Business Stripped Bare Page 9

  There was a handshake. I said I would give him A$10 million, and the next day it was deposited into his bank account. (His bank manager phoned him up, thinking it was a mistake!)

  Brett had already garnered support from Queensland's government, led by Peter Beattie, which would help with the marketing of this untapped tourist region. This was a great stroke of luck – all of the regional capitals in Australia were keen for a new airline to be based in their states, but Brisbane, along with Perth, was the fastest growing part of Australia, with the Sunshine Coast a huge attraction. The payroll tax was better than elsewhere, and so too were the beaches. When we launched we had 12,000 CVs from people all wanting to relocate to Queensland!

  When the American low-cost carrier JetBlue was set up, it had a budget of $120 million. Brett's budget of A$10 million was extremely tight, but he had done his homework. He knew that Compass, Australia's first budget airline, which was under-capitalised, collapsed and died in December 1991, squeezed out by Ansett and Qantas in a price war. Compass boss Bryan Gray gave us an indication of what to do – and where it all went wrong. We didn't need to repeat his mistakes. And what followed was as perfect an example of Virgin's 'branded venture capitalism' in action as you could want, and also a good illustration of why it is sometimes better to follow a pioneer than be a pioneer.

  Rumours started to fly about a new entrant in the domestic airline market, and on 30 November 1999, at a press conference in Custom House Quay, Brett's backer was revealed. It was Virgin. We had kept our deal under wraps brilliantly and caught the market on the hop. A one-way fare from Brisbane to Sydney, which had cost A$150 each way, would now be less than A$100. ASX, the Australian stock exchange, went mad. A$2 billion was wiped off Qantas's stock price. Brett and I joked that if we had thought to take a hedging position on the fall in Qantas's shares, we could have already recouped our start-up costs.

  We both knew that Qantas was one of the best-run airlines in the world – but they had become very cosy with their duopoly with Ansett. Virgin Blue simply had to be different. Our culture would be the point of differentiation – and no one could copy the Virgin culture.

  From day one, Brett was on the lookout for people with no previous airline experience. The advertising for Virgin Blue was along the lines of: 'If you've got purple hair and you're working in a butcher's shop and you can still smile after a tough day, you're the kind of cabin crew we're looking for.' His whole approach reminded me of the tone we set for publicity at Virgin Music. It was direct, informal and genuinely informative.

  And, of course, these were exactly the qualities he was looking for in his people. A genuine smile is impossible to fake for very long, and we needed people who were prepared to smile. The job of an airline cabin crew is arduous. You're standing for ten hours a day, in confined spaces, dealing with the public. At least the pilots get to sit down and don't have to face the passengers. But a cabin-crew member has to have the right spirit to deal with customers who have lost their bags, missed their flights or spilt red wine over their white sundress. On Virgin Blue, Brett and his team called his cabin staff 'guest-facing crew' and he worked hard to get their ethos right. I remember telling him once that his Virgin staff were more Virgin than anywhere else in the business. Admittedly the morning after a great party with them! I would have said the same about Virgin Atlantic staff the morning after the night before!

  Once I was asked by an Australian reporter why we had decided to call our new airline Virgin Blue when the Virgin symbol was red. The fact was we'd run a competition, and some people had sent this idea in to take the mickey. Since in Australia a redhead is known as a 'bluey' we thought, Hang on, that's quite clever. Let's make our red planes Blues.

  We're by no means the only company to gently mock our own brand, and the strategy is often very effective. You do need years of successful delivery before it's worth doing, but the idea is a sound one. It shows that you're comfortable with your public. Some commentators complain that Virgin's chumminess is a bit hard to take, given our global reach. On the contrary, I think the public are pretty smart. They know how big we are. They see our planes in the sky. I think the public are irritated far more by pompousness and cant, and so it's much better to make gentle jokes at your own expense than to make out you're more important than you are.

  Back in March 2000, Brett was still talking about starting slowly, with only a dozen people, including director of communications and third founder, David Huttner. But the momentum took hold. By August we had 350 staff and we were ready to take to the skies. We wanted to be ready in time for the Sydney Olympics, due to start on 15 September, but we were burning through our cash. Manny Gill, the finance director, went to see Brett to tell him there was nothing left in the coffers and they couldn't afford to pay the wages. Brett was shrewd: he had set up a separate account and tucked away a spare million for exactly this eventuality, and Manny was able to run the payroll.

  We needed new planes and Brett had to deal with this too. Our first planes were leased but later we also decided to buy ten New Generation Boeing 737s, delivered brand spanking new from Seattle. A few days later I received my daily phone call from Brett. The cheeriness was gone from his voice, and I sensed his nervousness.

  'Richard, I've a cheque in front of me for $A600 million. Are you sure you want me to sign it? The biggest cheque I've signed before was for my mortgage.'

  'Brett?'

  'Yes, Richard?'

  'Just sign the bloody cheque.'

  Our initial sales projection had us reaching profit within three years, but we overtook those goals sooner than we expected. Brett wanted to enter the New Zealand market after Air New Zealand's subsidiary, Freedom Air, began a service from Tasmania to Brisbane. This allowed us to launch Pacific Blue, operating out of New Zealand and flying from Christchurch to Brisbane.

  The idea was simple: to fly directly, point to point, rather than herd passengers unnecessarily through a larger hub airport. This 'hub-busting' approach made life far easier for the customer, and since our new planes were extremely reliable, there were huge efficiency gains. Within four years, Virgin Blue was flying forty-one Boeing 737s, the packhorses of the worldwide expansion of budget flying, and we had 3,000 people on our payroll and more than 30 per cent of the market. It was a considerable achievement.

  The day of the launch was 31 August 2000 at 10 a.m. The flight was packed and Brett, Rob and the team took a leaf out of my book and began a tradition of dressing up. They arrived as the Blues Brothers. I wish I could have seen the expression on the face of Geoff Dixon, Qantas's CEO, when he heard that. Here were his only serious rivals, taking the piss out of themselves, and everybody – crew, press and passengers – was loving them for it.

  A year in, and we were going head-to-head with Qantas and Ansett. We knew we were hurting them. They were running into a lot of difficulties. Virgin Blue, the new kid on the block, was roughing up the market.

  From the start, Virgin Blue was the airline of the Internet. If you wanted to fly, the cheapest way was booking over the Net. Qantas and Ansett, with their legacy systems and relationship with travel agents, took around 2–3 per cent of their bookings on the Net. Virgin Blue's Internet bookings were 60 per cent of the total at the launch, and 92 per cent within six months. The Net was easier to use, and because the transaction fees were minimal for us, this gave us an edge on costs.

  Then, in June 2001, we received an unsolicited offer for Virgin Blue. Brett was approached by Gary Toomey, Air New Zealand's CEO, and they had dinner at the Chairman's Club Lounge in Melbourne – an opulent place with its gold-plated toilet seats. They chatted away and Brett said that he would definitely listen to any offer, and wanted to keep the channels open if there was any way they might work together. A few weeks later, Brett was invited to catch up with Gary again at the Crown Casino in Melbourne, a popular haunt for big dealmakers. Before their hors d'oeuvres were ordered, Gary offered him $70 million for the airline. Brett, as quick as a flash, asked if
this was US dollars. 'Of course,' replied Gary.

  That was A$120 million.

  When Brett finished supper he phoned me with this info. It meant that at least we had a valuation for the business on the table. As far as the wider Virgin Group's position was concerned, it would have been a good time to realise some of the investment but, in truth, it was far too early to contemplate.

  We turned down the offer but it wasn't long before we had another, more significant approach. The chief executive of Singapore Airlines, Dr C K Cheong, called me up. I knew him well. In December 1999, we sold a 49 per cent stake of Virgin Atlantic to Singapore Airlines for £600 million, using the proceeds to invest elsewhere within the Virgin Group.

  Singapore Airlines had a 20 per cent stake in Air New Zealand – and Air New Zealand owned Ansett. We knew that Ansett was in deep trouble. Air New Zealand had bought it for too much money, only to discover it couldn't afford the number of planes necessary to replace Ansett's ageing fleet. Given Ansett's troubles, it didn't surprise us that Cheong wanted Virgin Blue out of the way.

  What startled us was his offer. 'Look,' he said to me, 'it only cost you A$10 million to launch Virgin Blue last year. Now I'll give you A$250 million for the company. But you have to give me a decision by tomorrow morning. If you don't say yes, we'll put massive investment into Ansett, and put Virgin Blue out of business within six months.'

  Cheong was our new partner. And this was a friendly conversation! But Virgin Blue was a fantastic airline. It was really making a difference in Australia. It was a fun airline to have a stake in. It had the best cabin crew, wonderful new planes and everyone thought the world of it. So we had a dilemma. On the one hand we had this amazing offer – it really was a fantastic return on the money we had invested. On the other hand the business had massive potential and the public and the staff relied on us.

  Brett understood the position. He knew that I might sell at this stage. We met up in Brisbane and had a long chat. We walked around the hotel room all evening, discussing the different options. There was something fishy in all this. Why were Singapore so desperate to get rid of us? Why were they willing to hurl their money down the bottomless pit that was Ansett, just in order to destroy Virgin Blue? They were our partners. They had taken a stake in Virgin Atlantic. I couldn't figure out their intentions.

  My executive team was keen that I sell up and take the money, but my instinct was to run the other way. As I've explained, for a good slice of the upside, I'll generally accept the greater risk. Then Brett called up his supporters and they came round to see me to try to persuade me to hold on and build the company. On the way back to the hotel lift I took Brett aside and said, 'You know, you didn't need the posse: I'm not going to sell.'

  Then the fax arrived. And we were back to square one.

  Quarter of a billion Australian dollars. There it was, Cheong's offer, in black and white. Brett and I sat there staring at it. This was twenty-five times the amount it had cost us to create, less than a year ago. Were we going mad?

  I rang up Andy Cumming, our corporate director at Lloyds TSB in London. I told him we had an offer of A$250 million on the table and that we could sell tomorrow, but we wanted to keep hold of the airline. If we turned this lucrative deal down, would the bank still support us?

  Andy and many of his bank colleagues have been very helpful allowing us to grow and prosper. They knew the score. Andy said our other projects were safe – we still had their backing.

  Then we went back to the sofa and stared some more at the fax.

  The next morning we made our decision. We called a major press conference, with dozens of TV cameras and most of the Australian press, at the terminal in Brisbane. There was hush when I stood up.

  'Hi, everyone. I've got some good news and some bad news. The good news is that I have this cheque for A$250 million.' I held it up. (The cheque was a prop, written out on a Qantas Savings Bank cheque belonging to one of the airport managers.) 'And I'm back off to England. Obviously, we've had a fantastic time in Australia. It's sad that we are selling out today – it's an offer we can't refuse.'

  Some Virgin Blue girls broke down in tears. I was so startled I forgot my lines. Before I could recover myself an Associated Press reporter rushed out of the hall to file her story. This news would be around the world in a matter of minutes. 'Only joking!' I cried, ripping the cheque up into tiny pieces. I threw them up into the air. 'There is no way we would sell out.'

  There were cheers and loud hurrahs. The AP reporter heard the commotion, came back and went white. 'I'll lose my job because of that!'

  I got down on my hands and knees and kissed her feet.

  The night before, as we sat there staring at that fax, Brett and I had become more and more convinced that something was fishy. Singapore Airlines just seemed too desperate to get rid of us in Australia and New Zealand. Why would they throw good money after bad, propping up an obviously ailing company like Ansett?

  We came to the conclusion that Singapore Airlines had no intention of propping up Ansett. Ansett's only hope was if we could be made to blink, and give up Virgin Blue in return for cash.

  The very next day they decided to pull the plug on Ansett, and on 13 September 2001 the company was placed into voluntary administration and the fleet was grounded. Competition from Virgin Blue and the shock of September 11 and the attack on the Twin Towers in New York City knocked the last breath out of them.

  More than 16,000 people lost their jobs – the largest single loss of jobs in Australian history. The Ansett collapse became a political issue in the Australian election campaign of 2001. Kim Beazley, the Labor opposition leader, made a promise to keep the airline going and subsidise the jobs. But this brought a challenge from John Howard, the Liberal leader, who said that the free market should dictate and propping up a dying airline wasn't good for Australia. Howard's coalition victory with the National Party put paid to any plans to restart Ansett.

  The black irony of September 11 was that many Australians stopped travelling abroad because of fears of terrorism. Instead they turned, en masse, to their own country for holidays in the outbackyard, Cairns and the Gold Coast. As a result, Virgin Blue – with no competition from Ansett – doubled its fleet in six months, then doubled it again, and doubled it again. Its thirty-six aircraft were nearly 100 per cent full, since many chose not to go to Europe or the US.

  In terms of productivity, Virgin Blue was streets ahead in the efficiency stakes: while Ansett had carried 10 million passengers at its peak with 16,000 staff, Virgin Blue was employing 4,000 people to carry 15 million.

  'Virgin Blue is a lot of media hype.'

  'The market is not big enough to sustain Virgin Blue.'

  'Virgin Blue doesn't have deep enough pockets to cope.'

  'Qantas will employ any options to see off the interloper.'

  'They'll be unlikely to survive a year.'

  'Claims by Richard Branson that domestic fares are high are misleading.'

  This was a range of opinions from senior airline executives quoted in a number of press interviews. We were certainly beginning to make waves in some Qantas back room or other. When I announced we had been given the British rights to fly to Australia (all that was left was for the Australian government to grant us landing rights), a scathing article in the Australian Financial Review said that our plans were a 'lot of hot air'.

  Enough was enough. In 2003, I wrote a letter to the Australian.

  I'm willing to lay down the following challenge to Geoff Dixon. If Virgin Atlantic is flying to Australia within 18 months he'll agree to eat humble pie by flying on our inaugural dressed as one of our stewardesses serving our customers throughout the flight. If I'm not flying to Australia by December next year I'll be prepared to do the same on a Qantas plane from London to Australia.

  I enclosed a mock-up picture of Geoff's head on top of a Virgin stewardess's shapely body.

  Geoff's reply was curt. 'We're running an airline – not a circus.'
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