End of airline, end of empire?
Can Richard Branson's tactic of expanding out of a crisis save the group?
Special report: transport in Britain
Sunday September 23, 2001
Sir Richard Branson said this summer that, one day, he might hand down the Virgin empire to his son Sam. But what will the boy, now aged 15, inherit?
If Virgin Atlantic becomes a high-profile victim of the financial crisis now engulfing the airline industry it could bring the whole sprawling business of more than 200 companies created by the British tycoon crashing down with it.
That will leave Sam with whatever Branson has squirrelled away. And that may be very little if the entrepreneur decides to 'raid' his own personal fortune to fling a rubber ring to Virgin Atlantic, the financial bedrock of his business labyrinth.
Virgin Group director and spokesman Will Whitehorn said this weekend that the airline had 'as much chance of survival as British Airways'.
So what did he reckon were BA's chances of survival right now? 'Unanswerable,' he said.
Whitehorn said the airline was 'financially ringfenced' from other businesses in the group - a block on cross-subsidy was agreed when 49 per cent of Virgin Atlantic was sold to Singapore Airlines for £550 million.
Branson can raise money on the back of Virgin Atlantic to put into other concerns, but the group cannot rely on Virgin Atlantic for its existence or valuation, he said.
Whitehorn argued that the rail and mobile phone businesses were currently 'booming' and in the 'theoretical' event that Virgin Atlantic ceased to exist, there would be 'no impact' on the rest of the group.
Back in June, Branson, 51, was talking about the succession game, days after The Observer revealed that he had mortgaged his 51 per cent stake in Virgin Atlantic as security against an overdraft from Lloyds TSB.
This news generated a debate about whether the £75m facility was a prop for losses in other parts of the trains - to - clothes - to - music empire or a cash pile for further international expansion.
Branson told The Observer that the facility was 'totally normal'. He had raised money in this way before and would do it again and he was not 'in hock' to the bank. The cash was to boost the international expansion of Virgin Mobile. A deal with US group Sprint to penetrate the vast but as yet untapped US market has yet to be done.
Since then he has accumulated around a further £150m by selling the Virgin One bank account business to Royal Bank of Scotland, and the French Virgin Megastores to industrial group Lagardère. Branson loves to expand his way out of any downturn.
But question marks were growing before the terror 12 days ago over whether Branson was getting perilously close to the sun.
He warned this summer that times ahead were tough for the airline as the US economy started to turn down in a dotcom/'dotbomb'-led recession, fuel prices rose, foot-and-mouth discouraged tourist traffic and the pound weakened against the dollar. Profits for 2000-2001 were flat at £45m and things did not look bright.
Profitability had already sunk by 60 per cent in the previous year, just before the SIA deal. This had valued the air line at around £1.2 billion, but industry observers put the value a few months ago at no more than £700m - a figure fiercely disputed by Branson.
The Sunday Times Rich List and US business bible Forbes magazine both halved their estimates of Branson's fortune this summer to between £1.15bn and £1.4bn.
Many other businesses in the empire are either too young or insufficiently successful to be profitable at the pre-tax level, and many, such as Virgin Trains and Virgin Direct financial services, are swallowing cash.
The airline, which Branson brought back from what he belatedly admitted was the very brink of collapse after the Gulf War - by selling his record label to EMI for £560m - had become the jewel in his empire.
It has given British Airways a scorching run for its money on North Atlantic routes. Despite being driven apoplectic by regulation Branson has built new routes to the US wherever he was allowed and, when he was blocked, he looked elsewhere and established routes to Tokyo, Hong Kong, Johannesburg and - more recently - the Caribbean, New Delhi, Shanghai, Lagos and Toronto. In retrospect these moves are even smarter than they appeared at the time.
But then came the revelation that Branson had secured his entire stake in Virgin Atlantic against a quite modest loan from Lloyds TSB. What will it take for the bank to pull the plug?
It would be difficult for SIA to increase its stake in the airline and for Virgin to preserve its flying rights as a European airline. Observers have talked about the possibility of one of the most profitable carriers in the world lending its partner survival funds.
But a well-connected source in Singapore told The Observer : 'Virgin has not asked for money and I do not think SIA would put any in - they are not prepared to be seen as a limitless bucket of cash.'
It is amazing what can be accomplised when nobody takes the credit