Virgin King (Text Only)

Not even the most skilful A&R person could have guessed in 1980 that George O’Dowd would within three years be topping the charts in seventeen different countries. A former window-dresser and model, who had worked for the Royal Shakespeare Company as a make-up artist, George had almost joined a band under the influence of Malcolm McLaren. By 1980, he was delivering stylishly polished performances in gay nightclubs in London, and had been signed as a songwriter to Virgin Music Publishers – but he had no recording contract. His manager, Tony Gordon, had contacted Simon Draper and offered to provide a fleet of limousines to take Draper and his colleagues down to a rehearsal room where Culture Club, George’s new band, was performing an odd mixture of soul, pop and reggae. Danny Goodwyn, a Virgin talent scout, was one of his most enthusiastic fans. ‘He was an extraordinary creature,’ remembered Steve Lewis. ‘What I liked about it was that there were some really classic pop songs – “I’ll Tumble For Ya”, which I thought was great, and “Do You Really Want To Hurt Me?”, which was brilliant.’ Back at Virgin’s offices in Vernon Yard, however, there were doubts about whether such a clearly gay artist could attract a straight following.

Those doubts were soon laid to rest. Under intense pressure from Gordon – who had agreed with George and his fellow-members of Culture Club that he would either get them a place in the top thirty on one of their first three singles, or lose the right to manage them – Virgin assigned Lewis, who was by then deputy managing director of the record company, to look after the artist personally. There was little that Lewis needed to do. As well as an ability to write elegant songs in a number of different styles, George also knew exactly how he wanted the band to look. The artwork on record sleeves, the T-shirts – all the ideas came from him. An album had been recorded, and two singles from it had already been released in order to drum up public interest. But there was not yet a Top Thirty single. And Tony Gordon was getting worried.

It was the promotion department that solved the problem. A message was passed to Lewis that the song which the disc jockeys at the radio stations would be willing to play was ‘Do You Really Want To Hurt Me?’. At a meeting with George, Lewis reported this. ‘George freaked,’ he recalled. ‘He was convinced that it wouldn’t be a hit.’

‘People will think we’re a white reggae band,’ said the singer. ‘It’ll ruin our career.’

‘Right now, George,’ said Lewis, ‘you don’t have a career.’ George allowed himself to be persuaded; the song duly went to number one.

But Culture Club just grew bigger and bigger. By 1983, with the launch of Colour By Numbers, the album containing the ‘Karma Chameleon’ hit single, George was the world’s most successful musician for more than a decade. Virgin employees, sometimes unable to reach their offices because of the crowds of fans who had assembled outside in the hope of catching a glimpse of Boy George, began to understand what it must have been like to be at the centre of Beatlemania. The sums that flowed into Virgin’s London bank accounts made the Oldfield millions of eight and nine years earlier seem almost paltry. Not for nothing was it later said that Boy George paid for Richard Branson’s airline. There would be trouble later, as George became a heroin addict and attracted the wrath of the tabloid press. But for the moment, he and Virgin Records could do no wrong.

Long before George’s popularity reached its height, Richard Branson had withdrawn from daily control over the record company. In no sense had he lost his touch as manager and deal-maker; only recently he had faced down an attempt to form a staff union by appearing uninvited at the meeting at which the staff were intending to prepare their demands, and shedding genuine tears at the idea. ‘We’re all one family,’ he had said, prompting the plotters to melt away, shamefaced at the realization that they had hurt his feelings so much. But Branson had left the creative decisions to Simon Draper, and the contractual and managerial matters to Ken Berry, since 1978. Branson’s role consisted of two activities: talking to both his lieutenants on the telephone, often several times a day; and appearing at the record company’s new offices on the Harrow Road whenever his presence was required to elicit the signature of an especially big or important star. Even the overseas distribution deals could be left to them; thankfully, Branson was no longer responsible for climbing aboard an aircraft with a suitcase full of cassettes and carrying it exhaustedly from one office block in New York to the other, trying to sell the work of Virgin artists in Britain for distribution in the United States. Draper managed the company by means of informal weekly meetings, first at Branson’s house, then in the coffee shop of the Hilton hotel at Shepherd’s Bush, then at his own house. Steve Lewis, who had become deputy MD of the record company in 1979 after Virgin had withdrawn from the business of managing artists, was responsible for the weekly meetings at which the pop charts would be analysed and strategies for sales and marketing decided.

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

Dear Randolph

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.