Branson: Behind the Mask (9 page)

The economics of pricing airline tickets is complex. Airlines continuously change their prices without notice. Passengers in
any Boeing 777 would be paying about sixty different fares, based on constant recalculations by sophisticated computer programs. A conspiracy between airlines to fix all those prices would be difficult. Fuel surcharges, however, have always been publicly announced. Ridgway knew that Branson was nervous about the mechanics of publicising a surcharge. Some inside Virgin would even say that Branson was ‘obsessed’ by the actual words used in Virgin’s announcement. In particular, he wanted the context of the surcharge – the rising oil prices – to be properly explained.

On 6 August, Branson was satisfied by the statement drafted by Moore, and Moore was told to confirm his agreement about the timing of the announcement with Burns. BA, everyone agreed, would make the first announcement of a £6 increase, and Virgin would follow hours later. This was the conspiracy to which Virgin pleaded guilty, wilfully incriminating BA. There was, however, another version.

Weeks after the £6
surcharge was announced, Branson, according to prosecutors, ‘emailed Boulter and suggested that Virgin should consider again increasing its Passenger Fuel Surcharge’. The following day, Boulter discussed a further increase with Alan Burnett, BA’s sales director. Boulter reported his agreement with Burnett to Ridgway, and two months after agreeing the £6 surcharge, BA and Virgin Atlantic simultaneously announced that their respective Passenger Fuel Surcharges would go up to £10.

Over the following months, oil prices continued to rise and Virgin’s finances were squeezed. In March 2005, after intense discussions within BA and by Virgin’s executives, Moore and Burns spoke again. Acting as messengers, they agreed about the timing of their respective announcements that the surcharge would be raised by a further £6, to £16 each way. On 24 June, after more discussions between Boulter and Burnett, both airlines increased their surcharge to £24. In anticipation of the announcement, Moore sent Burns a copy of Virgin’s press
release. On the same day, Branson appeared on TV to say that he was opposed to fuel surcharges. No one at BA’s headquarters was surprised by Branson’s inconsistency, but everyone knew that Virgin Atlantic’s finances had deteriorated. They would get worse after Hurricane Katrina hit the US. In the aftermath, oil prices soared, almost doubling in one year.

On 1 September, Steve Ridgway told Paul Moore, ‘I want you to have another of your conversations with British Airways.’ Moore called Branson, and immediately afterwards rang Burns. The two men were messengers of a further increase in the surcharge, but with a twist. Branson had discussed imposing a higher surcharge on first-class passengers with Ridgway, and Moore mentioned that possibility to Burns.

Pertinently, the senior executives of the two airlines were due to meet on Sunday 4 September at Branson’s Oxfordshire home. Branson was hosting a cricket match to mark the retirement of Rod Eddington, BA’s chief executive, and to celebrate their improved relationship. To repair the damage of the airlines’ vicious war, a prosecutor would say, Eddington had ‘not so much offered an olive branch; more like an olive tree’.

In the subsequent trial of Burns and three other BA executives, Richard Latham QC, the prosecutor, described events leading up to the cricket match. Branson, said Latham, had told Boulter to ‘sound out his contact at British Airways about a potential surcharge increase’. Branson wanted to know BA’s reaction if Virgin increased the surcharge again. In particular, Branson wanted Boulter to check with his BA contact ‘to see if they would follow if Virgin was to lead with a variable Passenger Fuel Surcharge’. Latham based his allegation on Boulter’s own admission to the Department of Justice. Initially, Boulter explained, he was ‘reluctant’ to fall in with Branson’s suggestion because the conversation needed to be ‘more sophisticated’ and, around the time of the cricket match, several parallel discussions between Virgin and
BA were under way. Nevertheless, before the game, Boulter did speak to Alan Burnett, apparently laying the ground for a conversation between Branson and Eddington when they met.

During that hot Sunday, the two men were seen to be engaged in a lengthy conversation, in which they agreed that surviving in the airline business was tough. Neither could recall, when subsequently questioned, whether the surcharge had been mentioned. They parted on good terms, although BA won the cricket match. Two days later, Virgin increased its one-way surcharge across the Atlantic from £24 to £30/$55. In an email sent to Virgin Atlantic staff on the same day as he announced the surcharge, in a statement vetted by Branson, Paul Moore warned that any photographs of the match should be kept private. ‘Please don’t put anything up on the intranet [
sic
]!!!!!!!’ he wrote. ‘If British Airways follow our surcharge it might not look too clever to show us fraternising two days before.’ Two days later, BA imposed the same surcharge. Pertinently, the prosecution would decide not to mention the conversation between Branson and Eddington.

Five months later, the US Department of Justice launched its St Valentine’s Day raids to find evidence of a cartel fixing cargo prices. Despite the turmoil, in April 2006 Moore and Burns spoke once more about surcharges, but their relationship ended abruptly once Virgin’s lawyers became involved.

Virgin’s immunity agreement with the Department of Justice and the OFT included an obligation to hand over all the relevant documents, emails and telephone records to the investigators. To comply, Virgin’s lawyers commissioned experts to download data from the company’s computers. At the same time, Ridgway and two other executives gave formal interviews and statements to the Department of Justice. Those early declarations described their discussions with BA, but they professed ignorance that they could be criminal. Moore, for example, while implicating
Branson in the discussions within Virgin, told the lawyers, ‘We all felt that however dodgy the conversations might have felt, they weren’t price-fixing … The surcharge was different to the price.’ In his early statements, he always referred to ‘price-matching’ rather than ‘price-fixing’. Those statements were unhelpful to the prosecution: the immunity agreement had been granted only in exchange for Virgin’s confession to a crime. ‘Other interests’, a Department of Justice lawyer sighed, ‘are coming into play’ – not least, the lawyers suspected, to protect Branson’s reputation.

Branson, while still uncertain about the outcome, accepted an invitation to an interview at the Department of Justice’s office on 14th Street in Washington. He was shown emails sent to himself by Ridgway and others referring to the discussions with BA and asked to comment. To each question he replied, ‘I can’t remember this.’

‘He’s not going to get his hands dirty,’ concluded an investigator. ‘He’s saying that he wasn’t at the sharp end.’

‘You know, Mr Branson,’ said an official, ‘you’re co-operating with the US government because you want us to win. You’re here because you want the British Airways folk convicted.’

Branson did not reply. Snitching on BA, he must have appreciated, would have consequences, but if Virgin failed to co-operate, the prosecutors would withdraw the immunity agreement. The airline’s owner, the lawyers realised, was reluctant to testify for the prosecution. His priority, they believed, was to exclude himself from any criminal trial. Once in the witness box, he would be vulnerable to a damaging attack on his motives. The defence lawyers representing BA’s executives could recite Branson’s long campaign against his rival. He might be accused of entrapping their clients in another chapter of their historic enmity. His dilemma presented the department with a problem. Although Ridgway admitted that Branson was made aware of the discussions with BA, the Department of Justice could not prove that
Branson had read the emails addressed to him. Since Branson said that he could not recall any of the discussions, the lawyers in Washington and London decided that his poor memory barred him as a potential witness for the prosecution. He escaped the spotlight. The remaining Virgin executives could not prevaricate. To retain their immunity, they were obliged to provide testimony that persuaded a jury that the BA executives were, like themselves, criminals.

The investigators focused first on Paul Moore, who had been Virgin’s contact with Iain Burns. Moore’s initial statement had been woolly. He described a close relationship with Burns, but his recollection of their first conversation was vague. In subsequent statements, prompted by the prosecutors, Moore’s memory became sharper. Burns would identify two mistakes. Firstly, he did not have a close relationship with Moore. They had first met at a peace-making lunch hosted by Will Whitehorn, and once again at a trade conference. That did not amount to a ‘close relationship’. And Burns insisted that Moore had telephoned him first.

Over the following months, the three Virgin executives – Paul Moore, Willy Boulter and Steve Ridgway – each made eight separate statements to the Department of Justice. Increasingly, each man shifted from professions of innocence to outright confessions of guilt and the direct implication of four BA executives in an illegal conspiracy. Thereafter, Virgin’s lawyers produced three binders drawn from the company’s records to support their admission of a conspiracy. ‘A silver-platter approach,’ concluded a prosecutor. Virgin Atlantic avoided a £180 million fine.

Willie Walsh, the new chief executive of BA, was unaware of those shifts. He cursed his poisoned inheritance from Eddington’s era of the cargo cartel. After lengthy negotiations, in June 2007 BA pleaded guilty in Washington to price-fixing for that cartel and began negotiating the fine. After BA’s plea, the Virgin
executives could be satisfied that their airline had escaped any sanction.

In London, the OFT’s legal team, first led by Simon Williams, grasped the guilty plea as an opportunity to prosecute BA’s executives for the fuel surcharge, relying on Virgin’s executives as the key witnesses. Ali Nikpay, the OFT director who inherited the case, was particularly keen to pursue BA because no individual had yet been prosecuted under a new anti-cartel law. If convicted, the four faced five years’ imprisonment and unlimited fines amid a deluge of media attention.

The OFT’s raid on BA’s headquarters near Heathrow in July 2007 stunned Willie Walsh. Within the building, his outrage over Branson’s betrayal was loud. Many BA executives had always blamed Branson for contriving the ‘dirty tricks’ litigation in the late 1980s to publicly humiliate their company. They were unforgiving about his successful defeat of BA in 1993 over alleged libels by the airline’s former chairman, and now they believed his aggression was being revived, despite the truce initiated by Sir Rod Eddington. Branson, the BA executives raged, had betrayed their trust. One indignant executive even ordered that Branson’s cameo appearance in
Casino
Royale,
the James Bond film, be edited out of the version shown on BA aircraft. One day, he pledged, there would be retaliation. Another dreamt of repeating an American politician’s defiance: ‘I’m going to give you a three-minute lesson in integrity. Then I’m going to ruin you.’ The reality was, however, indisputable. Ever since Will Whitehorn had invited Iain Burns and Paul Moore for lunch, BA’s executives had dropped their guard and trusted Branson.

The OFT’s formal indictments shocked the four executives. Instantly, they proclaimed their innocence. Like Willie Walsh, none doubted that Branson had, in his own words, ‘screwed us’.

Occasionally, Branson was beaten by competitors, but he rarely suffered the bitter taste of being ‘screwed’. He enjoyed a scrap and he fought to win. Opponents could expect no mercy, as BA’s Lord King discovered, after he injudiciously cast doubt on Branson’s veracity and was compelled to make a humiliating apology about BA’s so-called ‘dirty tricks’. Branson had enjoyed trashing King’s reputation.

Losing no longer bore the same horror for Branson after the rejection in 2000 of his bid to run Britain’s national lottery. The first defeat in 1994 had provoked tears, but he had also scored revenge against the winner, Guy Snowden, the chairman of Camelot. In a successful libel action, Branson had shattered Snowden, a decent man. In a BBC TV programme broadcast a year after losing the bid for the lottery, he described how Snowden had offered him a bribe at the end of a lunch in his home. Snowden publicly denied the allegation, and Branson sued for defamation. Branson claimed that Snowden’s denial of a bribe implied that Branson was a liar. Branson’s victory reinforced his pristine image, but many pertinent questions were left dangling.

In Britain, those sensational triumphs divided sentiment about Branson, but he was more loved than loathed. The majority enjoyed his cheeky taunts, admired his daredevil risks and supported his championing of underdogs. Whether Virgin’s publicity machine presented him as the victor or the victim, the company emerged successful.

The Virgin brand had become Branson’s cash card. Aspiring businessmen regularly offered him ideas to make their fortune, and the few he accepted agreed to his terms, which tilted the financial odds overwhelmingly in his favour. Robustly, he squeezed suitors to his own advantage.

Tom Alexander’s arrival at Branson’s London home in 1998 had been no different from that of dozens of predecessors offering joint ventures. Alexander had spent eighteen years in the telecommunications industry, most recently developing BT’s mobile-telephone operations at Cellnet.

Alexander’s idea was shrewd. After billions of pounds had been invested in building a network of masts and computers to provide a nationwide mobile-telephone service, he had spotted that BT, Orange and T-Mobile owned a considerable amount of spare capacity. He had proposed that Cellnet should create a new network based on renting that spare capacity. It would offer low call rates to owners of pay-as-you-go mobile telephones, especially during the night and at weekends. However, BT’s executives were uninterested. The company was focused on developing the new 3G spectrum rather than seeking bottom-end subscribers.

After that rejection, Alexander could either let the idea die and remain at Cellnet, or else find a backer for a private venture. Virgin was his obvious destination. Branson was known as a risk-taker, and the brand was a Mecca for start-ups. The Virgin label appeared to win any product the consumers’ recognition. Alexander approached Gordon McCallum, Branson’s chief executive. In turn, McCallum persuaded Branson to consider a classic Virgin venture – challenging Vodafone and BT, the established players. Branson made the call as Alexander was driving home at night: ‘I love the idea. Give me an outline of the concept and come with your team to Holland Park.’

Alexander arrived with three Cellnet associates. Branson’s
visitors soon realised that the tycoon did not understand the telephone business or the technology. But he did agree to support the development of Virgin Mobile.

‘I’ll give you the money to get it up and running,’ said Branson.

The four left Holland Park dreaming about the fortunes they would make from an eventual flotation. Branson’s energy and promises, they agreed, were ‘empowering’. Virgin was ‘a uniquely exciting environment, unseen in any other business’.

After resigning from BT, Alexander called a Virgin executive to inquire where his new offices were located. Before the end of the first week, there had been a ‘rude awakening’. There was no Virgin ‘hothouse of help’ to develop the business’s infrastructure. Virgin, he also discovered, had no money to spare, and Branson’s assurance of financial support did not materialise. ‘I’m surprised’, Alexander told his friends, ‘that Virgin has no financial resources.’ There was neither cash nor any relationship with banks to borrow any money. From the outset, Alexander would need to raise bank loans himself. Effectively on their own, the four rented an office in Euston, with Alexander wandering down Tottenham Court Road to buy coffee mugs, pens and paper.

During those months of struggle, Alexander often despaired. His lifebelt was Branson’s occasional telephone calls at 6 a.m. on Sunday mornings. ‘What’s happening?’ asked the voice, just before he went to sleep in Necker. Alexander’s self-doubt was dismissed. ‘Of course you can do it, Tom,’ soothed Branson. To Alexander, Branson’s praise was gold dust.

In return, Alexander was offering Branson a potential gold mine. For some years, Branson had not found a lucrative business to exploit his brand. The deal junkie with a weakness for profitable new ideas was often tempted by the offer of a free business in exchange for the brand, but his opportunities were diminishing. He was also restrained by the conservatism of Stephen Murphy, the group’s financial chief, and Gordon McCallum,
whose focus was increasingly on tax planning and extracting better returns rather than engaging in new businesses. Mobile telephones were the exception, however. Unusually, McCallum said ‘yes’ rather than ‘no’.

After several months, Alexander succeeded in negotiating an agreement to buy network space from T-Mobile, which was owned by Deutsche Telekom. In exchange, the Germans would own half of Virgin Mobile. He now needed over £100 million to rent premises, hire and train the staff, and launch a marketing campaign to persuade Vodafone and BT customers to switch to a new network. On the basis of Alexander’s proposal, without any material help from Virgin, J. P. Morgan offered a £126 million loan. ‘I took leave of my marbles,’ one banker who negotiated the loan would later say. ‘I took the risk without any collateral.’ The moneyman trusted Virgin’s brand. He also anticipated Branson’s technique of taking maximum benefit with minimal investment to avoid any financial risk.

With everything in place, Alexander arrived in Holland Park to negotiate with Branson and McCallum the ownership of the remaining half of the shares in Virgin Mobile. Ever since 1967, Branson’s balancing of upsides and downsides were Oscar-winning performances. Fixing deals on his way to mutating from a school drop-out into a billionaire had required steely charm to disguise his exploitation of a vulnerable target. The casualties of his empire-building were legion. Mike Oldfield had been persuaded to sell the rights of
Tubular
Bells
for a pittance; Randolph Fields, the co-founder of Virgin Atlantic, had been cajoled into relinquishing his financial rights in exchange for a few free transatlantic tickets; most of those involved with Virgin Music – the original creators and the public shareholders – had departed without a substantial reward; and brothers Tim and Rory McCarthy had lost their entire £80 million fortune backing V2, a dud music company established by Branson. Like
many others, they had succumbed to skills honed to capture prizes. Occasionally, Branson was rebuffed by tougher combatants, but Tom Alexander was ill prepared for the well-rehearsed performance – not least because the inventor of Virgin Mobile felt indebted to Branson for realising his ambition.

Alexander emerged from Holland Park grateful that his work had been rewarded with about 6
per cent of the shares, to be divided between the four men. Virgin took 44 per cent of the business in return for a minuscule investment, as was Branson’s custom. He took few risks and grabbed any profits. Ever since Virgin’s failed investments in clothes, cola, cosmetics, cars, cinema and energy, his search for another success similar to Virgin Music and Virgin Atlantic had proved elusive. Unknown to Alexander, Branson desperately needed a commercial windfall. The Virgin Atlantic sale had been just the headline act in a slew of disposals to rescue his fragile finances. Virgin Mobile was a punt with a difference: J. P. Morgan’s loan bestowed credibility on the risk.

In the course of over one year, Alexander and his team worked on organising the virtual telephone network’s sales and administration. After endless testing, he was satisfied that his invention was ready for sale.

Among Branson’s talents was organising spectacular launches. To promote Virgin Mobile he appeared on a float in Leicester Square, surrounded by topless models. He posed just long enough for dozens of photographers to record his illegal stunt before the police arrived and he disappeared. The sexy spectacle was successful. Within two years, the network had signed up 1.6 million subscribers, including many fans of Virgin Music and the Megastores. By 2002, 2.1 million customers were making Virgin Mobile profitable. Instinctively aggressive, Branson could not resist gloating: ‘Since our launch in November 1999, billions of pounds have been wiped off the value of our competitors and many established
names in telecoms have collapsed.’ He anticipated earning over £1 billion personally when the company was floated in the near future. His financial problems were solved – for the time being.

The bonanza, he hoped, would be doubled by launching Virgin Mobile in America. John Tantum, a thirty-two-year-old Californian, had proposed the idea to Gordon McCallum in 1999. After an interview in his Holland Park home, Branson agreed that Virgin would invest a limited amount of money in Tantum’s scheme in return for a 90 per cent stake in the American company. Like so many seeking a partnership with Branson, Tantum accepted the lopsided deal. Pertinently, Branson did not offer Tom Alexander a share of the potential profits in America, nor would J. P. Morgan earn any additional revenue. Branson kept the gold for himself. He also excluded Tantum and the American staff in San Francisco from converting without risk any shares into cash.

After two years’ work, Tantum was fired. A year later, his replacement was struggling. The sheer scale of the American market made Virgin’s attempts appear puny. Lacking money for a sustained promotion campaign, Virgin Mobile USA claimed to have 500,000 subscribers – just 1 per cent of the market – against Verizon’s thirty-three million, but many of Virgin’s turned out to be illusory. Branson was targeting young people with a pre-pay package that included a telephone sold at a loss. Many customers modified their handsets for use on other networks, or abandoned Virgin without paying the full value for the telephone. The ill-fated American venture was mirrored in Australia. There, Virgin Mobile was reported to have been prosecuted with its partner Optus (owned by SingTel) by the Competition and Consumer Commission for engaging in ‘false, misleading and deceptive conduct’. Virgin Mobile’s adverts had allegedly failed to reveal the full cash price of the packages and the real cost of terminating the contracts.

The minor disappointments did not hinder Branson’s search for cash. The obvious source was selling Virgin Mobile shares to the public through the City of London. His hurdle was a legacy of disappointed shareholders. Ever since Virgin Music’s unprofitable flotation in 1988 and the unethical treatment of its shareholders, many City financiers had lost confidence in Branson. His criticism of analysts for scrutinising his businesses had been accompanied by his vow never to seek public shareholders again, but the financial crisis he suffered in 1999 prompted an about-turn. Now, in 2004, Branson needed cash for new ventures, including Virgin America. His overture to the City was brash: ‘I’m back. I’m successful. This time you’re going to like me.’ The five-year-old Virgin Mobile, he told bankers and investors, was worth £1.3 billion ($2.4 billion), and he was selling 25 per cent to personally pocket £279 million after debts had been paid off. He would also charge the new shareholders £311 million, which, according to the accounts, was the debt owed to the Virgin Group.

To many, Virgin’s projections about future profits aroused suspicion. Potential investors could not value a telephone company that lacked its own network but simply relied on an advantageous contract with T-Mobile. Virgin’s claim to earn 65 per cent gross profit on every call seemed doubtful. Sceptics focused on Branson’s assertion that another million customers had been added over the past year, contradicting his own executives’ admission that the numbers were unknown. The disbelievers scorned Branson’s valuation and ridiculed his price of 285 pence per share. ‘There are no plans to change the price range whatsoever,’ a Virgin spokeswoman asserted defiantly.

The fight was waged on Branson’s behalf by Gordon McCallum and Stephen Murphy. Their adversary was Scott Bruckner, the banker responsible for the flotation. Branson’s representatives gave no quarter to get the maximum price. ‘They’re masters of posturing about the value of the brand and don’t want to
compromise,’ observed an eyewitness. ‘They don’t show their cards, even to their advisers, until they’ve extracted every possible concession.’ McCallum and Murphy failed to convert the disbelievers. The City’s wariness bred tension, and the valuation fell. ‘Find out who’s to blame,’ Branson ordered, convinced there was a conspiracy to denigrate him.

But the City did not deliver the hammer blow that jeopardised the flotation. The fatal threat was delivered by T-Mobile, Virgin’s partner. Convinced that Virgin did not have the stomach for an expensive fight, the German company denied the existence of a contract with Virgin Mobile to supply network space for ten years. Deutsche Telekom’s assertion horrified Tom Alexander and enraged Branson. Both believed that the Germans had decided to risk an expensive legal fight to neutralise the financial advantage Alexander had negotiated. Branson was the wrong person to choose; litigation was his oxygen. At the end of a tense trial, the judge denounced T-Mobile’s witnesses as unreliable and found entirely in Virgin’s favour. The victor took the spoils. T-Mobile sold its 50 per cent stake to Branson for about £100 million, giving Branson ownership of about 94 per cent of the company for a comparative pittance.

On the opening day of the flotation in July 2006, the shares were priced at 200 pence, but, fuelled by Branson’s critics, they fell to 190 pence. Branson was bruised. His hype had failed – for the time being. The company was valued at £502 million ($925 million), less than half of what he wanted. The £120 million he received immediately was, nevertheless, a lifebelt.