Business Stripped Bare

about 90 per cent of our core delivery strategy comes with us and slots straight in, without adjustment, without fuss, without trouble. Getting to grips with an unfamiliar infrastructure is simply a question of workload — of mastering detail. I haven’t yet had to be initiated into the mysteries of a cabal, and neither have the people I work with.

However complex the business is, you should be able to boil it down to a proposition that ordinary people can understand. When an industry delivers its proposition in a way that’s totally loopy and counter-intuitive, either you’ve made an elementary mistake and need to go back to your research, or the entire industry is pulling a fast one and is out to rip off the customer. And if that’s the case, then you, the wide-eyed innocent, are like the boy who declared that the emperor wasn’t wearing any clothes. You are about to change everything.

This can happen. In fact, it happens all the time. In fact, here at Virgin, we could write a book on how often this happens.

Welcome — for starters — to the airline industry.

There are a few contenders for Virgin’s greatest ever business deal. But the epitome of our spirit was the way we hired a jumbo jet to start up Virgin Atlantic in 1984. Of all our enterprises, it’s the classic case of snatching an opportunity when it appears and making it happen. The creation of Virgin Atlantic is the perfect case study of how we have gone about our business since then. Even today, many years on, it shows our pure audacity and it still defies all business-school logic.

I was interested in an airline as a business idea, but it was really my frustration as a frequent flyer that crystallised the idea for me. I was spending more and more of my time in the air and, along with everybody else, I was having a thoroughly horrible time of it. There were no redeeming factors about flying with British Airways, PanAm or TWA. The quality of service was dire and the staff looked bored and morose. Then, at the turn of the eighties, came the straw that broke the camel’s back.

Joan and I were supposed to be flying from the Virgin Islands to Puerto Rico, when the scheduled American Airlines flight was cancelled. The terminal was full of stranded passengers. I’d had enough. I called a few charter companies and agreed to charter a plane for $2,000 to Puerto Rico. I borrowed a blackboard, divided the charter cost by the number of people stranded, and wrote down the number. We got everyone to Puerto Rico for $39 a head.

The utter frustration I had been feeling while flying on other people’s airlines convinced me that Virgin Atlantic should be a fun airline with a ring of quality and one that got all the little details right from the start. But our big break had to wait till February 1984, when an American lawyer called Randolph Fields came to me with news that there were landing slots available for a British-based carrier from Gatwick airport, outside London, to Newark, New Jersey. Randolph had been hawking the idea of a budget business airline around all the usual airlines, but they were too close to the realities of the market and remembered the harsh lessons of Freddie Laker and Florida-based People’s Express — airlines that had both collapsed under pressure from the four transatlantic flyers, British Airways, British Caledonian, PanAm and TWA. The established airlines had conspired to put Freddie out of business by putting pressure on McDonnell Douglas not to supply him with planes; they persuaded the banks not to lend to him when he needed it; and they slashed fares to undercut him. It was a good old-fashioned mugging, and it succeeded. The British public never forgave them, but what did they care?

Randolph had obviously drawn a blank and I must have been on a list of his last-gasp record-label mavericks. In any normal business an unsolicited caller might get through to the chief executive’s PA, then be told to drop a letter in (or these days, send an email) to arrange a meeting on another day. Back in 1984, however, we were based on the canal boat and I made a point of answering my own phone. Randolph got straight through to me. He had a very persuasive pitch: he told me there were lucrative landing slots up for grabs but they had to go to a British carrier. Not only this, but nobody else would be able to get in on these slots once they were assigned. It was a genuine opportunity. Was I interested? I asked him to send me a proposal and I took it with me to the country to read over the weekend.

Randolph was proposing a business-class-only airline, but I thought a mix of business and economy would be better so that we could fill the planes at Easter, Christmas and bank holidays. I agreed to put ?1 million into the project to get it going. In the meantime, I needed to become an airline expert overnight.

I phoned Freddie Laker and he told me I didn’t need to buy a plane — that wasn’t the way it was done. He explained that the banks bought the plane in a deal with either Airbus, Boeing, Lockheed or McDonnell Douglas, and then the airlines leased the planes, guaranteeing to pay monthly fees.

I put in a lot of the legwork to find out all I could about starting an airline. We registered the name Virgin Atlantic and submitted our application for the slots. Then I found the Boeing telephone number through international directory enquiries. The actual conversation still makes me laugh. I remember calling Seattle and asking to be put through to the senior vice president for sales. ‘Hello, this is Richard Branson from Virgin here and I’m interested in acquiring a secondhand 747,’ I said in my politest English accent.

The guy at the other end said: ‘What does your company actually do?’

‘Well,’ I said, ‘we put out bands like the Sex Pistols, Boy George and the Rolling Stones.’

‘Oh. Really? What did you say your company is called? 'Virgin'?’

At the time, worldwide aircraft sales were in the doldrums and Boeing was having problems shifting its fleet of second-hand 747s, with many parked up and decommissioned in the Arizona Desert. So he didn’t put the phone down on me. I think perhaps he was intrigued by my chutzpah. He took my details. And he jokingly said at the end of our conversation: ‘With a name like Virgin, as long as your airline goes the whole way, we’ll consider selling you a plane!’

Boeing sent a salesperson over to meet me. He was a lovely old guy who stayed in a hotel for four months while we tried to get the deal sorted. Boeing finally agreed that if the airline didn’t work out, they would take the plane back at the end of the first year.

This meant that we could start our airline knowing that, if I screwed up completely, I had hedged my bets. Looking back, it was one of the best decisions I ever made.

What’s the most critical factor in any business decision you’ll ever have to make? Basically, it boils down to this question: If this all crashes, will it bring the whole house tumbling down like a pack of cards?

One business mantra remains embedded in my brain — protect the downside. By having the option of giving Boeing their plane back after a year, Virgin’s total exposure was ?5 million — half what we were making at Virgin Records. So we were gambling an acceptable six months’ loss, for an enormous potential upside. If disaster struck, it would hurt us, but it wouldn’t bring the whole pack of cards crashing down. ‘Protecting the downside’ is one of the very few business tenets that we try to adhere to at Virgin. Yes, there have been occasions when we have broken our own rule, times where I’ve said, ‘Screw it, let’s do it,’ mortgaged my home and really stuck my neck out. But that’s something I don’t recommend.

It was soon very clear that there was no way we could launch a new transatlantic airline unless we had working capital of at least ?3 million. We had to raise more cash.

While all this was going on, I knew that we needed to run Virgin’s other businesses on a more professional footing. So I approached Don Cruickshank about joining as chief executive to sort us out. Don’s arrival freed me up from the record business to learn more about the airline industry.

I phoned Freddie Laker (again) and invited him to lunch on my houseboat Duende and he told me why he had failed — and what I must do to avoid his mistakes. He warned me that British Airways would become the enemy, that they were ruthless and had destroyed his business.

We had to protect ourselves against currency fluctuations. The fixed instalments for the jumbo were due in US dollars, but sterling’s value was plummeting against the dollar. Our customers were paying for tickets with UK pounds, and we had to be careful not to get stung.

We were also responsible for insurance — and here we nearly came unstuck. We could only get insurance when the Civil Aviation Authority in the UK had given us full certification for airworthiness. So we undertook a test flight, the plane took off — and a flock of birds flew straight into the engine. Which exploded.

A new engine was going to cost us ?600,000 — and, naturally, because we’d had to abort the test flight, we weren’t insured yet. This nearly brought down the whole of Virgin as it just took us over our overdraft limit. Don and the other directors wanted me to postpone the launch date, but once I was sure everything was safe, I wanted our airline to get going.

In those four months or so to get the airline going, we had to learn every single thing about the airline