposed alliance be blocked as it was harmful to consumers. The two airlines combined, Branson told the president, would control 63 per cent of all transatlantic flights between Britain and America. Other statistics showed it would be 44 per cent.

Willie Walsh’s first reaction was polite. BA’s chief executive restrained himself. But as Branson’s campaign developed, Walsh accused his critic of sounding like a ‘cracked record’ and let it be known that he would ‘put the boot into Branson for ducking questions’. Branson, said Walsh, ‘should wake up to the economic realities of the business’.

One reality was Virgin’s size. Branson’s airline leased thirty-eight aircraft flying on thirty routes, while BA dispatched 248 aircraft on 150 routes; BA had 41 per cent of the slots at Heathrow compared to Virgin’s 5 per cent; and Virgin Atlantic ranked as the tenth-largest carrier across the Atlantic.

Walsh also questioned Branson’s sincerity. In October 2009, Branson criticised US airlines for levying a new $10 fee for baggage. ‘Airlines’, he said, ‘risked alienating travellers by adding so many charges on top of ticket prices. The extra fees are not a good idea.’ Branson’s condemnation was odd since seven months
earlier Virgin America had imposed a $15 fee for checked-in bags. The double standards coincided with the approaching trial of the four BA executives who had allegedly conspired to fix the Passenger Fuel Surcharge with Branson’s team. The bitterness among the BA management over Branson’s denouncement to the Department of Justice had not disappeared and raised questions about his understanding of the airline business.

Branson acknowledged a major error. For years he had single-mindedly focused on expanding Virgin Atlantic, ridiculing the low-cost airlines. ‘EasyJet’s a terrible idea,’ Steve Ridgway, the chief executive of Virgin Atlantic, had scoffed during the 1990s, adding, ‘Ryanair is rubbish.’ Branson echoed that opinion. Since then, Ryanair had become more valuable than BA, and easyJet had expanded to become a profitable challenger to BA and all the other European airlines.

The miscalculation exposed a central flaw within Branson’s empire. He prided himself on delegation but avoided reading complicated documents, was untrained in finance and copied old ideas which had failed elsewhere. Virgin Mobile had been one of the exceptions: renting network capacity was a genuinely novel concept. By contrast, his airline businesses all relied on an outdated and inflexible financial model. Both Ridgway and Branson had underestimated the potential of the internet. Neither had understood Michael Ryan’s genius in creating new routes, new airports and the model for Ryanair’s low fares: he priced the aircraft’s seats on the assumption that they would all be sold. Accordingly, Ryanair’s prices were low. Virgin Atlantic could not break its habit of slavishly shadowing BA.

Belatedly, Branson had tried to replicate the enormous profits reaped by cut-price flights across Europe by expanding Virgin Express, a troubled airline based in Brussels. ‘I am absolutely delighted’, he exclaimed in 2002, ‘that the Virgin Express product will be at the front of the wave of change that will shortly
sweep over German aviation.’ Twenty Virgin aircraft were to be based in Cologne. Then he abandoned the plan and, once again cursed by falling ticket sales and unreliable aircraft, he dashed for the exit in 2004 by selling Virgin Express to a Belgian rival. The failed venture had cost Branson about $100 million and weakened Virgin Atlantic. Instead of dismissing Ridgway for failing to devise a profitable budget airline, Branson showered praise on the hapless executive. He had one remaining lifeline to save Virgin Atlantic’s independence.

Michael Bishop, the owner of BMI, a British airline serving Europe, wanted gradually to sell his business after 2002 and retire. BMI owned 11 per cent of the slots at Heathrow and supplied about a quarter of Virgin Atlantic’s transatlantic traffic through code sharing. If Branson bought BMI, Virgin Atlantic would become a credible challenger to BA, easyjet and Ryanair. For several years, Branson had discussed a formal alliance with Bishop, first as a merger and then an outright purchase by Virgin. In Bishop’s opinion, their negotiations collapsed after Branson reneged on their oral agreements and tried to cut the purchase price. Bishop criticised Branson’s style and suspected at the end of 2008 that his finances were stretched. Even Branson admitted that if HBOS had crashed during the banking crisis, Virgin’s credit lifeline would have disappeared and the airline would have been imperilled.

With Branson out of the reckoning, Bishop sold a 30 per cent stake of BMI to Lufthansa, 20 per cent to SAS and kept 50 per cent plus one share. He also negotiated an option with Lufthansa that guaranteed a good price for his remaining shares. In July 2009, after Bishop activated that option, Lufthansa had to buy full control of the loss-making airline for £223 million ($368 million). In the midst of the recession, BMI was a poisoned chalice, and Lufthansa’s directors sought a buyer. BMI’s slots at Heathrow were worth about £200 million. Virgin Atlantic’s
independence depended on buying the airline, but Branson did not come up with the money.

As Britain’s star entrepreneur, Branson dived for a smokescreen. ‘We would relish the chance to buy Gatwick,’ he told his media friends. ‘Branson’s comments are fantasy,’ said a BA spokesman.

The fate of his airlines, Branson knew, was at risk.

Virgin Atlantic’s losses were matched by Branson’s investments in renewable energy. At the end of 2008, he had lost at least $60 million but, as the
New
York
Times
reported, Virgin had benefited through his championship of the environment.

Interviewing a woman in Manhattan protesting about capitalism and the banks, a journalist from the newspaper inquired how she had travelled from San Francisco. ‘Virgin America,’ she replied. But, she was asked, wasn’t Virgin the sort of corporation she should be opposing? ‘Branson’, she replied, ‘is working on creating solar planes.’ Other tycoons would have been damned by a high-carbon lifestyle, but Branson’s ‘green’ activities brought him approval as an environmental crusader. His public relations were masterful.

‘Oil is too precious to burn in cars. I drive cars using ethanol,’ said the billionaire, adding that Necker was powered entirely by wind and solar energy. Although global aviation was allegedly responsible for 4.9 per cent of man-made climate change, Branson deflected blame by explaining that Virgin Atlantic had ordered fuel-efficient aircraft. Even Virgin Galactic was presented as kind to the environment. ‘It produces the same carbon dioxide emissions as a Boeing 747 on a ten-hour flight,’ Will Whitehorn had said. Critics trying to monitor the results of Branson’s $3 billion pledge to produce non-carbon fuels were flummoxed. The evidence was elusive, but Branson was still the hero.

On 19 February 2008, Virgin Atlantic dispatched invitations to another spectacular environmental event. On the same day,
Branson flew in his Falcon from India to New York. Over the following three days, he continued to jet between San Francisco, San Diego, Los Angeles, Montreal, New York and finally Toronto, where, to ‘capture the public’s imagination’, he committed Virgin’s support to Earth Hour, an international gesture of dimming lights from Toronto to Sydney. The eco-entrepreneur arrived at Heathrow airport on 24 February to reassert Virgin’s green credentials.

No other businessman could have attracted nearly one hundred journalists to witness what Branson called ‘a historic occasion’. Just after 11.30 a.m., he stood in front of a Virgin Atlantic Boeing 747 holding a small bottle. ‘Today marks a biofuel breakthrough for the whole airline industry,’ said Branson. The bottle contained a mixture of coconut oil and babassu palm oil. He intended to prove that the jet could complete the forty-minute flight to Amsterdam’s Schiphol airport using three tanks filled with normal aviation kerosene and a fourth containing kerosene mixed with the biofuel.

The biofuel had been manufactured by Imperium Renewables in Seattle, on America’s Pacific coast. The company had imported 150,000 coconuts from plantations in the Philippines and palm oil tapped in the Brazilian wilderness. The product was then flown 4,800 miles to Heathrow.

Branson had chosen coconut fuel after discovering that ethanol froze at 15,000 feet. The switch did not damage his credibility. With a forced smile he drank the fuel. ‘My God, it was horrible,’ he later admitted. After the plane landed safely in Amsterdam, some environmentalists hailed Branson as ‘a game changer in aviation’. His experiment, they said, had started a debate. Other venture capitalists, those environmentalists anticipated, would produce alternative fuels using algae and natural crops. Their enthusiasm was reinforced by Virgin’s publicists telling journalists that 20 per cent of the fuel for the fourth engine was the
biofuel. Friends of the Earth challenged this assertion, claiming it was only 5 per cent. Among the crowd on the tarmac were representatives of Boeing and General Electric, the engine manufacturer. ‘Boeing has done five flights using biofuels,’ Virgin’s spokesman would later say as proof of the manufacturer’s commitment to using alternative fuels. Boeing subsequently explained the company ‘supported’ Branson’s idea but denied any ‘commitment’.

In the aftermath of the flight, Branson was asked whether burning biofuels in a jet engine was cleaner than kerosene. ‘Yes,’ he replied. Environmental campaigners, including Friends of the Earth, contradicted him. Burning biofuels is not cleaner than aviation fuel. Moreover, highlighting the production of crops for biofuels, his critics argued, had buried inconvenient truths about the carbon emissions needed to gather the coconuts and palm oil. Farmland and forests were being destroyed to grow the crops, and excessive carbon was emitted by manufacturing the fuel and shipping it around the globe. Branson’s performance, said his opponents, was a cheap alternative to greenwash advertising. As ever, Branson was not embarrassed. Although he admitted that there was insufficient palm oil and coconuts to manufacture the fuel regularly, even for a single Boeing engine, their objections were peripheral to one reality: on the same day as that flight to Amsterdam, the price of oil was $100 a barrel, the highest since 1980, and was certain to rise further. Virgin Atlantic’s financial hedging to protect itself from increased prices had been inept. His airline’s finances were deteriorating, and his investment in green technology was similarly hit.

Virgin’s Green Fund, based in London, was seeking, said Branson, a 30 per cent return from investments. ‘Up to now,’ he said, perplexingly, in 2009, ‘we’ve spent $300 million on this, so we’re ahead of the game because we haven’t actually made that amount of profit.’ A few weeks later, he spoke about the
imminent ‘completion’ of raising another $400 million for the Virgin Green Fund. The manager of the fund, Shai Weiss, he said, would be investing between $5 million and $100 million in projects to develop renewable energy. Weiss’s record was inconsistent. In 2008, Virgin had invested $14.5 million in Green Road Technologies, a research group seeking to reduce cars’ fuel consumption. Within two years, the company was in financial difficulties. Alongside that loss was Virgin’s faltering investment in Cilion.

Soon after Vinod Khosla had opened the first ethanol plant in Keyes, California, he announced its closure ‘for technical and market reasons’. His plan to build eight others was abandoned in January 2009. Despite government subsidies, the project was unprofitable and, worse, ethanol had become unpopular among environmentalists. The conversion of natural land into cropland was destroying ecosystems, including the sponges and rainforests that absorb greenhouse gases. Khosla’s $200 million investment in Cilion was sold for $20 million in cash and shares to Aetatis. An evangelical advocate of green innovation, Khosla was burning money rather than producing biofuel. But his reputation did not suffer.

Khosla sermonised about ‘the green-technology revolution’ and dismissed critics as ‘Luddite jokers’. His interest in biofuels as ‘the single most important tool we have so far for alleviating climate change’ and his justification of profiting from environmental investments were opinions Branson easily agreed with. ‘The only way to predict the future is to invent it,’ was Khosla’s golden phrase. He ridiculed the notion that the world could reduce its energy consumption. The trick, said the billionaire, was to find alternatives to oil, coal, cement and steel. Like any disciple, Branson repeated the gospel to his friends, including Tony Blair, who in 2010 agreed to join Khosla as a paid adviser on ‘global relationships’.

Blair’s endorsement coincided with increased stridency in the US Congress about reversing climate change. The politicians spoke about a $500 billion green economy creating two million new jobs in pollution control and conservation. Their conviction that entrepreneurs would make a difference to the world reassured Branson about the profitability of green industries.

Among his new investments was Solyndra, a manufacturer of solar panels based in California. $600 million had already been pledged to that ‘clean tech’ industry, whose advantage, said Khosla and others, was that its panels were made from a substitute for high-priced silicon. Virgin Green, said Branson, had scrutinised 117 different panel producers before investing $31.9 million in Solyndra. Joining other high-profile investors from Silicon Valley seemed a one-way bet after Khosla reaped a 100 per cent profit by selling Ausra, a solar thermal company, for $250 million. Soon after Branson’s investment, the
Wall
Street
Journal
praised Solyndra as America’s top ‘clean tech’ company. The seal of approval came in the form of President Obama’s personal support. The federal government advanced a $535 million loan to Solyndra, which triggered investors to pour in another $600 million. Holding on to Khosla’s coat-tails represented a break in Branson’s routine pattern of business. Usually he copied and challenged Goliaths. But Khosla’s mastery of government subsidies and regulations – mirroring Branson’s methods – was tantalisingly persuasive.

At that moment, Khosla was negotiating with the administration of Atlanta, Georgia, for a $162 million grant. He planned to build a factory to produce forty million gallons of cellulosic ethanol every year from local pine trees. Enthusiastic officials hailed Range Fuels, Khosla’s enterprise, as ‘liquid gold’. Warnings from sceptics about ‘a high-risk venture’ and ‘still unproven technologies’ were silenced by his admirers.

Branson did not invest in Range Fuels but, encouraged by
Khosla’s overall success, in 2008 he entrusted more millions to Gevo, Khosla’s next venture, which planned to manufacture butanol rather than ethanol as a renewable fuel. Manufactured by fermenting sugar and yeast, butanol produces more energy and is easier to blend with petrol than ethanol. After raising $199 million from investors, including a 10 per cent stake for Branson’s Green Fund, Khosla began planning production in Luverne, Minnesota. Once again, Branson confidently predicted success: ‘Butanol will replace jet fuel within five years. We’ve set ourselves a target of using butanol instead of jet fuel on Virgin Atlantic within five years.’ He also pledged to use it on Virgin Trains. However, within weeks of announcing the venture, Khosla ran into legal problems. Butamax, a company jointly created by BP and Dupont in 2003 to make butanol, had patented their perfected process in 2005. After three years’ research in a plant in Hull, north-east England, Butamax announced their intention to exploit their patent in an American factory. One year later, in 2009, Gevo applied for US government funding to develop butanol and was granted $1.8 million. The application revealed the company’s intention to use the identical process that Butamax had pioneered in Hull, prompting Butamax to sue Gevo for infringing its patents. Branson’s Green Fund now owned a stake in a company accused of unethical behaviour. Gevo denied the allegation and claimed to be more advanced in butanol production than Butamax. The dispute coincided with Khosla’s receipt of $76 million of taxpayers’ funds in Georgia to produce cellulosic ethanol. Despite receiving this money, Khosla had to delay starting production and reduced his forecasted output from forty million to twelve million gallons a year.

The setbacks did not damage Branson’s reputation. The few cynics were silenced by the favourable publicity still surrounding the $25 million Earth Challenge. Few seemed to be aware that no winner had been named and that the prize remained unpaid.
Among the hundreds of disappointed applicants was James Lovelock, a Branson favourite. Lovelock proposed laying pipes across the surface of the oceans to suck carbon dioxide into the sea. ‘Richard has been in touch with Jim Lovelock about this idea’, said a Virgin spokesman, ‘and is very interested. We are looking into it to see if we can fund a trial.’ Nothing happened but, at no cost, Branson’s image was enhanced by his continuing association with three other outstanding environmentalists: Tim Flannery, Crispin Tickell and James Hansen.

That coterie of stars, combined with his own activities, elevated Branson’s standing among the environmental clan as preparations for the meeting of the UN Climate Change Conference in Copenhagen in December 2009 were concluded. The organisers were appointing ‘world business leaders’ to inspire the expected 15,000 delegates, 5,000 journalists and ninety-eight political leaders, including President Obama. With Al Gore’s help, Branson was given a starring role in the conference as a ‘councillor’ among the business leaders.

Branson adopted a Churchillian pose. Britain’s prime minister had directed the nation’s defence against Nazi Germany from a subterranean war room. To conjure a similar image, Branson created the Carbon War Room in Washington. Several passionate climate campaigners joined Branson to, in the jargon he adopted, ‘enhance low-carbon economic development, remake the carbon-industrial complex into a post-carbon economy and accelerate green solutions’. ‘Black Gold’, a War Room slogan, was dedicated to removing carbon dioxide from the atmosphere.

Naturally, Branson sought others to help finance his ‘think tank’. Two of the ‘founding partners’ were unusual: Novamedia, which manages the Dutch Postcode Lottery, and Strive Masiyiwa, the Zimbabwean owner of Econet Telecom, a mobile network in Africa. Branson and the other founders, who chose to remain anonymous, committed $3 million each over three
years. Branson’s contribution was sourced from the fees paid for his public speeches.

A head-hunting agency recruited the executive directors through unsolicited telephone calls. Jigar Shah, who had created and then sold for $200 million SunEdison, a provider of solar-energy systems, agreed to be chief executive for $253,001 a year. ‘I want to give something back,’ he said, adding to Branson’s delight that ‘climate change is the largest wealth-creation opportunity of our lifetime’. The director of operations was to be Peter Boyd, Virgin Cola’s former head of marketing, who later worked for Virgin Mobile in America and South Africa. Travis Bradford, an investment-fund manager, was Shah’s deputy on $209,091 per annum. Mark Grundy, previously employed to promote Coca-Cola and PepsiCo and an advocate of greenwashing, was responsible for publicity. ‘Companies’, he said, on Branson’s behalf, ‘will be most successful if they tie their green efforts to a specific cause or issue – whether that is personal health, sustainable business practices or climate change.’ In the aftermath of the 2008 crash, he linked the environment to money-making: ‘Green is now always going to be part of marketing in a way that it wasn’t before 2007.’