Branson: Behind the Mask (31 page)

During their discussions, the officials decided to change the SLFs. Anticipating that critics would suggest that Virgin could not have been awarded a £5.5 billion contract without any financial guarantee, the officials suggested that Virgin’s SLF be set at an arbitrary £40 million. And to make FirstGroup’s sum more reasonable, the officials decided to ‘round down’ the SLF to £200 million. ‘Can we do that?’ the chairwoman of the departmental committee asked their lawyer. Although changing
the published guidelines for the bids was prohibited by law, the lawyer approved the ‘rounding’. On that basis, FirstGroup was awarded the franchise, subject to the minister’s approval. The decision was not announced publicly, but rumours leaked out describing ‘a clear leading bid’.

After the meeting, the officials were warned by independent lawyers that the recalculation of the SLF could be challenged in court. The advice was ignored. Thereafter, the department’s officials gave every minister and the external lawyers inaccurate information about their method of assessing the bids. The officials’ behaviour was later criticised as a cover-up.

Virgin was told the result by the department on 20 July. ‘There is clear blue water’ between the two bids, said the civil servant. Branson was incandescent. He had been convinced by Virgin’s directors that their bid was a winner. No one at Virgin had anticipated that FirstGroup would bid aggressively. ‘I’m shocked by the size of FirstGroup’s bid,’ said Furze-Waddock.

Having miscalculated the bid, Branson looked for ways to challenge the result. The alternative would be incalculable damage to Virgin, both financial and reputational. Although some would say that he ignored 49 per cent shareholder Brian Souter’s dismissal of protests as ‘a waste of time’, others mentioned that Martin Griffiths, Stagecoach’s chief executive, was ‘more enraged than most’. Unlike Stagecoach, Virgin could not afford to lose guaranteed profits, an interest-free cash mountain and free promotion of the brand via the railway; and just as seriously, Branson needed the taxpayers’ money to balance the haemorrhaging of cash from Virgin Atlantic. In addition to the airline’s £132 million losses in 2009/10 and £80.2 million in 2011, the 2012 losses would be a record £135 million. Losing the West Coast franchise would be a disaster for Virgin – and Branson.

Regardless of the merits of the case, Branson’s default reaction
to any loss was to attack the winner as wicked. BA, Camelot and Arriva had all been targets of his anger. FirstGroup now joined those enemies, and as usual Branson’s aggression knew no bounds.

His first complaint was to David Cameron. Without flinching, he pushed the knife into his rival. FirstGroup, he wrote to the prime minister, had overbid. The company had won the franchise, he alleged, by offering to pay the government £9.6
billion, an amount Branson’s advisers seemed to have plucked out of the air. Virgin’s rival, continued Branson, was untrustworthy and guilty of offering unreliable financial predictions to grab a prize at the nation’s expense.

Branson’s accusations were inflammatory. In 2012/13, Virgin Trains paid the government a premium of £160 million out of revenues of £938 million. In its new bid, Virgin had offered to pay an average of £400 million a year over thirteen years, while FirstGroup’s average annual payment would be £480 million. Both could be accused of overbidding by overestimating the extra number of passengers and Britain’s economic growth, and FirstGroup was also guilty of committing itself to huge payments at the end of the contract. FirstGroup was only marginally more aggressive in its bid than Virgin, but by attacking first, loudly and in the public arena Branson portrayed his company as the victim of tricksters.

His letter to Cameron arguably breached the government’s conditions for bidders. Under the terms governing ‘confidentiality’ and ‘publicity’, Virgin had undertaken not to lobby officials for information and assistance. On top of that the company had agreed not to challenge the process before the result had been announced. Branson was also bound not to reveal details about Virgin’s bid. But, as ever, he was not deterred by rules and was delighted that FirstGroup’s directors remained silent. Sensing that Cameron and the government officials were too intimidated
to demand his silence, Branson’s megaphone outrage dominated the confrontation he was engineering.

In alleging to the prime minister that FirstGroup had overbid, Branson was relying on Furze-Waddock’s extrapolations rather than precise information. Although Virgin Trains had received privileged information from the department, the directors did not appear to have discovered the details of FirstGroup’s bid. Despite that ignorance, Branson and Virgin’s publicists uttered detailed descriptions of FirstGroup’s bid with such authority that outsiders accepted their authenticity.

According to Branson, while Virgin predicted that passenger numbers would rise from thirty million to forty-nine million by 2026, FirstGroup was predicting sixty-six million passengers. ‘You would have to pile people on the roof of a train like in India’, scoffed Branson, ‘to get anywhere near FirstGroup’s numbers.’ FirstGroup denied those numbers and, speaking to journalists off the record, even accused Branson of ‘lying’ but the company was ignored. ‘He’s just throwing spaghetti at the wall and hoping it will stick,’ one FirstGroup executive complained.

Not mentioned was FirstGroup’s own financial vulnerability. The company had failed to sell off expensive investments in America. To restore its balance sheet, it needed to win the franchise or else suffer a shortage of funds. Like all the train operators, FirstGroup’s credit rating was poor. Virgin, with no rating at all, was battering a rival also fighting for survival.

On 23 July, Branson wrote to Theresa Villiers and sent a copy of his letter to David Cameron. He forecast an apocalypse. FirstGroup, he warned, would collapse just like National Express had in 2009, when it quit the East Coast line.

Branson had entered sensitive territory. National Express had won the East Coast franchise in 2006 after promising sizeable payments to the government. In the aftermath of the 2008 economic crash, however, the number of passengers fell on all
train services. National Express could not fund the unanticipated losses and handed back the franchise. In Branson’s terms, National Express had only won the franchise by deliberately overbidding, and that FirstGroup was committing an identical sin. The similarities appeared convincing. The officials at the Department for Transport had proven to be inept at assessing the applicants for the East Coast franchise, and National Express had certainly overbid. But Virgin Trains, the runner-up, had offered only marginally less. The unforeseen losses in 2008 would have forced Virgin to surrender the franchise too. That truth remained unspoken and Branson’s version dominated the media.

On 30 July, Branson wrote again to David Cameron. FirstGroup, he alleged, could only make its bid work by ‘drastically cutting the quality of its services’. He urged the prime minister not to confirm FirstGroup as the winner. In a continuing barrage of letters and telephone calls, Branson demanded that the government provide the documents showing how the department had decided to reject Virgin’s superior bid. By then, Cameron was on holiday, but a Virgin director persuaded Ed Llewellyn, the prime minister’s chief of staff, to disturb him. The prime minister, assured by his senior officials about the reliability of the process, angrily rejected Branson’s protests.

Unknown to Cameron, the transport officials who had made the original decision were giving Downing Street wrong information based on an unreliable review of their decision-making process. Branson had an unusual advantage. Unlike the government, Virgin’s executives had become aware of the truth. Furze-Waddock had extrapolated the audit trail and suggested that FirstGroup’s SLF should have been at least £600 million rather than £200 million. He also decided that Virgin’s SLF was too low. Pointedly, on 10 August Virgin requested sight of a new consultants’ report commissioned by the department. After analysing the decision-making process, the consultants had identified
the flawed calculations. Remarkably, at the same time, Theresa Villiers was told by her officials that the process had been faultless. Pertinently, if the department had levied a £600 million SLF on FirstGroup from the outset, Virgin would have been denied any reason to protest.

Branson rarely resisted attacking a competitor, even when his arguments were thin. On this occasion, some facts were irrefutable, and he added another. In his opinion, FirstGroup was vulnerable for handing back the Great Western rail franchise three years before the end of the ten-year period and avoiding a payment of £793 million to the government. That was proof, said Branson, that FirstGroup had overbid on that contract, lacked money and was unreliable.

Since abandoning the Great Western franchise, FirstGroup had indeed run the same service on a management contract. Branson attacked the operator’s poor punctuality and dilapidated trains. His criticism, echoing the passengers’ complaints, increased sympathy for Virgin against the government. Arguably, the facts were somewhat different.

The Labour government had awarded the franchise to FirstGroup in 2005, with an unusual option to end the agreement after seven years. By 2012, there were good reasons for FirstGroup to activate the break clause. The recession had reduced revenues and the tracks out of Paddington were due to be rebuilt and electrified, mirroring the same work on the West Coast line ten years earlier. Reading station, a key junction, was to be rebuilt, with inevitable disruption and a decrease in passenger numbers. Legal termination of the contract meant the taxpayer was protected from FirstGroup’s claim for compensation. That was ignored by Branson. His purpose was served by portraying FirstGroup as financially risky, unlike Virgin Trains, an example of financial probity running a modern service. He ignored the poor infrastructure along the Great Western line
from Paddington to the west of England, a problem that had faced the old West Coast line. Once the reconstruction of the Great Western line was completed and the new trains were introduced, the operation would be equal to Virgin’s.

On 14 August, Branson wrote once again to Cameron. He complained that he was being ignored by the Cabinet secretary, who wielded supreme power over Whitehall and enjoyed constant access to the prime minister. The final decision, Branson suggested, should be delayed until an audit had been conducted. His protest was rejected, and on 15 August FirstGroup was officially awarded the franchise.

Branson’s resolution intensified. ‘I think under the current system you will be seeing the end of Virgin trains in the UK,’ he said. Virgin, he explained, could not wait to bid again in thirteen years, apparently forgetting his advocacy of longer franchises. Emotionally, he attacked FirstGroup’s victory as ‘a big gamble’ and ‘insanity’. His warnings were supported by Bob Crowe, the militant leader of the RMT trade union. FirstGroup, said Crowe, planned to cut services and catering. Both accusations lacked substance.

Virgin’s publicists found no difficulty in arranging for their employer to appear on radio and TV, urging David Cameron to intervene. Branson repeatedly offered to run what he called ‘one of the best networks in the world’ for no profit if the handover was delayed. Pertinently, a BBC interviewer refrained from linking three facts: Branson presented himself as the guardian of British taxpayers; Virgin passengers buying a ticket that morning would be charged £231 for a standard-class return on a crowded train to Liverpool which arrived late – and with smelly lavatories; and Branson was speaking from Necker, his tax shelter.

During subsequent interviews, Branson again criticised the award of franchises to operators who overbid ‘on the East Coast and on Cross Country. We came runner-up twice and the
successful companies ran into financial trouble.’ That was not the case with Arriva. The new operator of Cross Country had won because passengers were dissatisfied with Virgin’s service, and by 2013 Arriva was earning a reasonable profit. ‘Branson’s spooking the government,’ a FirstGroup executive noted, fearing that the government would surrender. ‘He’s using his reputation to get heard.’

Branson’s blitzkrieg took no prisoners. FirstGroup, he howled to journalists, would be earning ‘outrageous’ profits at the taxpayers’ expense! His shock sounded genuine. ‘We said we’d spend £800 million on new trains and improvements to the stations,’ he continued. ‘FirstGroup said they’d spend £300 million. That £500 million difference was not taken into account in the calculations. People should be encouraged to come up with innovative ideas to improve tracks and trains.’ FirstGroup denounced Branson’s figures as ‘untrue’.

The distress among FirstGroup’s executives was growing. Under the government’s rules, the details of the bids were permanently secret, yet it appeared to them that Virgin’s executives might have been receiving details about FirstGroup’s confidential bid from officials in the Department for Transport. Virgin would deny receiving leaks, and there was no evidence that the company did improperly receive inside information, but details about FirstGroup’s proposed improvements were published. Two weeks after Branson’s tirade began, Tony Collins, Virgin Trains’ managing director, proposed a practically identical list of ‘improved services’. Among them was a commitment to start direct services from London to Shrewsbury and Blackpool, the same commitment Virgin had reneged on after 1997.

FirstGroup began fighting back, providing guidance to those interested in scrutinising Virgin’s proposals. One argument deployed by FirstGroup was that in the calculations for its bid, Virgin Trains had failed to reduce its costs in the manner
suggested by Roy McNulty in his report for the government. Nor had it increased the number of trains and destinations, and nor had it proposed to replace first-class carriages with more seats for standard-class passengers. Branson also omitted to explain that Virgin’s additional services to Shrewsbury and Blackpool depended on the government agreeing to guarantee new subsidies. Swiftly, the media’s sympathy for Virgin ebbed. Newspaper editorials criticised Branson as a bad loser who championed competition and then screamed ‘I wuz robbed’. Tim O’Toole, FirstGroup’s chief executive, joined the chorus. ‘Sour grapes,’ he said. ‘FirstGroup will provide a better service for customers and a better return for the government.’ His company was due to take over the service on 9 December, but he was up against a man who wanted the same as himself but who, to his surprise, happily dived for his opponent’s jugular.