Simon Draper, taking advantage of Nik Powell’s departure, had raised with Branson the question of his shareholding in Virgin. Pointing out that the record company was overwhelmingly the most profitable business in the Virgin Group, and that its profits were for years being reallocated to other areas for expansion, Draper suggested to Branson that his shareholding in the subsidiary record company should be converted into an identical shareholding in the parent. For until he owned part of the Virgin Group, Draper knew that he would never be financially secure. ‘I used to get terribly anxious about the profits,’ he remembered, ‘because they were always massaging them. I remember having secreted away in a drawer a note from the auditors saying, “For the purposes of valuing your shares, the profits should have been x.”’
Branson immediately saw the justice of Draper’s case. But he was far too practised a negotiator to agree immediately to such a suggestion. In return for Draper’s 20 per cent shareholding in the record company, he at first offered only 10 per cent of the group. It required a number of painful meetings between the lawyers for Branson to raise his offer to 15 per cent, and to accept Draper’s demand for a payment of £100,000 in cash and for a watertight agreement on profits which guaranteed Draper’s share of the money that the music group would make, but protected him from losses presided over by Branson elsewhere in the group. Draper’s lawyer, who appeared not to recognize that it was the record company that was making the vast majority of the group’s profits, was horrified. After all, Draper seemed to be parlaying a fifth of the record business for an only slightly smaller share of what seemed to be a much larger business – including retailing, films, clubs and a number of other interests. ‘He didn’t realize what a strong position I was in,’ recalled Draper. ‘He didn’t realize how valuable the record company was in relation to the record shops … I should have asked for £300,000.’
Given Branson’s normal business methods, the negotiation was conducted in a strange way. Branson felt that the sums of money were so vast that he did not want to deal directly; his cousin, however, saw things differently. ‘We hardly ever spoke face to face,’ said Draper. ‘Neither of us enjoy it. [When we did meet] I’d just say that’s what I want, and he, very tightlipped, would always agree.’ For Branson knew that Draper had too often seen behind the facade that worked so well with outsiders. His cousin, his most trusted business partner, preferred to negotiate with Branson by letter and through lawyers.
Perhaps for this reason, the deal turned out to be satisfactory to both sides. Draper no longer felt so anxious about the precariousness of his financial position. Part of the agreement was that Branson, as before, would have the obligation to buy Draper’s shares in the event that he decided to sell them. But since Draper now owned almost a sixth of the whole Virgin group, it no longer made sense for the price at which Branson would buy him out to be based on profits. Instead, the two cousins agreed that the price would be set at ‘fair value’ – a phrase whose meaning would be determined by a firm of independent auditors, with an appeals process written into the agreement in case Branson and Draper could not agree on the auditors’ conclusions.
SIX (#ulink_d0ed1dd8-d57f-5ee2-9fba-81ce252e45c4)
Dear Randolph (#ulink_d0ed1dd8-d57f-5ee2-9fba-81ce252e45c4)
THE FOUNDER OF Virgin Atlantic Airways, the company that was to change Richard Branson’s life, was a barrister named Randolph Fields. Three years younger than Branson, he had been born in the United States to English parents, but moved to Britain at the age of nine. Like Branson, he had a chequered school career and showed early signs of entrepreneurial and negotiating flair. The two shared a taste for teenage politics, too: but by the time Branson was marching on the US embassy, Fields had already become more conventional. He took up the study of law at a London polytechnic, where he stood out from the majority of student activists. A newspaper later described him as having been a ‘political leper’. Fields sued for libel but was awarded only nominal damages.
While Branson was as energetic and unkempt as ever in his beard and woolly jumpers, Fields favoured sober double-breasted suits and was beginning to run to fat. And while Branson had acquired a dubious reputation with Her Majesty’s Customs and Excise, Fields had taken the bar examinations that entitled him to argue cases in both English and Californian courts. His growing practice in Los Angeles specialized in defending American insurance companies against asbestos claims. In less than two years, Fields had amassed savings of more than £200,000.
But life in California was dull, and the devil of adventure still gnawed at his soul. So Fields was in a receptive frame of mind when he heard on his kitchen radio during breakfast on 5 February 1982 that Sir Freddie Laker, the entrepreneur whose Skytrain service had brought the cost of flying across the Atlantic down to £49, had gone bust. Where the radio commentators saw only failure, Fields saw a business opportunity.
Four months later he was sitting in an armchair at the Gatwick Airport Hilton Hotel, where Sir Freddie had sat up until the early hours of the morning trying to save part of his business from the receivers. Facing Fields, a handful of men who had been Laker’s most senior employees listened with growing astonishment as he outlined a scheme for a new airline. It must have made an extraordinary scene: a handful of grizzled veterans, their cynicism of the airline business intensified by the Laker collapse that they had just witnessed, being lectured on the lessons of their own failure by a self-confident barrister of 29 whose experience of aircraft was limited to a few dozen flights back and forth across the Atlantic. Yet, miraculously, they were convinced. Within a few weeks, Fields had firm commitments from two valuable Laker managers: David Tait, who ran Sir Freddie’s US sales operation; and Roy Gardner, an engineer trained by the Royal Air Force and British Caledonian Airways, who had been the entrepreneur’s technical manager. Soon after that, Fields bought an off-the-shelf public company called Ritter PLC, and agreed with Tait and Gardner that the new airline would trade as British Atlantic Airways.
The young barrister had realized that Laker’s demise left a gap in the lucrative but highly regulated market for air travel between London and New York. His idea was to scoop up Laker’s licence, and to use it to fly a single jet between Heathrow and John F. Kennedy – either a McDonnell-Douglas DC-10 or a larger Boeing 747 – exclusively for business class travellers. He would offer the commercial customer a more comfortable, pampered passage than the existing airlines did. ‘At the time, business class consisted of putting a curtain across the front of the economy cabin, and giving out free drinks,’ Fields recalled. ‘It was a joke.’
In most other industries, anyone who wished to set up in business was free to do so. But the Civil Aviation Authority, set up in 1971 by Edward Heath’s Conservative government, saw itself as the guardian not of competition between carriers, but of safety standards – which might be put at risk if existing airlines were undercut by a newcomer. British civil servants had concluded that the best way to achieve this objective without ignoring the interests of the consumer altogether was for Britain to have two international airlines, British Airways and British Caledonian. The arrival of Laker had upset this careful planning, and it was therefore with little regret that some civil servants mourned his passing.
President Jimmy Carter’s decision to deregulate the American airline industry made this policy harder to sustain. He appointed to the Federal Aviation Authority an economics professor from Cornell University who thought the purpose of the free market was ‘to let people do crazy things’, and who saw a succession of airline start-ups and bankruptcies as proof that the market was working. For the CAA, by contrast, an airline collapse of the Laker kind was evidence of a policy failure – since an airline that failed either never should have been allowed to start or should have been closed down by the regulators before it ran into trouble. It was no surprise, therefore, that when Fields applied for a transatlantic licence the CAA delayed as long as it could, and then turned him down.
Not to be put off, Fields appealed against the Authority’s decision directly to the Secretary of State for Transport. In September 1983 the CAA was told to reconsider. The officials at its Kingsway headquarters began to realize that Fields would never leave them in peace until he was awarded a route. They would never risk a repeat of the Laker fiasco by allowing him to fly a scheduled service between the main London and New York airports. But he could, if he wished, have the route between Gatwick, London’s second airport, and Newark, New York’s third. To deliver this message informally, Ray Colegate, the Authority’s head of economic regulation, made an appointment to have lunch with Fields at an Italian restaurant in Covent Garden.
As soon as he got wind of the CAA’s intentions, Fields realized that his original plan for an all-business service would have to be torn up. A minority of business travellers might be persuaded to trek out to more distant airports if offered free transport and a better service on board. But British Atlantic, Fields’s new airline, could no longer rely on business traffic for its bread and butter. Instead, it must join the fight for budget travellers – and its first opponent would be People Express, the lowest-cost airline in the history of aviation.
Founded by a Wall Street analyst named Donald Burr, People Express was a firm whose name struck fear into the hearts of airline executives everywhere. It cut all the corners it could, except for those that might compromise passengers’ safety. Its staff were paid less than those in other airlines, and had no effective union to represent them. No advance reservations were allowed; passengers had to turn up at the airport and pay for their passage before boarding the aircraft. The ticket price covered only the cost of a seat and the right to visit the lavatory on board; food, drink and entertainment were extra. As a result, People Express could afford to undercut all the other airlines that plied the Atlantic crossing.
The colour brochure that Fields had prepared for potential investors in 1982, expatiating upon the delights of his proposed business class service, therefore had to be jettisoned. But Fields was determined that his new airline should be no clone of People Express. Where Burr had painted his cabins dark, Fields’s would be light. Where only cold snacks were sold aboard People Express, the meals given away on British Atlantic would be hot. Reservations would be taken; business class travellers would be carried; baggage, instead of being charged for, would be carried free up to thirty kilograms. To enable its passengers to enjoy the in-flight movie, British Atlantic would provide them with high-quality electrical headphones. (This was not quite the extravagance that it seemed, however. In the course of his researches, Fields had discovered that the acoustic headphones rented out by most airlines to economy class passengers, which worked on the same principle as an ear-trumpet, were in fact more expensive to provide. ‘I discovered that the airlines were intentionally selling discomfort,’ said Fields.)
Fields also began to consider a still more radical way to make his service stand out. Instead of offering a single feature film and a handful of music channels, he resolved to turn in-flight entertainment into the most important selling point of his airline. Flying was to be not merely glamorous, but also fun. If the American studio MGM could combine entertainment, hotel-keeping and gambling in the same Las Vegas establishment, why should he not perform similar alchemy 37,000 feet above the ground?
As he sat down to antipasti with Ray Colegate in the Italian restaurant where they had agreed to meet on 11 December, Fields therefore showed no surprise when Colegate announced that Gat-wick-Newark might be his for the asking. The barrister already knew that he would have to argue his case at – a public hearing if another carrier objected to the granting of his licence. He would also have to show that British Atlantic Airways had enough capital behind it to ensure that it would not leave passengers stranded on the wrong side of the ocean if it were to suffer the same fate as Laker. Confident that he could surmount both of these hurdles, Fields drew from his pocket an already completed application for the route, and handed it across the table to the astonished civil servant with a flourish.
Unfortunately, the profits of Fields’s California law practice, augmented by modest loans from his mother and his sister’s American husband, were not enough to turn the paper British Atlantic into an airline with craft, crew and reservations department. Fields knew that he had to find at least another £1m – and since the public hearing was called for 1 March, he needed it within three months. But with memories of the Laker collapse so fresh in bankers’ memories, raising the necessary funding was to be no easy task. One after another, potential backers looked at his business plan with polite interest, promised to call back, and never did.
Trying hard not to sound desperate, Fields telephoned Richard Branson on 13 February 1984, the day before Valentine’s Day. He explained his idea to Branson briefly, and sent around two copies of his business plan: one for Branson himself, the other for Terry Baughan, the nearest thing Virgin then had to a finance director. Two days later, after Branson and Baughan had been through the plan, the three men met on Branson’s houseboat Duende to talk it over.
Branson realized at once that this deal was different from the scores of strange suggestions that filled his postbag every month. Fields’s proposal was not only ambitious. It was also well researched, and supported with some analysis of the kind of traffic that the airline might hope to attract, how many seats it would have to fill to break even, and how its expected revenues would divide between business and economy class. And there was a second attraction: Virgin could afford to carry modest losses for a while, since they would help to reduce the tax bill on the fat profits that the record label was making at the time.
But it was hard to see what relevant experience Virgin had that qualified it to try its luck in the air travel industry. The group had certainly dipped its finger in many different pies: it had in its time published magazines, sold clothes and mail-order records, delivered sandwiches to offices, and dabbled in pubs and restaurants. But its diversifications had generally been modest, and had also generally been confined to businesses in which the company had some expertise that might be helpful. Nobody in the Virgin Group knew the first thing about airlines.
Branson’s most loyal lieutenants were flatly opposed to the idea. Simon Draper was characteristically forthright.
‘It’ll be a total disaster,’ he said to himself as Branson explained his plans over the telephone. But he tried to dissuade his friend diplomatically. He explained that although it might be a good idea, they should hold back nevertheless. ‘You’ll bankrupt the rest of Virgin,’ he said, and added for good measure that if Branson was serious about going ahead with the idea, he should realize that this would be the beginning of the end of their relationship.
Ken Berry, always more quietly spoken, contented himself with the dry observation that the similarities between this proposed new venture and Virgin’s existing businesses were ‘not exactly obvious’. But he left Branson in no doubt that he too believed it would be a mistake to go into business with Fields. If Virgin was looking for new ventures to start whose losses could be offset against the tax that the group would have to pay on the millions it was earning from Boy George and its other moneyspinners, why not stick to ventures in the record business?
Branson could see that there was money to be made in flying the Atlantic. After spending a weekend vainly trying to call the People Express reservations line in London, he had concluded that People was either badly managed or so popular that it could not keep up with customer demand – or both. Either way, there seemed to be an opportunity there. But air travel was still a highly regulated industry in which a newcomer might have to fight with any number of state-owned monoliths, with monopoly profits from their home markets, subsidies from their countries’ taxpayers, and suspiciously friendly relations with politicians and with the regulators who set the rules of the competitive game.
And yet … the world was changing. Laker might have gone bust, but he had not done so quietly. The $1bn legal action he had launched in the British and American courts against the airlines that he claimed had conspired to bring him down was still before the courts, so the big carriers would have to be more subtle in their tactics against any new entrants. The safety and technical issues that had obsessed airline managers and regulators until the 1970s were disappearing, as aircraft had become more reliable and easier to maintain to a high standard. People who had never before imagined that they would travel between continents had begun to do so. In the airline business of the 1980s and 1990s, the skills that would matter would be marketing, good service, and the use of computerized reservations systems to fill the highest possible proportion of the seats on each flight. If People Express could be run by a Wall Street analyst, and British Airways by a former executive of Avis Rent-A-Car, why couldn’t a pop tycoon start an airline?
It did not therefore take long for Branson and Fields to shake hands on an agreement that gave Virgin a 45 per cent stake in the new airline, with Fields himself retaining another 45 per cent through his holding company Fields Investments, and the rest divided between the company’s employees. The day-to-day management of the business was left in Fields’s hands.
One important question was left open.
‘British Atlantic? The name doesn’t really grab me,’ said Branson. Fields replied that it was the best name he could think of, but that if Branson could come up with something better he would be happy to consider it.
A few days later, an excited Branson called back with the news that he had just had a brainwave.
‘How about Virgin Airways?’ he asked.
Fields was no fool. He realized immediately that whatever their shareholding agreement said, it would be difficult to maintain the independence of the airline from the rest of the Virgin Group in the eyes of the outside world if it shared the same name. But Branson was not to be put off. In the end, they ‘compromised’ on Virgin Atlantic Airways. It was only later that they discovered that Branson’s original suggestion would have inadvertently made use of the name of a small Caribbean airline based in the British Virgin Islands. It was only by later paying off the aggrieved Caribbean carrier with tickets across the Atlantic that Branson was able to prevent the other Virgin airline from taking legal action against it.
Once he knew that Branson was prepared to invest, Fields reported the good news to Gardner and Tait. Neither was enthusiastic. Gardner saw Fields’s approach to such an unconventional figure as proof of his lack of understanding of the airline industry. Tait, who had been living in the United States for some time, had never heard of Branson; but he knew that Virgin Atlantic was a crazy name.
As the public hearing approached, Fields became worried that Branson’s lawyers, Harbottle & Lewis, were proving slow to produce a draft contract. He wanted the affair settled; Branson’s signature would be accompanied by a cash influx into the business that would help to restore his dwindling pot of savings. Each successive letter from Fields’s own lawyers about the agreement seemed to include a demand for money more urgent than the last.
On 29 February the two men appeared at a press conference at Maxim’s Restaurant to announce the launch of the new Virgin Atlantic Airways. It was Branson’s name that appeared in the following day’s newspapers, promising to undercut People Express, and declaring his conviction that at least 250,000 British citizens would fly to New York if only the ticket price were low enough. What the assembled journalists did not know, however, was that Branson was not a director of the company. Nor did he hold any of its shares; while his handshake with Fields a fortnight earlier had yet to be formalized, he in fact held no legal interest in the venture at all.
As the toughness of Virgin’s demands was spelled out in detail, Fields’s lawyers became suspicious. They were concerned when Branson demanded that Fields himself should give personal guarantees for the debts of the airline – thus risking being made bankrupt and losing everything he owned if it failed. (There was no suggestion that Branson should do the same.) They also warned Fields in writing that Virgin would ‘be able to control an important function of the company,’ and expressed ‘very grave doubts about the wisdom of the press conference held today.’
Undaunted by these cautions, Fields went off to the Civil Aviation Authority on 1 March to argue his case. The public hearing started inauspiciously. The three-man CAA panel, familiar with his style from earlier appearances, was irritated to discover that Fields had decided to make an impassioned speech himself instead of allowing the lawyer employed by his company to present the case in more measured terms. ‘A man who acts as his own advocate has a fool for a client,’ recalled one of the panel members later. It was not only the panel who were unimpressed: after hearing a report on the first day of the hearing from Colin Howes, his lawyer from Harbottle & Lewis, Branson also decided to come and speak on the second day. His presence soothed the panellists: although none of them had ever heard of Branson before – and were at first bewildered to find this unfamiliar presence from the music business invading their world of dark suits – the Virgin chairman’s answers were convincing, and refreshingly to the point.
The question at issue was straightforward. British Caledonian Airways, which had been forced to wait a dozen years to acquire its own first transatlantic route, was determined to prevent an upstart like the new Virgin Atlantic from winning one in as many months. Specifically, BCal pointed out that it already had permission to fly passengers between Gatwick and JFK from 1985 onwards, and complained that if Virgin Atlantic were allowed a head start in operating the Newark route, the profitability of its own forthcoming flights would be put at risk. Since BCal had shown no great enthusiasm for the competitive North Atlantic run in the 1970s when it had the chance, this argument did not impress the panel. The CAA therefore seized on a detail of Virgin Atlantic’s proposal – that it would run a scheduled daily service in summer, but might fly less frequently in winter if there were not enough passengers – and decided that the new airline counted as a sort of honorary charter airline. Since BCal had said that it would not oppose a charter service, concluded the CAA’s written response triumphantly, Virgin Atlantic’s application should therefore be granted. There was one condition: the airline was given a month to satisfy the bureaucrats that it was ‘financially fit’ to fly.
Until Virgin had a shareholding in the airline, it would not be in a position to make any formal promises to the Authority about underwriting the new venture. Fields had hoped that the contracts would be wrapped up within a matter of hours or days of the 29 February press conference. But, as the end of March approached, the draft agreement did not appear. The night before the two men were due to visit Clifford Paice, the CAA official in charge of financial vetting, Harbottle & Lewis had still not produced the paperwork. It was only by having the papers rushed round for signature at 10 AM on the day of the meeting that the two men were able to answer the CAA’s financial inquiries as formal partners. In accordance with the deal they had shaken hands on, the two partners would have 45 per cent of the equity each, with the airline’s founding employees holding the balance. Each side would have the right to appoint two directors to the company’s board, though Branson would not at first be one. Day-to-day control of the business would stay in the hands of Randolph Fields, who would receive the title of chairman. His employment contract gave him thirty working days’ holiday each year, a car ‘of suitable standard for his business and private use’, but no salary. Instead, Fields was to be paid £25,000 out of the first £1m that the airline made in profits, and five per cent of whatever profits it made after that.
With the helpful publicity generated by the newspapers, it had been a relatively easy matter to argue in the public hearings that a new carrier between Gatwick and Newark would help bring low-cost transatlantic travel to the masses, and would give a British business a chance to compete on a route dominated by People Express of the United States. But the financial experts at the CAA proved harder to please. Refusing to accept Fields’s most pessimistic scenario, they started from the assumption that the airline would lose money heavily for most of its first year of operation, and demanded that £3m be injected into the company, either as share capital or as a loan from another Virgin company, to cover that eventuality. Under protests from both Branson and Fields, it relented. The airline need not come up with cash, said Paice; instead, the Authority would be happy to accept Richard Branson’s offer for Virgin to guarantee whatever losses the airline might sustain.
This was not surprising to Fields, for he knew how conservative a view the Authority was apt to take of airline financing. What shocked him was Branson’s reaction to the CAA meeting when they met back on his houseboat that afternoon. Without preliminaries, Branson told Fields that the contract they had signed that morning would have to be torn up.
‘My bankers won’t let me do it,’ said Branson. ‘Unless we control the company, we’ll have to walk away from this deal.’
Fields was crushed. He had come so close to realizing his dream; it would be cruel indeed if the prize were to elude him at the last minute. Recovering his dignity, he told Branson that he refused to be squeezed, and immediately left the boat with his lawyer to return to his chambers at Gray’s Inn.
‘Don’t worry,’ said the lawyer on the way back. ‘He’ll call you within twenty minutes of our return.’ When the two arrived, Branson had already left three messages. He was more malleable when Fields returned his call.
‘All right, Randolph,’ he said. ‘You win.’ But he was concerned that his attempt to renegotiate their earlier agreement should not sour the relationship. ‘It wasn’t me,’ he explained. ‘It was the bankers. I didn’t want to do this to you. I was forced into it.’
Fields slept more soundly that night than he had done for months. The next morning, however, Branson was back on the telephone, harking back to the issue that Fields thought had now at last been settled. Once again he was demanding a greater share of the equity, and pleading that his advisers would not allow him to continue to support the CAA application on the terms they had agreed.
‘Dear Randolph,’ he wrote in a letter on 26 March.
Please put yourself in my position. We have now been asked to give both unlimited guarantees to the CAA and to commit ourselves to Boeing for $13m [for the 747 whose lease they were negotiating] at a risk to us of $3,241,000. Furthermore – tomorrow – we have to outlay a considerable nonreturnable deposit. Unless we go with Boeing tomorrow, I don’t see this venture getting off the ground in time for the summer.
